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Higher interest rates after election cost State millions in BP bonds (but it could have been worse)

Bill Britt

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By Bill Britt
Alabama Political Reporter

During a Special Legislative Session in September 2016, a bill to allocate $640 million of the BP Settlement funds to repay the Rainy Day Account, the Alabama Trust Fund awarded $120 million to Baldwin and Mobile counties for road projects and fund Medicaid for fiscal 2017 and 2018. But, that’s not what happened. The $640 million promised by lawmakers didn’t materialize. Why? “The elections,” says State Director of Finance Clinton Carter.

Carter wasn’t in the Finance Department when the legislation passed, but more importantly when expectations for the payout were set. Carter said the capitalized interest was not figured into the promised amount, which accounts for some the difference. Capitalization of Interest is the amount a bond issuer may set aside from a bond sale to cover a certain number of interest payments according to The Finance Base.

“It [BP money] would have supported $650 million at 1.4 percent but when rates rose it supported less,” said Carter. “So instead of getting $650 [million] we received $630 [million].” After capitalized interest it is around $600 million.

Only Baldwin and Mobile Counties are being short changed.

And even though Medicaid received its promised fund, Commissioner Stephanie Azar wants more than the $120 she will receive.

“The bonds were scheduled to sell on November 15, however, after Donald Trump won the presidency on November 8, the next day the market shot up,” said Carter. “When the legislation was passed, the rates were 1.5 [percent] on election day it was 1.8 seven days later it was 2.3,” said Carter. “That not a lot and it’s not a big jump, and it’s not but we couldn’t change the BP amount.”

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Carter says the bonds sold “lighting fast” and received a Double A rating but the jump in the market cost.

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Conference calls were held between finance, Baldwin, and Mobile counties to make sure they wanted to go forward with the sale.

“We cautioned that interest rate could go higher meaning even less than they have,” said Carter. “We made the right call, but it means they received $20 million less.”

The final sale resulted in a total issuance of $628.7 million, according to Carter. “We are pretty happy with the results considering the significant disruption in the bond markets [rising interest rates] after the election.”

Excluding cap interest (about $29.0 million), the net proceeds are $600 million, the cash flow schedule is:

Alabama Trust Fund $238.4 million

General Fund Rainy Day $161.7 million

Alabama Medicaid Agency $120.0 million ($15 million in FY17, $105 in FY18)

Mobile/Baldwin County $78.4 million + $29.0 million = $117.4 mm

Bill Britt is editor-in-chief at the Alabama Political Reporter and host of The Voice of Alabama Politics. You can email him at [email protected] or follow him on Twitter.

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