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March 17, 2006
Overview of State Bond Overview of State Bond Financing ProgramsFinancing Programs
Laura Lockwood-McCall Laura Lockwood-McCall
Director, Debt Management DivisionDirector, Debt Management Division
Oregon State TreasuryOregon State Treasury
2
Introduction
U.S. Debt Market
The Sovereign State of Oregon
Oregon’s Economic and Revenue Outlook
State Biennial Budget and State Services
General Obligation Credits and Ratings
Oregon’s Bonding Process
Long-term Debt Trends
State Debt Ratio Comparisons
3
Treasury**16.4%
Mortgage Related23.3%
Federal Agencies10.3%
Money Market13.2%
Asset Backed7.8%
MunicipalSecurities
9.0%
U.S. Corporate20.2%
U.S. Bond Market
Outstanding Bond Market Debt as of September 2005* ($Trillions)
Total: $24.7 Trillion
Source: Bond Market Association * Figures may not add due to rounding** Includes interest bearing marketable public debt only
$5.0T
$3.2T$2.5T
$1.9T
$2.2T
4.0T
$5.7T
4
U.S. Municipal Bond Market
Mutual Funds14.3%
Money Mkts15.2%
Closed-End Funds4.2%
Commercial Banks7.0%
Prop. & Casualty Insurance
13.2%
Other**7.9%
Households34.6%
Owners of Municipal Securities as of June 30, 2005* ($ Billions)
Total: $2.1 Trillion
Source: Bond Market Association*Figures may not add due to rounding** Includes non-financial corporations, state and local government general funds & retirement funds, savings institutions, life insurance companies, private pension funds, brokers/dealers, etc.
$815B
$304B
$323B
$90B
$141B
$281B
$168B
5
Under the United States Constitution, the State is a sovereign entity that has given only limited powers to the federal government
The State was founded in 1859 and has its own Constitution
The State has the power to raise revenues, to borrow money, and to pay its expendituresindependent of the federal government
$8.5 billion in debt outstanding as of 6/30/05
Interest on Oregon bonds is generally exempt from federal, state taxes
State Treasurer is elected by statewide vote for a 4-year term
One of three constitutionally defined elected officers, charged with tending to the State’s finances
Based on dollar volume of transactions and assets under management, State Treasurer’s Office is one of the largest financial entities in Oregon
Responsible for managing the State's debt portfolio, including new borrowings
Serves as State’s Investment Officer, responsible for all State trust and general funds, including oversight of the State’s pension fund investments
Oregon
Washington
California
Nevada
Idaho
The State of Oregon Is a Sovereign Entity
6
Overview of Oregon’s Economy
Total Gross State Product in 2004: $128 billion
Increased by 111% from 1991 to 2004
Oregon’s economy has diversified away from resource-based industries into high-tech industries
High-tech products* constituted 6.2% of 2004 Gross State Product, versus 2.3% in 1991
2004 Population: 3.6 million
Growth driven by in-migration in past decade
11th fastest growing state during the 1990s
Increase of 1.2% over the 2003 population, above the 1% annual growth rate since 2000.
Employment growth and personal income growth has returned, but not at 1990 levels
Exports are a growing part of the State’s economy
$11.2 billion of exports in 2004
$5.7 billion of exports to Asia, 8th largest in the nation
*Electronic and other electric equipment manufacturing
Sources: Bureau of Economic Analysis, Bureau of the Census, Export.gov
7
Oregon’s Exports Have Grown Significantly
Since 1990, Oregon’s exports increased by a compound annual rate of 8.4%
Oregon’s exports have also diversified away from lumber and wood products to high-tech products
Sources: National Trade Data Bank-The Export Connection; Export.gov.
