Financial Assumptions and Cash Management Study
- FileName: FinancialAssumptionsandCashManagementStudyfinal.pdf
Financial Assumptions and Cash
Prepared for the Joint Transportation Committee,
Washington State Legislature
October 7, 2008
Public Financial Management
Table of Contents
1. Summary ......................................................................................................... 1
1.1. Findings and Recommendations ....................................................... 1
1.2. Acknowledgements ............................................................................. 3
2. Financial Plan Bond Financing Assumptions ........................................... 5
2.1. Description of the 16-Year Financial Plan ...................................... 5
2.1.1. 16-Year Financial Plan Computer Model .............................. 5
2.1.2. Legislature’s Debt Model ......................................................... 6
2.1.3. OFM/WSDOT Debt Model ................................................... 6
2.1.4. WSDOT Monthly Plan Model ................................................ 6
2.3. Evaluation of Bond Financing Assumptions .................................. 7
2.3.1. Interest Rate Assumption......................................................... 7
2.3.2. Costs of Issuance ..................................................................... 15
2.3.3. Bond Premium or Discount .................................................. 16
2.3.4. Debt Service Withholding ...................................................... 18
3. Cash Management Practices for Capital Expenditures .......................... 23
3.1. Current Practices ............................................................................... 23
3.1.1. WSDOT Funds and Accounts .............................................. 23
3.1.2. Capital Expenditure Projections ........................................... 26
3.1.3. Budget Monitoring and Evaluation ...................................... 27
3.1.4. Bond Sizing and Timing ......................................................... 28
3.1.5. Basis of Accounting in the Financial Plan ........................... 29
3.2. Historical Accuracy of Capital Expenditure Projections ............. 30
3.2.1. Actual vs. Projected Capital Expenditures .......................... 30
3.2.2. Historical Cash Balances ........................................................ 32
3.3. Impact of Inaccurate Capital Expenditure Projections ............... 33
3.3.1. Interest Earnings vs. Interest Expense ................................ 33
This report provides an independent evaluation of the bond financing assumptions used
in the 16-Year Transportation Financial Plan and corresponding Legislative, Office of
Financial Management (OFM), and Department of Transportation (WSDOT) budget and
debt models, as well as WSDOT’s cash management practices as they relate to bond
sales, capital spending, debt service withholding and fund balances.
This report, where appropriate, makes recommendations regarding changes in
assumptions that are more aligned with best-practices, and changes in practices that can
result in a more effective use of budgeted and planned transportation cash and bond
1.1. Findings and Recommendations
The 16-Year Transportation Financial Plan generally uses reasonable bond financing
assumptions that are consistent with those used by other states and forecasts of major
financial institutions. Its bond withholding assumption attempts to adhere to existing legal
requirements and is a prudent way to ensure debt service is paid.
WSDOT employs cash management practices that are similar to those of other state
governments; however, WSDOT has continued to experience significant capital budget
variances and substantially larger-than-expected cash balances, which may have
resulted in the issuance of debt earlier than it is needed, the accrual of attendant interest
cost, and the diversion of resources from other priorities.
This report attempts to identify strategies that have the potential to reduce the budgeted
and planned transportation-related net interest cost and cash balances to a level that is
more in-line with expectations.
The major findings and recommendations of this study are summarized below.
Financial Assumptions and Cash Management Study |1
Summary of Findings and Recommendations
Finding 2.1 The Legislature’s lower interest rate assumptions that have been used
beginning in 2008 (and subsequently adopted by OFM and WSDOT) are
similar to those used by other state forecasting entities.
Finding 2.2 While no interest rate forecast has been shown to be an accurate predictor,
the base interest rate forecast that OFM/WSDOT and the Legislature rely
upon (Global Insight’s BBI forecast) is at least consistent with the interest rate
forecasts from major financial institutions.
Recommendation 2.1 The Legislature’s lower interest rate assumption that has been used
beginning in 2008 (and subsequently adopted by OFM and WSDOT), which
adds 29 basis points to the Global Insight BBI forecast, appears reasonable
and is not overly aggressive, as the average interest rate on appropriate
State MVFT bonds has been just 5 basis points higher than BBI over the last
three years, and we do not recommend a change to the assumption.
Recommendation 2.2 The Legislature should continue to monitor the relationship between future
State MVFT bond issues (new-money, non-AMT tax-exempt, current interest
bonds) and the BBI, and revisit the Legislature’s interest rate assumption in
the event the TIC exceeds the BBI by more than 29 basis points. The
Legislature should consult with the OST, who can confer with its financial
advisors and bond underwriters, to identify and evaluate any credit or bond
market changes that caused the increased spread to BBI.
