Juan Fernandez, J.P. Morgan November 12, 2009
Local Infrastructure Funding in Federal Funds Local Bond Initiatives Tax supported schools, government buildings, roads Revenue bonds water, sewer, public power State Funding State General Obligation Bonds Non-traditional Sources
Local Bond Funding Tax Supported 2/3 vote (55% for schools) Budgetary and policy considerations Revenue Bonds Affordability for ratepayers Proposition 218 requirements Fundamental changes in the municipal bond market The collapse of the monoline insurers forced a greater emphasis on underlying credit Historical Historical Insured Insured Issuance Issuance Volume Volume 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Long Term Municipal Issuance ($ Mm) Percent Insured (%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 60% 50% 40% 30% 20% 10% 0% Generic Generic Secondary Secondary Municipal Municipal Market Market Credit Credit Spreads Spreads (10Y) (10Y) 400 350 300 250 200 150 100 50 (bp) AA MMD A MMD BAA MMD 0 11/08 1/09 3/09 5/09 7/09 9/09 11/09 Source: J.P. Morgan
State Funding Transportation Commission General transportation State Transportation Infrastructure Projects ( STIP ) State Grants & Loans Clean Water SRF Nearly 400 projects Over $4 billion funded Drinking Water SRF
State Bond Funding General obligation bonds Voter approved Single purpose Funds schools (State portion of K-12 construction), State universities and community colleges, transportation, water and parks, high speed rail, stem cell State General Fund pays debt service $58.53 billion currently outstanding Lease revenue bonds Legislatively approved Single project State prisons, State universities and colleges, State buildings State General Fund pays debt service $7.96 billion currently outstanding Revenue bonds Department of Water Resources Water & Power Revenue Bonds Department of Transportation GARVEE Bonds
State General Obligation Bonds: Current Picture General Obligation bonds can only be issued for voter-approved purposes, primarily consisting of capital projects General Obligation bonds have largely utilized a 30 year fully amortizing principal structure In 2009 year-to-date, the State has issued $19.744 billion of bonds State State of of Annual Annual General General Obligation Obligation Debt Debt Service Service ($ ($ billions) billions) Authorized Authorized and and Outstanding Outstanding Bonds Bonds $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 Source: State Treasurer s Office. 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Authorized $53.18bn (48%) Outstanding $58.53bn (52%)
State General Obligation Bonds: Recent Challenges The budget deficit that surfaced in Fall 2008 and rapidly grew to an historic high were addressed in February 2009 after ongoing Legislative discussions February 2009: Initial 2009 Budget Act enacted $42 billion of solutions July 2009: Amended 2009 Budget Act included another $24 billion in solutions The on-going budget crisis resulted in important implications for the State s infrastructure funding: The State could not sell any infrastructure bonds for nine months, from July 2008 to March 2009 Two rating agencies, Moody s and Fitch, downgraded the State s bonds from A-level to BBB-level 0n December 17, 2008 the State halted interim financing for more than 5,000 infrastructure projects. Credit Rating Pressures Moodys: has significantly less flexibility relative to other states when it comes to budgeting and revenue raising. (August 22, 2009) Standard & Poors: Numerous constitutional provisions that separate from most other states in the conduct of its budget and financial management complicate the budget situation for lawmakers. (August 21, 2009) Fitch: Effective budget-making is hampered by inflexibility imposed by voter initiatives, and the state has a history of inability to achieve consensus when faced with financial challenges. (March 24, 2009)
State General Obligation Bonds: Comparable Trading Spreads Tax-Exempt Tax-Exempt relative relative to to other other large large issuers issuers - 10 10 year year spreads spreads above above AAA AAA MMD MMD (bps) (bps) 200 180 160 140 120 100 80 60 40 20 CA (Baa1/A) IL (A1/AA-) NYC (Aa3/AA) WA (Aa1/AA+) 0 1-Jul-09 11-Jul-09 21-Jul-09 31-Jul-09 10-Aug-09 20-Aug-09 30-Aug-09 9-Sep-09 19-Sep-09 29-Sep-09 9-Oct-09 19-Oct-09 29-Oct-09 Taxable Taxable relative relative to to other other large large issuers issuers - Spreads Spreads above above 30-year 30-year UST UST (bps) (bps) 425 400 375 350 325 300 275 250 225 200 175 150 125 100 75 50 2039 (Baa1/A) NJ TPK 2040 (A3/A+) NY MTA 2039 (AA) Univ of CA 2043 (Aa1/AA) UVA 2039 (Aaa/AAA) 1-Jul-09 15-Jul-09 29-Jul-09 12-Aug-09 26-Aug-09 9-Sep-09 23-Sep-09 7-Oct-09 21-Oct-09 4-Nov-09 Source: J.P. Morgan, MSRB Trading data 10 day Moving Averages
State General Obligation Bonds: Future Affordability The State Treasurer s Office estimates that the State could issue $225.98 billion of additional General Fund backed bonds from 2009-10 through 2027-28 General Fund debt service payments are expected to grow each year, reaching over $19 billion in 2027-28 Debt service will consume a larger piece of the State s General Fund, growing from the current 6.7% to 10% or more by the middle of the next decade unless the budget improves Projected Projected New New Bond Bond Issuance Issuance vs. vs. Debt Debt Affordability Affordability $ Billions 20 Projected New Bond Issuance ($ Billions) Debt Ratio (%) 12% 15 10% 8% 10 6% 5 4% 2% 0 0% 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2018-19 2017-18 2016-17 2026-27 2025-26 2024-25 2023-24 2022-23 2021-22 2020-21 2019-20 2027-28 Source: State Treasurer s Office. Debt Affordability Report October 2009.
The Safe, Clean and Reliable Drinking Supply Act of 2010 Drought Relief $455 million Water Supply Reliability $1.05 billion Delta Sustainability $2.25 billion Statewide Water System Operational Improvement $3.0 billion Conservation and Watershed Protection $1.785 billion Groundwater Protection and Water Quality $1.0 billion Water Recycling Program $1.0 billion
Conclusion Local governments infrastructure needs are many Local funding through bonds can be challenging Federal and State funding can be limited and unpredictable