Part 1: New Hampshire Looking to Borrow $125 Million Next Week

It’s a warm and sunny morning in Concord, but inside the State Treasurer’s Office, it’s raining. Faced with the “most challenging period of time in any of our lifetimes,” New Hampshire State Treasurer Cathy Provencher is trying to make sure the Granite State has the cash to pay its bills.

As states around the country face falling revenues and mounting deficits, Provencher has the Constitutional duty to make sure the Granite State doesn’t go bankrupt. And while the state’s $5.5 billion budget is a high profile political battle, the cash flow challenges of meeting payroll go unnoticed. Provencher sat down with the Josiah Bartlett Center for a series of in-depth interviews to explain how the Treasurer’s Office manages New Hampshire’s finances.

“The Treasurer’s responsibility is to ensure that our cash and investments are safeguarded, that we have a prudent debt management policy in place, and that at a very high level is the Treasurer’s role,” Provencher explains “To make cash flow is adequately managed and that there are many other responsibilities that the Treasurer has, but from a Constitutional level, I need to ensure that there is in fact an appropriation for all checks that go out the door, and that cash and debt are appropriately managed.”

A November report from the Center for Budget and Policy Priorities shows that 35 states will face a combined deficit of $35 billion by the middle of 2010. The total shortfall for Fiscal Years 2010 and 2011 could reach $350 billion. The Center calculates that Arizona’s $2 billion deficit is more than one-fifth the size of the state’s annual General Fund budget, the largest relative budget gap in the nation. Detroit Mayor Dave Bing is seeking state approval to borrow $250 million to bail out the Motor City of its budget deficit and avoid bankruptcy. But Provencher says New Hampshire isn’t in any danger of bankruptcy or default.

“Goodness, no!” Provencher exclaims. “That is not even a concern of mine. There may be other programs that may be cut deeply before our state would not make a debt service payment. With my interactions with our elected officials in the House and the Senate and the Governor’s Office, debt service is off the table when there are conversations. ‘You need to cut your budget 5%, exclusive of debt service.’ So, no, I don’t have that concern at all.”

According to the state’s Comprehensive Annual Report, the New Hampshire Treasury has started each of the last several Fiscal Years with $400 to $500 million in the bank as a cash reserve, about 10% of the state’s two-year budget. Provencher says that total fluctuates significantly throughout the year.

“I’ll give you an example; on September 1st, we’re statutorily mandated to provide a first tranche of Adequacy Payments to all of our local school districts,” Provencher explained during our first interview in August. “On September 1st, there will be $115 million going out to the school districts in the state. So on August 30th, we’ll have a good chuck of cash in the bank. On September 3rd, that balance will be significantly lower.”

While the Legislature has to make sure the budget is balanced after two years, she has to make sure there is money in the state’s accounts every day.

“When laws are adopted or enacted requiring certain payment dates, there’s not always a consideration of the cash flow; that the school districts need those payments in advance of when the state might get its tax payments,” she says.

Provencher is careful not to criticize the Legislature for talking a long-term view. After all, it was the 400 Representatives and 24 Senators who elected her to her current post in January 2007. She was re-elected to a second two-year term this year.

In late August, Treasury issued $50 million in Bond Anticipation Notes in order to make sure those payments were covered.

“We first issued it for thirty days. It first came due in September. We rolled it again through November 17th. And we just rolled it again through January 20th.” At this point Provencher got up to check a bulletin board with the details from the August notes. “We are paying 30 basis points, so 0.3% is what we paying on that, annualized.”

New Hampshire will pay back that $50 million when it floats its annual General Obligation Bond on December 15th. Provencher is preparing to borrow $125 million next week to cover the state’s capital expenses. The funds will pay back $40 million in school Building Aid, $17.5 million for UNH capital projects, and $67.5 million for the Capital Budget.

“We just sent our draft official statement to the rating agencies,” Provencher says, adding that she will spend much of this week on the phone going over the bond issue with Moody’s, Standard and Poor’s and Fitch’s. “We had pretty robust conversations with the agencies in August when we were issuing our commercial paper. The big question is going to be the JUA, and the result of the JUA Case.”

Provencher says not knowing the outcome of the JUA Case is causing uncertainty about the strength of New Hampshire’s credit, but she can’t wait for the Supreme Court’s decision to borrow the money.

“It’s no accident that we issue this debt in December, in advance of a January 1st Adequacy Payment to all the school districts,” she observes. “So I can’t wait for the JUA decision to issue the debt. We need the cash.”

But the JUA Case isn’t the only issue worrying the bond rating agencies.

“Our pension funded ratio has now fallen below 60%.” Provencher says the state’s Other Post-Employee Benefit, or OPEB, commitments are also on the table. “That’s a significant liability that the state really hasn’t started to address yet.

Provencher emphasizes that the state isn’t borrowing money to pay for operating expenses, even if it appears that way in terms of cash flow. Rather, she explains, she has used money budgeted for operating expenses to cover capital costs like Building Aid, rather than issue new debt at the beginning of the Fiscal Year.

“Be very clear on that. We’re not bonding to make the Adequacy Payments. It’s all based on cash flow. I’ll go out as far as I can without borrowing, because why would I start paying interest before I need to pay the interest costs? The rates that we’re earning on our excess funds are effectively zero. We’re earning 15 or 20 basis points, so even though the debt rates right now are at a historic low. We’ll probably do this G-O deal and the rates might come between 3.5% and 4%, which is very cheap. But it’s still more than we’re earning on our excess cash, so why would I issue the debt and make interest payments before I need to?”

Provencher expects an enthusiastic response to the state’s annual bond issue, based on the success of the Turnpike System bonds floated on November 17th. The Turnpike System, which is segregated from the rest of the state’s accounts, issued $150 million in new debt on November 17th, and refinancing $67 million in old bonds. Provencher says investors jumped at the opportunity to invest in New Hampshire.

“There was such an appetite for this debt, we were three times oversubscribed,” which Provencher says allowed the Turnpike to pay a lower interest rate. “We shaved probably 40 basis points because of the oversubscription. It was a very successful sale. I think it was really a testament to again, New Hampshire is a good little story in the marketplace.”

The $150 million in Turnpike money was financed with “Build America Bonds”, which are taxable, but also include a federal subsidy of 35% of the interest to the issuer. Provencher says that federal subsidy and the popularity of the bonds allowed the Turnpike System to borrow money at a net rate of just 3.95%, and refinance its old debt at 3.49%.