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
($ M
illi
on
s)
1990 2004
State of Oregon Exports 1990 and 2004
Total Exports Lumber and Wood Products High Tech Products
8
Total legislatively-adopted biennial budget includes $42.367 billion in revenue from all sources, including (as % of budget)
General Fund Revenues (27.1%)
Federal Funds (19.9%)
Other Funds, including sales and use taxes, fees, interest earnings, and bond proceeds (51.2%)
Lottery Funds (1.8%)
General Fund revenues derived primarily from personal income taxes
Note: Legislative actions to increase revenues have been allocated to General Fund revenue categories
7%
7%
81%
Summary of Fiscal 2005–07 Legislatively Adopted Biennial Budget
General Fund Revenues (Total $11.36 Billion)
Corporate Income Tax4%
Personal Income Tax90%
Other Revenues6%
Personal Income Tax Corporate Income Tax Other Revenues
9
Scope of State of Oregon’s Budget and Services
The State provides a wide range of services to its citizens, including (as % of budget):
Education (55.7%)
Human Services (21.3%)
All Other Programs (7.2%)
Public Safety/Judicial (15.8%)
State Constitution requires a balanced budget
Five special sessions during 2001-03 biennium to balance budget to ever declining revenue forecasts
Improving budget picture at State level is offset by continued pressure for increased spending on education, prisons, health care
Bond rating upgrade may be contingent on restoration of GF reserves to pre-recession levels (at least 5% of GF revenues)
10
Taxable General Obligation Credits vs. Corporate Credits
Moody’s 2002 study illustrated the superior credit quality of municipal securities in comparison to “AAA” corporate bonds from 1970 - 2000
10 year default rates
All General Obligation Bonds AAA Corporate Bonds
0.000% 0.675%
In 2003, Moody’s introduced in 2003 “Corporate Equivalent” Ratings for taxable municipal credits to illustrate their comparative strength versus corporate credits
Oregon’s $2.0 billion taxable Pension Obligation Bonds (POBs) received a corporate equivalent rating of “AAA”
POBs were listed on the Luxembourg Stock Exchange, with a large portion of overall bond issue sold to European investors
Oregon’s credit strengths are not shared by corporate credits:
Cannot file for bankruptcy or be acquired by another entity
Constitutional requirement to balance budget
Required transparency of financial results
Constitutional checks and balances
11
Recent Oregon G.O. Bond Rating History
Moody’s S&P Fitch1989 A1 AA- (September) A+1990 Aa (January) AA- AA (September)1991 Aa AA- AA1992 Aa AA- AA1993 Aa AA- AA1994 Aa AA- AA1995 Aa AA- AA1996 Aa AA (September) AA1997 Aa2 (April) AA AA1998 Aa2 AA AA1999 Aa2 AA AA2000 Aa2 AA AA2001 Aa2 AA AA2002 Aa2 AA AA2003 Aa3 (February) AA- (October) A+ (February)2004 Aa3 AA- A+2005 Aa3 AA- AA- (April)
Key Rating Agency Criteria for
General Obligation Bond Ratings
• Economy
• Budget
• Debt Profile
• Management
Key Rating Agency Criteria for
General Obligation Bond Ratings
• Economy
• Budget
• Debt Profile
• Management
12
Legal Authority for General Obligation Bond Programs
Oregon Constitution provides the State with authority to issue general obligation (“GO”) bonds
Separate GO bond programs are created by constitutional amendments approved by State voters
The State unconditionally promises to pay debt service over the life of each GO issue from any legally available revenues
Limit on the amount of indebtedness authorized by voters is linked to real market value (RMV) of property in the State
e.g., Higher Education (XI-G) Bonds 0.75% RMV = $ 2.48 B authorized Only $170 M in XI-G debt outstanding
Numerous other GO bond authorizations, each with hefty debt limits
More practical limits on outstanding debt established by State Debt Capacity Advisory Commission (SDPAC)
General Fund debt service as % of General Fund Revenues (5% max target)
13
Oregon’s Bonding Process
Oregon has disciplined debt management policies and procedures
Biennial budget process requires legislative authorization for all new bond issuances during a biennium
General obligation bonding programs currently focused on capital needs of higher education, community colleges
Revenue bond programs are created by statute that authorizes State agencies to pledge specific revenue streams for debt repayment
Appropriation credits generally used for funding construction of state prisons, other state office capital needs
Governor
Budget & Bonding Proposal
Legislature
Considers & Approves Budget
& Bonding Proposal
State Treasurer
Issues State Bonds on behalf of State
