A growing number of municipalities are turning to tax-exempt bond pools to help allay the costs of liability and workers' compensation insurance, a practice that is expected to increase further, according to Standard & Poor's Corp.
The use of pooled financing, is likely to accelerate because of the "high costs and limited availability of insurance, and municipalities' large annual insurance needs," the rating agency said in a press release last week.
"I definitely would expect this to take off because you have some cost advantages if your funding is tax-free municipal bonds, and the amount of insurance needs are huge," said David Hitchcock, a director at Standard & Poor's, although he said it is hard to predict an exact level of volume. "A lot of municipalities are feeling their way as to what the proper structure [of such pools] should be. As more participants become familiar with the process, we'll see more issuance.
In the latest example of the trend, Standard & Poor's assigned an A rating to California's Central San Joaquin Risk Management Authority on Sept. 22.
Similar bond pools from the Mid-America Regional Council Insurance Trust in Missouri and the California Schools Insurance Authority were rated A-minus in recent weeks. Standard & Poor's has also followed developments in the Idaho Counties Risk Management Program, but that entity has yet to issue bonds, the release said.
San Joaquin's rating applies to two series of tax-exempt revenue bonds to be issued by the authority: a $7.7 million pooled liability insurance program Series 1994A and an $8.9 million pooled workers' compensation insurance program Series 1994C.
Miller & Schroeder Financial Inc. will be the lead manager for the San Joaquin deals.
Joe Arton, senior vice president at Miller & Schroeder, said the date of the sale has not been determined because two additional series, B and D, have yet to be rated. The $9.56 million B series and $15.92 million D series will be taxable structured issues, Arton said.
Selling the issue could be a "major problem," Arton said, because of the market's unfamiliarity with pooled issues and,because of the structured taxable Portion. The unfamiliarity, combined with the few number of issuers willing or able to sell pooled securities, will keep the level of volume down, he said.
"We might see more, but I don't see the floodgates opening," Arton said. "The situation is that they are so specialized and so few have been done we end up talking to the institutional analysts for days getting them up to speed and then [they] do their own credit analysis."
Previously, the San Joaquin authority issued $13.9 million of taxable bonds in 1991 and about $12 million of revenue bonds in a private placement in early 1992, according to Securities Data Co.
The bond pool program was established in 1979 and has grown to 54 small- and medium-sized cities in the San Joaquin area that are required by law to provide insurance.
"You might see larger state pools, but I think initially we're finding this at the local level," Hitchcock said. "It's the smallest entities that are having the hardest time getting insurance and they're finding it's more affordable if they band together."
Contracted fixed payments from members of the San Joaquin program are projected to provide at least 1.25 times debt service coverage on the bonds, which mature in three years. Proceeds from the bonds will be used to make payment on individual claims of up to $300,000, which limits the possibility that one participant could wipe out the pool, Hitchcock said.
The authority's ability to call the bonds if coverage falls below 1.25 times, strong disincentives for withdrawing from the program, and a short debt service schedule provide additional strength to the San Joaquin program, Standard & Poor's said.
