March 15, 2010

Locally, Wall Street stalls funds for Maine's streetsState hits surprising obstacles in trying to sell road bond: high rates, no buyers

NOEL K

— By . GALLAGHER

click image to enlarge

John Patriquin/Staff Photographer; Thurs, Sept.,25, 2008. Photo taken on Warren Ave. towards the Intersection of Warren Ave. and Riverside st. in Portland.

Staff Writer

The state of Maine could not float a $50 million transportation bond this week because traders told officials there was ''no market'' at all for large financial transactions such as this one.

The state hopes the national financial crisis will stabilize by next week, when it again tries to access capital, probably getting a higher interest rate than had been expected.

''In 34 years I have never had a trader say, 'I can't give you a sale price. There is no market,' '' said Maine Municipal Bond Bank Executive Director Robert Lenna, describing his efforts to sell the bond on Wall Street.

A week ago, Lenna said, the interest rate for the AA-rated revenue bond would have been about 3.8 percent or 3.9 percent. But on Tuesday, short-term interest rates, a factor used to calculate interest rates for municipal bonds, soared as high as 9 percent and 10 percent, effectively shutting down market activity.

''If there is any place the (national financial) crisis is affecting the citizens of Maine, it is here,'' Maine Treasurer David Lemoine said Wednesday.

The board of directors for the Maine Municipal Bond Bank voted Wednesday to sit out this period of turmoil in financial markets and try to sell the transportation bond sometime before Nov. 15 at a rate no higher than 5.5 percent. Even at that rate, the bond would cost taxpayers millions of dollars in extra interest payments over the life of the loan than might have been expected a week ago.

Lemoine said Thursday that the state's bond bank representatives made the right move by delaying.

''Congratulations on stepping back from the plate and having the courage to do that,'' he told Lenna at the bond bank's monthly board meeting Wednesday.

There were no immediate repercussions from failing to sell the bond this week because the state Department of Transportation did not need the funds immediately. However, there will be consequences if the market turmoil lingers, Lemoine said.

The $50 million TransCap bond is meant to pay for 10 highway reconstruction projects involving more than 20 miles of road in eight counties. It is part of a larger transportation package approved by the Legislature last session that includes $160 million in bonds earmarked for bridges. Those bonds are scheduled to be put on the market in annual $40 million issues, from 2009 through 2012.

Lemoine said the jobs associated with the 10 transportation projects covered by the $50 million bond could be jeopardized if the markets don't recover. As a rule of thumb, about 34 jobs are created for every $1 million in transportation funds, meaning that up to 1,700 jobs could be affected.

''If this problem is not fixed, then you can look at the list of projects and the jobs that they would have created and say that is not going to happen,'' Lemoine said Thursday.

Lenna said the ''frozen, distorted'' bond market is particularly surprising because municipal bonds are considered very stable, with a default rate of less than 1 percent. But that perceived stability has been knocked out of kilter by the financial crisis. ''It's like this poison has been introduced into the financial circulatory system,'' he said.

''(The bond market) is where governments and towns and counties go to borrow the money that lets them build schools and build sewer plants and pave roads and do all of that infrastructure that needs constant maintenance,'' Lenna said. ''If this market were to contract substantially, if investors decide it is not as secure as they thought it was or they thought there are other places to put their money, the impact on our ability to get money to build schools and hospitals and all of this stuff would be affected. ''It's a big deal. It's a really big deal,'' Lenna said.

In addition to re-floating the TransCap bond, the Maine Municipal Bond Bank is looking to re-enter the market next week for its semi-annual bond sale, with a $99 million bond representing local projects for more than 20 municipalities. Lenna said he hopes the market will have settled down by then.

Maine's situation is not unique, said Susan Gaffney, an executive with the Government Financial Officers Association, a nationwide trade association.

''We're hearing from many state and local entities that they are having problems with pricing and accessing the market,'' she said, noting that most are also choosing to delay activity until the market stabilizes. ''This is a problem with liquidity and not a problem with municipal securities as a product.''

If anything, Maine is in a better position than most, since it has a limited number of bonds in play. Some major cities have daily activity in the market. ''You are in better shape to wait and let the market recalibrate,'' Gaffney said.

The TransCap bond sale delay will not hurt the 10 transportation projects, state transportation officials said. One of the projects, to repave a section of Route 4 in Sandy River Plantation, is already under way, and a second project, to repair a section of Route 1 in downtown Kittery, has been put out to bid.

''Right now, we're fine. We're funding (the work) with money from elsewhere,'' said Mark Latti, spokesman for the Maine DOT. ''Now, if things continue and we're unable to sell the bond by the end of the year, it would pose some challenges. It would mean those projects would be delayed.''

Revenue to repay the TransCap bond will come from five sources, including 7.5 percent of annual receipts from the state gas tax, currently at 28.4 cents per gallon for gas and 29.6 cents for diesel. But gas consumption is down, eating into that revenue.

Other sources of TransCap revenue are $10 from each $25 vanity license plate fee and $10 from each $33 vehicle registration fee. Last month, Maine DOT announced it was suspending work on about 85 miles of road, a little more than 10 percent of the work planned for the year, because of rising asphalt prices.

''It's a difficult environment,'' Latti said. ''All state agencies are experiencing difficult times, and it's a balancing act between available funding and available contractors. We're really in extraordinary times.''

Staff Writer Noel K. Gallagher can be contacted at 791-6387 or at:

ngallagher@pressherald.com

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