CHICAGO -- A $214 million bond sale planned today by the Ohio Building Authority will use funds from the state's Bureau of Workers' Compensation to pay off the debt.
Paul Goggin, the authority's executive director, said he believes the deal will mark the first time that workers' compensation funds will be tapped for debt service on an Ohio bond issue.
Bond proceeds will be used by the authority to purchase a building in Columbus that currently houses the operations of the workers' compensation bureau. The building is owned as investment property by the State Insurance Fund, a trust fund set up by the bureau to provide benefits to public and private employers in Ohio.
The authority will lease the building to the bureau. The lease payments, which will come from the bureau's Administrative Cost Fund and which are subject to biennial appropriation by the Ohio Legislature, will be used to pay debt service on the bonds.
The administrative fund gets its revenues from a mandatory assessment on 350,000 employers in Ohio. According to R. Ray Kljajic, a managing director at Smith Barney Shearson, the senior manager on today's deal, the fund is expected to collect $300 million in fiscal 1994, while annual debt service payments on the 20-year bonds will average $20 million The bureau's fiscal year starts Jan. 1.
"The amount of money that goes into the fund is large, relative to debt service," Kljajic said, adding that debt service payments are scheduled in the month following the biannual assessment collections by the bureau.
The bureau must forward the April and October debt service payments to the bond trustee 20 days before the payments are due. If there are insufficient funds, all of the Administrative Cost Fund's money "has to go to pay debt service before it's used for anything else," said Leonard Jones, a vice president at Smith Barney.
The transaction's strength, Kljajic said, can be attributed to the monopoly that the bureau has on workers' compensation in Ohio, the bureau's "essential public purpose," and the fact that it is subject to state oversight.
The Ohio bureau is the largest of the nation's six state-run workers' compensation departments, he said.
Goggin said another important feature of the deal is the potential savings it represents to the bureau.
"Even under the most conservative assumptions, the savings for the state and the Bureau of Workers' Compensation" will be significant, with present value savings about $40 million to $50 million, Goggin said.
Sandra H. Devery, the bureau's chief financial officer, said the savings will come from locking in a low interest rate on the bureau's lease for the building and from the State Insurance Fund's ability to invest bond proceeds in higher-yielding instruments.
Under its current lease with the insurance fund, the bureau has paid a variable rate of 4.5% to 7%, according to Goggin. After the issue is priced, an interest rate in the low 5% range is expected, Kljajic said.
Legislation authorizing the transaction was passed by the Ohio Legislature in 1991. However, the deal was delayed until after the passage this year of cost-control reforms for workers' compensation by state lawmakers. Kljajic said it was important to have the reforms in place for disclosure and marketing purposes.
The bonds are rated A by Moody's Investors Service and A-plus by Standard & Poor's Corp.
James Dearborn, an assistant vice president at Moody's, said that while the revenues from the workers' compensation bureau are more narrow than the state general fund revenues usually used to back authority bond deals, the rating agency was reassured by structural safeguards like the 20-day prior payment of debt service. He said the agency had some concerns about the recent reforms of the workers' compensation system, but was comfortable with the 40% assessment increase on employers included in the reforms that will help the bureau build its cash reserves.
In a release, Standard & Poor's cited the state's "long history" of using appropriations-secured bonds and the usefulness of the workers' compensation building as factors leading to its A-plus rating with a stable outlook.
According to the preliminary statement, the offering will contain about $119 million of serial bonds with maturities from 1995 to 2008 and about $95.7 million of term bonds maturing in 2014. The bonds are exempt from federal and Ohio income taxes. Kljajic said the bonds should attract institutional and retail interest.
Co-managers on the deal, which is scheduled to close Oct. 26, are Banc One Capital Corp.; Donaldson, Lufkin & Jenrette Securities Corp.; M.R. Beal & Co.; A.G. Edwards & Sons Inc.; Kemper Securities Inc.; Merrill Lynch & Co.; and Seasongood & Mayer.