The State of Maryland’s annual general obligation bond sale, on June 11, yielded a total of $1.6 billion in financing, including $900 million in new issuances, at an overall interest rate of 3.55%. In the wake of one bond rating analyst’s downgrade of the State as an issuer, the change in interest rate is seen as fairly minor.
Maryland’s annual bond sale underpins the State’s effort to use capital financing to attach costs of long term projects over their lifespan – and generates revenue to support school construction, State capital facilities, and many other projects.
The Treasurer’s statement about the June sale summarized the numbers behind this year’s effort:
Maryland State Treasurer Dereck E. Davis announced that the Board of Public Works (BPW), composed of Governor Wes Moore and Treasurer Davis, completed the sale of $1.6 billion of General Obligation bonds earlier this morning. The bonds will fund a variety of capital improvements and grant programs across Maryland and will refinance existing debt for savings. The bonds had an all-in true interest cost (TIC) of 3.55%.
“Today’s successful bond sale underscores the strong demand for Maryland’s bonds and continued investor confidence in the fiscal strength and creditworthiness of our state,” said Treasurer Davis.
In Conduit Street coverage of the recent ratings downgrade (by one of three investor services), MACo offered:
Maryland’s upcoming bond sale, scheduled for June 11, will likely reveal the immediate impact of the downgrade. A lower bond rating typically drives up interest rates on state borrowing, raising the cost of public infrastructure projects.
This shift could strain capital improvement plans and force difficult budget choices for a state that has long prided itself on low-cost borrowing for schools, roads, and community facilities.
An analysis by the General Assembly fiscal staff placed more context around the issuance, and offers some sense of scale of the interest rate effects:
The Department of Legislative Services (DLS) has been analyzing the factors that influence the TIC rates from GO bond sales for two decades. Specific factors change over time, but the variables that have been most statistically significant in all bond sales are (1) an index for State and local government interest rates at the time of the sale and (2) Maryland personal income compared to U.S. personal income. This suggests not only that economic performance is important, but that slower growth in recent years has already been factored into Maryland’s TIC. The generally accepted rule is that a ratings downgrade increases annual interest rates by 0.15% (15 basis points) to 0.20% (20 basis points). DLS will continue to monitor factors that influence interest rates in an attempt to estimate what effect this downgrade has had on Maryland GO bonds.
Seeking more context? MACo’s Kevin Kinnally and Michael Sanderson mostly predicted this outcome in their breakdown in the Conduit Street Podcast from May 23. Listen to that episode here, or by searching in your favorite podcasting app.
