Centralizing state debt issuance lowers costs and adds efficiency, official says.

CORONADO, Calif. -- Several states are moving to set up debt management systems that would coordinate all debt issuance, including that of localities, through a central state agency, a Moody's Investors Service official said here last week.

These centralized debt management strategies will ultimately lower administrative costs and make debt issuance more efficient, Katherine McManus, a vice president and a manager at Moody's, said Thursday.

Her comments came during a discussion of debt reform practices at the annual fall conference of the Association for Governmental Leasing & Finonce.

The debt management strategies could come in many forms, but the most common proposals currently being discussed plan for all debt issuance by local governments to pass through a centralized state agency, she said.

Several states, including Virginia, Maryland, Oklahoma, and Georgia, have already set up such practices, McManus said.

These programs "have several strengths from Moody's perspective," she said.

The states that have implemented these management strategies treat all obligations, including lease financing, as debt "to be paid from state revenues for projects they can reasonably afford," McManus said. The state projects are also centralized, "giving the state the tools necessary to properly implement them, to access the market quickly, [and] at a lower cost by reducing administrative costs," she said.

Most importantly, Moody's thinks "the programs will result, over time, in promoting long-term fiscal stability," McManus said.

Centralized debt management also lessens the risk of non-appropriations on vendor leases, she said, because those leases sometimes have been entered into without prior state knowledge. Channeling all municipalities through one state agency for debt issuance virtually eliminates the risk of non-appropriations or default, McManus said, adding that the ratings agencies look more favorably upon this arrangement.

Several states are currently working on centralized debt management plans, including Ohio and Kentucky, she said.

Ohio is one of the few states that has specific constitutional authority to issue lease debt, and the state's current reorganization of its debt management strategy would take that one step further, McManus said. Since the state's lease debt obligations are treated like general obligation debt in the appropriations process, the state proposes eliminating these types of financing altogether and issuing general obligation bonds instead, she said.

"This approach will result in lower administrative costs, centralized control of debt management, lower interest rates, [and] promote use of issuance through competitive bids. Moody's is not averse to this kind of thinking," she said.

Kentucky, which has historically financed all of its projects with certificates of participation, is working on a constitutional amendment that would eliminate the long-term debt assumption provisions in the constitution but leave some debt limitations in place, McManus said.

"If this package passed, the result could be that it would create a new capped class that looks a lot more like a limited tax [general obligation bond] than an unlimited tax obligation," she said.

New York State is in the process of setting a $25-to-$26 billion cap on aggregate debt issuance including any general obligation, any certificate of participation, and any state appropriation debt, said Joseph Branca, chief financial officer of the New York State Urban Development Corp.

"Anything supported by state revenue is subject to this cap. The cap is based on the gross personal income of the state of New York in any one year," Branca said.

A referendum will be held on the proposal in November of next year, and, if passed, would take effect in January 1996, he said. The proposal would allow state debt issuance to grow by 0.3% a year from its current level of 1% of gross personal income to a maximum of 4.4% in fiscal 2007, Branca said.

"We think this particular mechanism is one that can provide long-term control depending on whoever is in office. The concept is to try to maintain a level of debt that is supportable by the people of the state of New York," Branca said.

Also included in the debt reform proposal is a limit on the amount and type of debt that can be offered at one time without going to the voters, he said.

"All of this overall is designed to provide controls imposed on the state by the state so that it's clear both to the investor community, as well as to the elected community, as well as the debt ratings community that New York is serious about controlling its debt," Branca said.

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