The State of Maryland last week sold $1,011.4 million in general obligation (GO) bonds for capital projects. This included $540 million in new tax-exempt bonds, $115.8 million in tax-exempt refunding bonds, and $355.6 million in taxable advanced refunding bonds. Maryland typically issues tax-exempt GO bonds twice a year to support the State’s nontransportation capital program.
The true interest cost (TIC) for the sale bonds is 1.11%. The TIC for the most recent bond sale on March 4, 2020, was 1.38%. The TIC was low because interest rates have declined since the last sale, and the State issued $471 million in refunding bonds, which have shorter maturities and lower interest rates.
As with other recent issuances of new debt, the new bonds sold generated a substantial premium, which totaled $180 million.
The refunding issuances reduce projected fiscal 2021 debt service costs by $61 million, and the new issuances generated a bond sale premium that increases the Annuity Bond Fund (ABF) balance by $78 million and provides $102 million of funding for capital projects. The ABF, which supports GO bond debt service costs, has sufficient revenues to fund fiscal 2021 debt service costs and leave an estimated $53 million surplus for fiscal 2022.
As previously reported on Conduit Street, prior to the bond sale, the three major rating agencies – Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings – reaffirmed the State’s AAA bond rating for GO bonds.
According to the Maryland Department of Legislative Services:
Maryland remains 1 of 12 states to have the AAA rating from all three major rating agencies. The other states are Delaware, Florida, Georgia, Iowa, Missouri, North Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia.
With respect to Maryland, the rating agencies identified the following strengths:
- Wealth and Income Levels: S&P notes that Maryland’s per capita personal income was 116% of the national average in 2019.
- Broad and Diverse Economy: Strengths include abundant higher education and research institutions; proximity to the nation’s capital; transportation facilities such as the Port of Baltimore; and a concentration of employment in higher paying sectors such as business services, education and health services, and government. Moody’s notes that Maryland has a highly educated workforce whereby 40% of the population over 25 has at least a bachelor’s degree, compared to about 32% nationwide.
- Strong and Well-embedded Financial Practices: Fitch notes that the State has “very strong fiscal management with consensus-oriented long-term planning and multiple sources of flexibility, all of which position the state to address implications of the ongoing coronavirus pandemic.” Moody’s considers Maryland’s “proactive financial management” to be a credit strength and that BPW “is able to respond swiftly to midyear budget challenges.” S&P considers that Maryland’s financial “practices are strong, well embedded, and likely sustainable.” The agencies also noted that the State has made numerous attempts to address the unfunded pension liability, such as increasing State and employee retirement contributions, moving to an actuarially approved approach, reducing benefits, and increasing the length of time that it takes new employees to vest. Strengths of the capital budget process include the Capital Debt Affordability Committee process and the State constitution limiting GO bond maturities to 15 years.
- Adequate Reserves and Liquidity: Moody’s considers the State’s adequate budgetary reserves and strong liquidity to be a credit strength. Approximately $1.1 billion is currently available in the Rainy Day Fund.
However, the rating agencies did identify challenges. The most significant and consistently noted challenges relate to the State’s long-term liabilities, such as pension-funded ratios and Other Post Employment Benefits liabilities. Maryland’s pension-funded rate is lower than most AAA-rated states.
Rating agencies have identified factors that could lead to Maryland being placed on credit watch or downgraded, which include:
- economic and financial deterioration that results in deficits, fund transfers, and reserve draws without a plan for near-term replenishment and structural balance;
- failure to keep a commitment to fully fund pensions; and
- S&P notes that if the State relies “on nonrecurring resources to balance its budget, prove unable to enact budget cuts or make other or make other timely corrective action, or draw down reserves that is unlikely to be meaningfully replenished, we may revise our outlook or lower the rating.”
Rating Agency Coronavirus Pandemic Comments
The rating agencies recognize that the nation is in a recession that is stressing state budgets. The agencies note that there is considerable uncertainty about the depth and length of the recession. Much of the agencies’ assessment relates to how well the State is able to manage this initial coronavirus shock. While this will require the State to make difficult choices, the consensus is that Maryland is a good position to manage its budget.
S&P notes that “Maryland has a long history of proactive budget management” that is likely to continue. Fitch added that “Maryland is well positioned to utilize its superior gap-closing capacity to manage through the current downturn.”
The Board of Public Works (BPW) managed last week’s bond sale. The three-member panel, which includes Governor Larry Hogan, Comptroller Peter Franchot, and State Treasurer Nancy Kopp, reviews projects, contracts, and expenditure plans for state agencies – many of which have an effect on county governments.
Maryland Department of Legislative Services Analysis: July 22, 2020 General Obligation Bond Sale