Bloomberg News

Nevada Booze Bonds Seen Overcoming Worst Housing Slump

February 18, 2013

Nevada Governor Brian Sandoval

Nevada Governor Brian Sandoval is seeking a way to borrow at municipal interest rates close to four-decade lows. Photographer: Mark Wilson/Getty Images

Nevada (STONV1:US) Governor Brian Sandoval, whose borrowing ability has withered as the state suffered the nation’s biggest drop in property values, wants to tap a revenue stream that emerged from the recession unscathed: liquor taxes.

Levies on alcoholic beverages rose in seven of the past eight years, even as property taxes have suffered, state data show. The Republican governor proposed $58 million in general- obligation bonds to repair state buildings in his 2013-2015 budget proposal, and his administration is considering using revenue from existing booze levies to back the debt. It’s an opportune time to borrow, as signs of an economic rebound lead investors to ask for less extra yield on Nevada securities.

Sandoval, 49, is seeking a way to borrow at municipal interest rates close to four-decade lows. The property tax revenue that traditionally funds the state’s general-obligation debt service has been falling since 2010. As a result, Nevada is unlikely to be able to issue new debt backed by those taxes until 2020, according to the state treasurer.

“What we need is a very predictable, reliable funding stream,” said Jeff Mohlenkamp, director of the state’s Department of Administration in Carson City.

Recession Hit

In Nevada, the recession that ended in 2009 hit harder than elsewhere in the nation. The jobless rate peaked at 14 percent in 2010, the highest since at least 1976. While it fell to 10.2 percent in December, that tied the state with Rhode Island for the nation’s highest level, data compiled by Bloomberg show. Nationwide, the rate was 7.8 percent.

Nevada is one of 11 states without a prediction for when tax collections will return to peak levels, according to the National Conference of State Legislatures. It wouldn’t be the first to turn to alcohol sales to bolster its finances.

Last month, a private entity created by Ohio Governor John Kasich to spur job growth sold $1.5 billion in debt backed by profits from the state’s wholesale liquor distribution system. In 2009, the state issued taxable Build America Bonds with a similar backing of liquor profits.

While Sandoval is still weighing options for a dedicated funding source for the debt, such as the tax on slot machines, the liquor levy on licensed importers and wholesalers has emerged as the most probable choice, Mohlenkamp said.

Alcohol Advance

Revenue from that source has surpassed pre-recession levels, rising every year except one since fiscal 2005. It will probably keep climbing over the next three years, according to the state’s Economic Forum, the entity charged by the legislature with estimating general-fund revenue.

Meanwhile, state property tax collected to repay general- obligation bonds is projected to decline to $129.8 million in fiscal 2013 from $186.7 million in 2010, according to the treasurer’s General Obligation Debt Capacity and Affordability Report. Property-tax revenue generally trails changes in home values.

The proposed bonds, which would need approval from the legislature as part of Sandoval’s $6.6 billion budget plan, would probably be structured so the debt is backed secondarily by the state’s general fund, Mohlenkamp said. If approved, the same mechanism could be used for more bonds in the next biennium, he said.

Funding Promise

The promise of stable, dedicated funding may alleviate some concern that the housing market may not have bottomed, said Michael E. Johnson, managing partner in Solana Beach, California, at Gurtin Fixed Income Management LLC.

“It is something we could be interested in,” said Johnson, whose firm handles $4 billion in munis. “Traditionally, liquor revenues across the country are relatively stable. I tend to like that part of it.”

Last month, Nevada, which has about $2 billion of debt, issued tax-exempt general obligations. The refinancing sale showed the state shrank its relative borrowing costs in the past year.

Five-year tax-exempt debt sold last month yielded 1.18 percent, or about 0.33 percentage point above benchmark bonds, data compiled by Bloomberg show. That extra yield is down from about 0.5 percentage point for similar-maturity debt at a Nevada offer in March. The securities were rated AA by Standard & Poor’s, the third-highest level.

Premium Push

Before the sale, state officials worked to reduce what they call the “Nevada premium” resulting from the state’s fiscal travails, said Chief Deputy Treasurer Mark Mathers.

“During the financial crisis, Nevada was in the news for its high foreclosure rate and high unemployment rate,” Mathers said in an interview. “The headlines left our bonds, despite being AA, trading at a higher spread than other AA-rated states.”

There have been signs of a turnaround in Nevada, the fastest-growing state in the last decade.

Home values in Las Vegas, Nevada’s largest city, rose about 10 percent in November from a year earlier, the fifth-best annual gain in the 20-city S&P/Case-Shiller index. Prices fell 61 percent from February 2007 to March 2012 -- the most of any American city.

Home prices in Nevada remained 52 percent lower in December than they were at their peak in March 2006, the largest drop of any U.S. state, according to CoreLogic (CLGX:US), an Irvine, California- based data provider.

States’ Quest

Nevada joins states investigating alternative funding to expand debt capacity as traditional revenue streams stagnate, said Emily Raimes, an analyst at Moody’s Investors Service.

“There are a lot of discussions going on in the states on the best way to fund the transportation and capital programs they want to fund,” Raimes said from New York. “Nevada is not very unusual in that it is looking at other funding sources.”

While the state isn’t required to identify a dedicated funding stream for its general-obligation debt, the treasurer’s office has recommended the step to reassure investors, Mohlenkamp said.

“They have recommended we identify a direct funding stream to provide a little more certainty, a little more structure to the bond purchasers,” he said.

Following is a pending sale:

NASSAU COUNTY (9315MF:US) in New York plans to sell $142 million in general-obligation bonds and $187 million in bond anticipation notes as soon as Feb. 21, according to offering documents. The county had its finances taken over by a state control board in 2011. (Added Feb. 19)

To contact the reporter on this story: Amanda J. Crawford in Phoenix at acrawford24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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