CHICAGO -- Bond issuance for underground petroleum storage tanks will be given a twist tomorrow when an Ohio agency plans to sell $25 million of taxable revenue bonds backed solely by user fees.
The bond issue marks the first by the state's Petroleum Underground Storage Tank Release Compensation Board and the first in the nation not to rely on any public funds to pay off the debt, according to officials involved in the deal.
"The main distinction is that [Ohio's board] makes the people that are going to receive the benefit, pay for the benefit," said Noreen White, a principal at Municipal Advisory Partners Inc., the board's financial adviser. "There is no state backup or moral obligation pledge or the use of general fund money. It's a classic case of a public-private partnership."
While previous storage tank debt issues in Iowa and Maryland were backed by tax revenues, the Ohio bonds are backed by mandatory annual fees collected from tank owners.
Bond proceeds will be used to clean up property that is damaged by accidental leakage of petroleum from underground tanks.
The Ohio legislature created the board in 1989 in response to U.S. Environmental Protection Agency regulations that set financial responsibility requirements for tank owners.
State lawmakers also established a financial assurance fund overseen by the board that is funded by the mandatory fees. Since 1990, the board has collected more than $32 million in fees.
Payments out of the fund are used to satisfy tank owners' claims for expenses related to correcting problems caused by accidental petroleum leaks and to fund the board's administrative costs.
Richard C. Murray, the board's director, said there are 40,000 storage tanks at 16,000 locations whose owners are assessed fees by the board. He said the owners include oil companies, governments, and fuel-related businesses. Small tanks and tanks for home heating oil or tanks that are abandoned are not covered by the fund.
The bond issue was spurred by projections that claims by tank owners against the fund will surpass annual revenues over the next four years.
Jocelyn Mortensen, a vice president at PaineWebber Inc., the sole manager on the deal, said that the projected claims are based on the EPA's 1998 compliance date for tank owners to upgrade tanks and install leak detection systems.
"What we anticipate is a bulge of claims when the upgrades are going on, which is a perfect situation for issuing bonds," Mortensen said.
The bonds will be sold on a taxable basis because the fees used to secure the bonds come mostly from private entities and the proceeds from the bond issue will largely benefit private entities, White said. Under the 1986 Tax Reform Act, bond issues exceeding both the 10% private use and private security interest test cannot be sold on a tax-exempt basis.
The issue was rated A-minus with a stable outlook by Standard & Poor's Corp. based on the mandatory participation of tank owners in the program, 2.85 times debt service coverage, and the board's rate-setting flexibility.
On the downside, the agency pointed to a decline over the last three years in the number of tank owners in the fund that resulted in a slight decrease in fee revenues from $8.5 million in 1990 to $8.3 million in 1992.
Moody's Investors Service was not asked by the board to rate the issue.
The deal contains $20.6 million of term bonds that mature in 2008 and $4.3 million of serial bonds that mature in 1994 through 1997.
Murray said the board may return to the market in two years. James Miller, the chief financial officer for the board, said a return to the market would be warranted depending on the number of claims that are made in the near future.
The only previous bond issues for underground tanks were done by Iowa and a group of local governments in Maryland, according to Mortensen.
Larry Thornton, Iowa's deputy state treasurer, said two tax-exempt issues, totaling $76 million, have been sold since the legislature approved the bond program in 1989. The bonds were backed by motor vehicle tax revenues and were sold on a tax-exempt basis, he said.
However, he said that the state's Petroleum Storage Tank Fund also collects per tank fees, which can be used to back bonds that could probably be sold on a taxable basis.
In 1990, a pool of local governments in Maryland sold $16.2 million of tax-exempt certificates of participation that were backed by the general obligation pledge of each participant.
Two other Midwest states are considering legislation to allow for the issuance of bonds to address storage tank problems. The bonds would be tax-exempt.
In Illinois, the General Assembly is considering a 20-year extension of a 0.3 cent-per-gallon motor fuel tax and to allow the issuance of $110 million of general obligation bonds.
In Michigan, the Legislature is expected to take final action this week on a bill that would authorize the state treasurer to issue up to $250 million of bonds backed by a 7/8 cent-per-gallon gas tax, according to a spokeswoman for the state's Department of Management and Budget.
White, the Ohio board adviser, said that after Ohio's deal is sold, other states may become interested in doing storage tank issues that are not backed with tax revenues.
"Once we've seen the reception in the market, I think other states that are grappling with budget problems could consider copying the program," she said.