Balancing Concern for Jobs and Cost of Debt, PA Treasurer Rob McCord Agrees to $650 Million Bond Offering

Decision will keep job-producing projects moving forward, but save Commonwealth more than $36 million a year in debt service

HARRISBURG, Pa., Dec. 9, 2010 /PRNewswire-USNewswire/ -- Having rejected a proposed $1 billion bond issue, Pennsylvania Treasurer Rob McCord today agreed to a $650 million General Obligation bond offering that will prevent a potential shutdown of key job-producing capital projects, while saving taxpayers an estimated $36.3 million a year in debt service payments.

A copy of the letter from Treasurer McCord notifying Governor Ed Rendell of the Treasurer's agreement to a reduced amount of bond debt follows this press release. 

"A billion dollars in debt would not have been appropriate, and I will not approve such an offering," McCord said.  "But neither, in my judgment, would it be appropriate to issue zero debt, and in so doing risk a winter shutdown of ongoing infrastructure-improvement projects – job-producing projects that are an important component of our fragile economic recovery."

"Today, after a vigorous internal review and appropriate collaboration with other elected officeholders, I am announcing my decision.  It is a solution that will ensure uninterrupted funding into June 2011 for projects that are under-contract and underway," the Treasurer said.  "We are authorizing a prudent and proper amount of bond debt for the Commonwealth. It is substantially less – and less costly – than proposed.  But it is sufficient to cover the Commonwealth's legal obligations and to keep job-producing projects humming.  And, unlike the $1 billion proposal, it is consistent with historic norms for debt issuance during gubernatorial transitions."

Based on his recent conversations with Governor-elect Tom Corbett's transition team, Treasurer McCord believes a $650 million offering also is consistent with the next administration's view of what is best for the Commonwealth at this time.  "No one wants ongoing projects to stop.  But we also must be appropriate stewards of the state's resources," McCord said.  "This offering is right-sized to address those shared concerns." 

McCord said that all parties involved also were concerned about the availability of the Build America Bond Program, a federal program that provides interest rate subsidies slated to expire December 31.

Gov. Rendell proposed in October a $1 billion gubernatorial-transition bond offering.  McCord declined to approve it.  Such an offering would have been twice as much debt as was issued in the last gubernatorial transition eight years ago, and would have created annual debt-service obligations of $83 million.  "The law and my duty as State Treasurer require me carefully to evaluate these transactions.  So does my commitment to Commonwealth taxpayers, who rightly are demanding that public officials carefully consider public spending priorities and debt obligations," McCord said. 

"The cash on hand to fund already-approved projects will be depleted by early February.  It is important we have cash to continue funding those projects.  But there was no need to borrow $1 billion all at once.  If we had done that, we would have been sitting on money and paying interest as we did so – losing more money than necessary with what financial executives call 'negative carry.'  I would not agree to that."

The Capital Facilities Debt Enabling Act, enacted in 1999 to provide a means for the public financing of certain authorized public improvement projects, establishes the procedures and requirements necessary for the issuance of General Obligation debt in order to finance public projects, including capital projects and redevelopment assistance capital projects. 

The Act designates the Governor, Treasurer, and Auditor General as issuing officials who collectively must consent to the authorization of public debt.  In the event that three issuing officials are unable to agree, the Act permits the debt to be authorized upon the consent of the Governor and either the Treasurer or Auditor General.  Under no circumstances does the Act authorize the Governor the sole discretion to issue General Obligation debt.

December 9, 2010

Via Hand Delivery

The Honorable Edward G. Rendell

Governor

Commonwealth of Pennsylvania

Room 225, Main Capitol Building

Harrisburg, Pennsylvania 17120

Re: Series 3 General Obligation Bond Issuance

Dear Governor Rendell:

After considerable investigation by my office, discussions with your office and consultation with Governor-elect Corbett's transition team, I hereby notify you of my consent to the issuance of $650 million in General Obligation debt to ensure the uninterrupted funding of existing public improvement and redevelopment assistance projects.  I judge this amount, if properly managed, to be sufficient to ensure that each project, originally anticipated to receive funding pursuant to this bond issuance, will continue to receive public funding support into June 2011.

I believe the proposed issuance of $1 billion in new debt is neither justified nor necessary. The issuance of $1 billion in new debt would be substantially more than historically has been issued in the transition between administrations – at a moment in time when we must be more keenly attentive than ever to new debt obligations. At the same time, it is also my judgment that issuing no new debt whatsoever would be irresponsible. Transportation and other governmental infrastructure investments are an appropriate and important component of our fragile economic recovery, and summarily shutting them off would, in my opinion, be unwise and hurtful to Pennsylvanians. Further, over time, these projects can pay for themselves and are, therefore, appropriately funded by capital project debt.

After consultation with experts in and outside my office, and with consideration of the input of the incoming Administration, I believe the appropriate issuance is $650 million. By trimming the debt issuance by $350 million, the Commonwealth's annual debt service liability to the General Fund will be reduced by $36.3 million according to Office of Budget estimates.  

Questions related to the proposed Bond issuance have illustrated the necessity to reexamine the process by which General Obligation bonds are used to finance public improvement projects. Because this type of debt is issued on a "cash flow" basis, instead of a "project basis," each bond sale funds only a portion of the total cost of projects to which the Commonwealth is obligated to fund. The consequence is to create "unfunded liabilities" by which taxpayers are obligated to assume increasing debt levels in order to pay for each project, or risk interruption or payment penalties. This is an issue that I intend to highlight in the future.

Though this may represent a departure from past practice, it is my intention to actively conduct due diligence reviews of all future proposed public debt issuances. It is clear that Commonwealth taxpayers demand that their elected officials evermore consider public spending priorities and debt obligations. The provisions of the Capital Facilities Debt Enabling Act reinforces this notion by requiring public debt be issued upon the consent of Governor, Treasurer, and Auditor General, following an independent assessment of the nature of the proposed debt issuance. Simply stated, the issuance of public debt is not within the sole discretion of the Governor. The amount, timing, scope, and purpose of any proposed debt obligation are each reasonable and prudent subjects of inquiry to be conducted by each of the independent issuing officials.

Thank you for the ongoing conversations we have had throughout this time-sensitive process.  

Sincerely,

Robert M. McCord

Treasurer

cc: Auditor General Wagner

Governor-elect Corbett

SOURCE Pennsylvania Treasury Department

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