Forward Metro St. Louis Presentation On Missouri Fifth State Building Bond Issue James R. Moody & Associates September James R. Moody & Associates

It is fairly easy to find total debt in Missouri’s financials, but you have to go to Note 5 of the Missouri CAFR to find assets. Missouri has total debt of $3.8 billion; assets are based on historical cost and exceed $100 billion before depreciation. If Missouri was an individual we would be considered wealthy. How Much Is This Building Worth? 2James R. Moody & Associates

Missouri Has Been A Conservative and Fiscally Responsible Borrower General obligation debt only for state building projects and water pollution and stormwater control projects with borrowing approved by voters Pledge of appropriation debt for certain state buildings and prisons, and revenue bonds issued by the Board of Public Buildings No bonds or notes used to pay normal operating costs of government, unlike other states GO bonds rated triple AAA, another indicator of good financial management Current on actuarially required contributions (ARC) for pension systems which are a state responsibility. 3James R. Moody & Associates

Normal Types Of Governmental Borrowing General Obligation Bonds (voter approved) Revenue Bonds With Earmarked Revenue Source (MODOT bonds) Pledge of Appropriations Bonds (revenue bonds backed by pledge of appropriation) Short term borrowings (revenue anticipation notes --RANS, tax anticipation notes--TANS) 4James R. Moody & Associates

Bad Borrowing Techniques Used By Other States Issuing state debt to pay ongoing operating expenses Sale of toll road (Indiana turnpike) Sale and leaseback of existing state buildings (Arizona) IOU’s (California) Underfunding actuarially required contributions (ARC) to pension systems which are the responsibility of the state (Illinois, other state and local governments) 5James R. Moody & Associates

A Few Caveats Bonded indebtedness should not be utilized to pay ongoing operating expenses That is similar to using your credit card to pay for ongoing operating costs of living If you support a bond issue, it should be only for capital improvements, and not allow Missouri to fall into the gimmicks other states have used James R. Moody & Associates6

Whether To Issue Bonds Is Similar To Decisions Made To Expand Your Business How much can you afford What is the term of the loan Fixed rate or variable rate Serial payments or lump sum When can you refinance or pay down debt 7James R. Moody & Associates

Missouri’s General Obligation Debt Third and Fourth State Building Bonds Water Pollution Control Bonds Stormwater Control Bonds James R. Moody & Associates8

Missouri Bonded Debt By Category Principal Outstanding Per Capita Debt General Obligation$666.5 million$ Board of Public Buildings$623.3 million$ Other$253.3 million$42.84 MODOT$2.355 billion$ Total$3.832 billion$ James R. Moody & Associates

Missouri’s Per Capita Debt Compared To Other States Missouri shows up 22 nd in the country in per capita debt, but the majority of that debt is MODOT debt backed by an earmarked MODOT revenue stream. Missouri’s non-MODOT per capita debt of $ is relatively low, and not of major concern to the debt rating agencies 10James R. Moody & Associates

Arbitrage Issues Arbitrage is whether borrowed funds can be invested at a rate above or below the borrowing rate. Positive arbitrage means the funds are invested at a rate above the borrowing rate. Negative arbitrage means the funds are invested at a rate below the borrowing rate. Based on current market conditions, the State will almost certainly face negative arbitrage, which means funds should not be borrowed until expenditures are very near. This would mean that a series of bond issues similar to the Third State Building Bonds might be necessary. 11James R. Moody & Associates

Third State Building Bonds Issuances Series and Year of IssuanceDollar Amount Of Issuance Series A 1983$40 million Series B 1983$35 million Series C 1984$50 million Series A 1985$75 million Series A 1986$325 million Series B 1987$75 million Total$600 million 12James R. Moody & Associates

General Obligation Bonds Must Be Voter Approved Third State and Fourth State Building Bonds both narrowly passed a vote of the people. (Third State was a June election, Fourth State an August election). Governor Nixon wants to push an aggressive timeframe, which would probably mean a special election. Conventional wisdom is that issues such as these (and such as tax increases) can only pass at a statewide primary or general election, which means August 2010 or November This timeframe does not meet Governor Nixon’s goals. An aggressive campaign will be needed to convince voters of the needs. 13James R. Moody & Associates

Steps In The Approval Process To Issue Bonds Passage of a bill calling for a referendum by the General Assembly Passage of the referendum at a public vote Appropriation of funds for debt service Bond Issuance Current authorization for Build America Bonds expires at the end of calendar year In a best case scenario a referendum would happen by April James R. Moody & Associates

How Much Is Debt Service and How Will We Find The Money A general rough rule of thumb for estimating annual debt service payments is about 6%. For example, if $100 million is borrowed, principal and interest annual payments would be around $6 million. Governor Nixon has said that debt service will be paid by reductions or offsets in operating budgets. Rates are creeping up a little, but the borrowing environment is still good compared to historic interest rates. James R. Moody & Associates15

Problems With Passing Fifth State Building Bonds Governor Nixon would like legislative consensus. It does not seem to be there yet. Governor Nixon would like that consensus to be on both the idea of borrowing and the elements of the package. Nixon approach would likely combine withheld stabilization projects, some higher education, converting some leased buildings to owned, some mental health projects, possibly buildings at old JC Penitentiary site, possibly some transportation funding, also public safety infrastructure. Can that package gather consensus? Doing a package quickly even with consensus could be a challenge. 16James R. Moody & Associates

Timing of Bond Issuances and Budget Impacts If authorized, the Fifth State Building Bonds will be issued over a number of years, similar to the Third State Building Bonds The budgetary impacts would also therefore be spread over a number of fiscal years. Debt service would only be necessary after the bonds are issued. Debt service would probably not begin for a few years, which might coincide with revenues growing again. 17James R. Moody & Associates

What Type of Bonds Will Be Used Initial bonds might be Build America Bonds, dependent and contingent upon when voter approval occurs. Build America Bonds are taxable but with a 35% federal subsidy on interest cost. Build America Bonds authorization currently expires on January 1, 2011, so the current window for Build America Bonds is narrow, thus the desire for fast action by the Nixon administration. After Build America Bond authorization expires, tax-exempt bond issuance will probably be used. Nixon administration is also considering possible use of Economic Recovery Zone Bonds and Energy Efficiency Bonds. The use of Economic Recovery Zone credits makes sense, as they have a 45% interest subsidy. Nixon administration is working on accumulating unused Economic Recovery Bond authorization statewide. 18James R. Moody & Associates

Summary Voter approval is a major hurdle, but getting legislative consensus may be a larger hurdle. A package will move forward only with consensus, and nothing will move until after veto session in mid-September. Therefore no special session during veto session to consider Fifth State. Missouri has the capacity to do more debt without impacting its “triple AAA” rating status. Budgetary issues exist but could probably be managed. Increased debt service would be spread over a number of future operating budgets. Make sure bond proceeds are not used to subsidize the operating budget. 19James R. Moody & Associates