Official: Credit rating won't cost state much - East Valley Tribune: Politics

Official: Credit rating won't cost state much

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Posted: Wednesday, January 6, 2010 5:42 pm | Updated: 3:24 am, Sat Oct 8, 2011.

The recent downgrade of Arizona's credit rating should not significantly increase the cost to taxpayers to borrow $737 million to help balance the state budget, an administration official said Wednesday.

Alan Ecker acknowledged the moves by Moody's and Standard & Poor's last month concluding Arizona is not as creditworthy as it was before the state ran into financial problems. Moody's took Arizona from an A1 rating to A2; S&P took Arizona to an A+ rating from AA-.

And Ecker, spokesman for the Department of Administration, said those new ratings apply to the borrowing the state hopes to do next week.

But Ecker said the state has the option of buying insurance on some or all of what it plans to borrow, essentially guaranteeing to investors that they will get repaid.

That insurance costs 0.3 percent of the amount borrowed. State Comptroller Clark Partridge said that will be worth it if it reduces the amount investors are willing to accept in interest payments by at least that much.

How much the borrowing will cost, though, won't be decided until next week when the state puts the plan on the market. Partridge said he assumes the various notes, which will cover periods as long as 20 years, will run in the range of 4 to 5 percent annual interest.

On paper, the state is selling off $735.4 million worth of buildings. But what it really amounts to is a mortgage of sorts.

The terms of the deal are based on the premise the state will continue to lease those buildings for the next 20 years. Payments will be designed to repay the principal on the buildings and the amount of interest the lenders demand.

At the end of the 20 years the state would again own the buildings outright.

But the buildings are a necessary part of the deal.

The Arizona Constitution contains a provision prohibiting the state from borrowing more than $350,000 on a long-term basis.

By arranging what is a sale/lease-back proposal, the state technically isn't "borrowing" any money.

More to the point, the deal legally allows the state to stop making payments at any time during the 20-year period and walk away from the buildings. The list of buildings offered for sale, though, is designed to convince investors the state won't do that, even including the state House and Senate buildings.

Relatively quick action to close the deal is necessary.

State Treasurer Dean Martin said Wednesday he originally thought the state would have to have the cash from the sale sometime this month to pay its bills. But Martin said actions taken by Gov. Jan Brewer to have the government delay paying some of its bills will get the state through this month.

He said, though, if the money from the sale isn't in the treasury in February, the state will be out of cash and will have exhausted its temporary $700 million line of credit from Bank of America. At that point, Martin said, the only option is for the state to issue IOUs, both to employees and suppliers.

Ecker said that shouldn't be a problem.

He said the plan is to market the package to individual and institutional investors next Tuesday and Wednesday.

"Assuming that the sale of the certificates goes well next week, which is the state's current expectation, the actual closing of the financing and delivery of the financing proceeds to the state is scheduled to occur on Jan. 26," he said, which is right in line with what had been planned.

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