Agencies
State Agencies
Manage Bond Programs
State Debt Policy Advisory
Commission
14
Trends in Oregon Bond Issuance
History of Total Obligations Outstanding
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fiscal Year Ending J une 30th
General Obligation Bonds Direct Revenue Bonds Appropriation Credits • Historically, most general obligation debt linked to self-supporting Veteran’s Mortgage Bonds
• Growing use of revenue bonds to fund economic development, highways, mortgages for 1st time homebuyers
• Recent State budget crisis led to issuance of $450 M in appropriation deficit bonds and $2B in POBs in 2003
• On the horizon -- $1.9 B authorization for ODOT bridge and road improvements
15
Trends in General Obligation Bond Issuance
History of Outstanding General Obligation Debt
$0
$1
$2
$3
$4
$5
$6
$7
Fiscal Year as of June 30th
In B
illi
on
s
DVA Bonds All Other GO Debt Pension Obligation Bonds
16
Trends in Appropriation Credits Issuance
History of Outstanding Appropriation Credit
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Mil
lio
ns
Fiscal Year Ending J une 30th
Certificates of Participation Appropriation Bonds
17
Trends in Direct Revenue Bond Issuance
History of Outstanding Direct Revenue Bonds
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Fiscal Year Ending J une 30th
SF & MF Mortgage Bonds Lottery Bonds
Highway User Bonds EDD Bond Bank
18
Calculation of Net Tax-Supported and General Fund Debt
Type & PurposeTotal
Gross DebtOutstanding
Net Tax-Supported Debt
General Fund Supported
Debt
General Obligation BondsGeneral Fund Supported
General Purpose Bonds $0 $0 $0Community College Bonds 2,675,000 2,675,000 2,675,000Higher Education Facility (XI-G) Bonds 170,163,993 170,163,993 170,163,993Pollution Control Bonds (85% of Total) 33,528,250 33,528,250 33,528,250DAS Oregon Opportunity Bonds 192,605,000 192,605,000 192,605,000DAS Pension Obligation Bonds (38% of Total)* 791,904,800 791,904,800 791,904,800
Total General Fund Supported $1,190,877,043 $1,190,877,043 $1,190,877,043
Fully Self-SupportingState Highway Bonds $0 $0 $0Veterans' Welfare Bonds 757,690,000 0 0Higher Education Facility (XI-F) Bonds 595,923,724 0 0Pollution Control Bonds (15% of Total) 5,916,750 5,916,750 0Water Resources Bonds 1,356,000 1,356,000 0Elderly & Disabled Housing Bonds 213,580,000 0 0Alternate Energy Project Bonds 133,685,000 0 0DAS Pension Obligation Bonds (62% of Total)* 1,292,055,200 1,292,055,200 0
Total Self-Supporting $3,000,206,674 $1,299,327,950 $0
Total General Obligation Bonds $4,191,083,717 $2,490,204,993 $1,190,877,043
Revenue BondsDirect Revenue Bonds
Lottery Revenue Bond Program(s)** $600,555,000 $600,555,000 $0Highway User Tax I Revenue Bonds 174,500,000 174,500,000 0Highway User Tax II Revenue Bonds 355,085,000 355,085,000 0Transportation Infrastructure Bank 0 0 0Economic Development - Bond Bank 186,335,000 0 0Single-Family & Multi-Family Housing 1,520,641,073 0 0State Fair & Exposition Center Bonds 0 0 0
Total Direct Revenue Bonds $2,837,116,073 $1,130,140,000 $0
Conduit or Pass Through Revenue BondsEconomic & Industrial Development $683,185,401 $0 $0Oregon Facilities Authority 738,324,836 0 0Multi-Family Housing Programs 98,510,785 0 0
Total Conduit or Pass Through Revenue Bonds $1,520,021,022 $0 $0
Appropriation Credits Certificates of Participation (COP's) $1,040,030,000 $1,040,030,000 $1,040,030,000
Oregon Appropriation Bonds 385,865,000 385,865,000 385,865,000Total Appropriation Credits $1,425,895,000 $1,425,895,000 $1,425,895,000
Total Gross Debt $9,974,115,812
Total Debt - Less Conduit Revenue Bonds $8,454,094,790 $5,046,239,993 $2,616,772,043
*To conform to rating agency methodologies Pension Obligation Bonds are considered net tax-supported debt.** Rating agencies recognize that these programs are supported by a dedicated Lottery revenue source.
State of Oregon
Comparison of Total Gross Debt, Net Tax-Supported Debt and General Fund Supported Debtas of December 31, 2005 (all numbers to be updated subsequent to agency verification)
19
State Debt Comparisons
Source: Moody’s State Debt Medians Reports, 1996 - 2005
Recent Trends in Oregon's Net Tax Supported Debt per Capita
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Moody's Median Year
Deb
t pe
r C
apit
a
POB Bonds
Oregon
Median Among 50 States
20
State Debt Comparisons
Source: Moody’s 2003 State Debt Medians
Recent Trends in Oregon's Net Tax Supported Debt as a % of Personal Income
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Moody's Median Year
Deb
t as
a %
of
Inco
me
POB Bonds
OregonMedian Among 50 States