WASHINGTON -- Virginia is slated to come to market this week with a $90 million moral obligation bond issue, the first under a new security structure for the state public school authority in which the state pledges appropriations in event of a deficiency.
The deal will come on the heels of a controversial ruling, handed down by the state Supreme Court in April, that temporarily invalidated appropriation-backed debt in April.
Earlier this year, the General Assembly adopted a resolution authorizing the bonds, which in part are backed by a moral obligation of the state to replenish a debt service reserve account in event of deficiencies.
The obligation is not binding, though state officials in an information sheet distributed last week said "there is certainly an expectation that any future session of the General Assembly would certainly provide such appropriations."
Appropriations-backed debt in Virginia suffered a temporary blow in April when the state Supreme Court declared such obligations unconstitutional. The state constitution requires voter approval for long-term debt.
The court's broad decision came in Dykes v. Northern Virginia Transportation District Commission, a case challenging the constitutionality of a proposed $330 million revenue bond issue to finish a roadway in Fairfax County, Va.
But earlier this month, the court withdrew its April 19 ruling and announced it would reargue the case, probably in September.
In any event, the moral obligation pledge serves as a final backstop for the bonds, not as primary security. And analysts said the Dykes situation does not appear to extend to the public school authority bonds, which have been rated double-A by Standard & Poor's Corp., Fitch Investors Service, and Moody's Investors Service.
"No one is really claiming that the obligation is part of the security for the bonds," said Richard Larkin, a Standard & Poor's managing director. "It's more removed than that."
He added: "I know there has been a lot of brouhaha about the Dykes case and some of the verbiage included in the Virginia Supreme Court's decision. A lot of people are concerned. But we don't think it goes to the moral obligation and we feel comfortable at the AA level."
Fitch analysts took much the same view.
"The state can't exactly pledge an appropriation," noted Claire Cohen, Fitch's executive managing director for governmental finance. "If there's a deficiency in the reserve, the governor puts it in the budget and it's up to the legislature to approve it. That's why it's a moral obligation."
Ms. Cohen said it was hard to envision a situation in which the state was faced with having to replenish the reserve fund, which is funded with bond proceeds. "It's hard to see them getting down to the reserve fund anyway," she said.
Analysts at Moody's could not be reached for comment on the issue, which is being sold on a negotiated basis. Senior managing underwriters for the issue include Morgan Stanley & Co. and Craigie Inc.
The issue will be structured with a 21-year final maturity, with $69 million of serial bonds expected, as well as one or more term bonds.
The authority will issue the bonds, then loan the money to 35 cities and counties to help them fund school construction needs. The bond-loan program has been in existence for almost 30 years. Primary security for the bonds is provided by a pledge of repayment of those loans by the participating localities.
That repayment obligation is a general obligation of each participating locality. According to state officials, there has never been a default by any locality in the history of the program.
Secondary security is also provided by state aid intercept provisions. In the event a locality did default in its payment of interest or principal, the state comptroller would withhold any state aid headed for the locality. The money would be used to meet the debt service.
According to state officials, state aid exceeds general obligation debt service by a ratio of roughly 5-to-1.
Finally, the bonds are backed by the debt service reserve account. Because 35 localities will participate in the issue, with no one locality receiving more than 10% of the proceeds, the reserve fund provides "a high level of protection against potential defaults by individual localities," the information sheet on the sale says.
Should deficiencies in the reserve fund arise, the chairman of the public school authority is required to report the matter immediately. The governor then is required to include sufficient money to replenish the fund in his or her budget, which is submitted to the General Assembly in January.
A similar moral obligation pledge has been used for bond issues done by the other Virginia authorities. State officials say there has never been a draw on the reserve funds of those authorities requiring special appropriations by the General Assembly.