Recommendation 2.3 The Legislature and OFM/WSDOT should continue to use the Legislature’s
assumption for future bond sales costs of 0.51% of the principal amount for
all projected bond sales, as this percentage is much closer to the amount
paid on historical State bond issues and the nationwide average underwriter’s
Recommendation 2.4 The Legislature should continue to monitor the bond sales costs for future
State MVFT bond issues (new-money, non-AMT tax-exempt, current interest
bonds) and revisit the Legislature’s assumption in the event actual bond sales
costs exceed 0.51% of the principal amount. The Legislature should consult
with the OST, who can confer with its financial advisors and bond
underwriters, to identify and evaluate any credit or bond market changes that
caused the increased bond sales costs.
Recommendation 2.5 WSDOT should request that the Office of the State Treasurer adjust the par
amount of bonds offered for sale in order to more precisely target the amount
of bond proceeds that are needed and offset any bond premium or discount.
Financial Assumptions and Cash Management Study |2
Summary of Findings and Recommendations
Recommendation 2.6 WSDOT should continue its practice of monthly withholding and transferring
approximately 1/6th of the upcoming semiannual debt service payment to the
relevant debt service fund. WSDOT should adjust the amount transferred so
that the balance in the relevant debt service fund (after the transfer for that
month is made) is approximately equal to, but not less than, the semiannual
debt service payment becoming due in the following month. The WSDOT
budget for debt service should be equal to the amount expected to be
withheld. The WSDOT supplemental budget for debt service should reflect
any changes in the bond issue amounts from the original budget.
Recommendation 2.7 WSDOT should not change its debt service withholding practice unless the
State identifies the specific legal restrictions for debt service withholding and
WSDOT prepares an alternative funding plan for debt service. WSDOT and
the Legislature should confer with the OST, who may consult with its bond
counsel, prior to making any changes to the debt service withholding practice.
Recommendation 2.8 WSDOT should eliminate the task of manually determining monthly debt
service withholding amounts for years beyond the current budget biennium,
as this information has limited benefit given the financial planning models use
annual or biennial cash flows.
Recommendation 3.1 OFM/WSDOT and the Legislature should work together to determine
minimum fund balances for the WSDOT administered funds. The minimum
fund balances should be the amount needed, along with other WSDOT
revenues, to fund fixed costs and high-priority expenditures after a downturn
in major revenues, consideration of the potential to delay or eliminate certain
capital and operating costs, and accessing any additional sources of liquidity.
Recommendation 3.2 WSDOT should move the “25th month” of capital improvements expenditures
from its monthly plan and its biennial budget into the following biennium, as
the actual outlay of cash will occur in the following fiscal year.
Recommendation 3.3 WSDOT should implement a formal and well-defined process of monitoring
and measuring its budgeted and actual capital expenditures in an attempt to
improve its budgetary performance and more efficiently allocate and utilize
Recommendation 3.4 WSDOT should exclude any accrued “25th month” capital expenditures when
determining the amount of its bond sale request. WSDOT should also reduce
its initial bond sale request if actual and projected bond funded expenditures
are lower than those estimated at the time of the initial request.
Recommendation 3.5 WSDOT should develop estimates of interest earnings for its various funds
that are dependent upon the respective fund balance and an assumed
interest earnings rate.
The information and findings included in this report are based on the input and guidance
of several State of Washington staff, including Jeff Caldwell of WSDOT, David Ward of
Financial Assumptions and Cash Management Study |3
the Senate Transportation Committee, Svein Braseth and Doug Extine of the Office of the
State Treasurer, Jerry Long of the House Transportation Committee, Erik Hansen and
Robin Rettew of the OFM, and David Forte of the Joint Transportation Committee.
Financial Assumptions and Cash Management Study |4
2. Financial Plan Bond Financing Assumptions
This section evaluates the major bond financing assumptions used in the 16-Year
Transportation Financial Plan by both OFM/WSDOT’s and the Legislature’s budget
models, with a focus on the interest rate and debt withholding assumptions. The interest
rate evaluation compares the OFM/WSDOT assumptions to those of other state DOTs
and the underlying interest rate forecast (which is prepared by a private firm) to the
forecasts of other financial institutions. The evaluation of the bond withholding
assumption identifies the parameters that mandate the withholding of revenues and
compares current WSDOT practices to financial management best-practices.
2.1. Description of the 16-Year Financial Plan
The 16-Year Transportation Financial Plan is the long-term funding plan prepared by
OFM/WSDOT for the State’s transportation needs. The 16-Year Transportation Financial
Plan is also the means by which the Legislature both portrays the biennial budget and
demonstrates the means to fund infrastructure improvements incorporated in the biennial
budget through the adoption of transportation project lists. The State, through WSDOT,
is responsible for the maintenance, preservation, and improvement of the State’s
highways, bridges, facilities, and support systems, as well as the associated planning and
administration. The State’s primary funding sources are motor vehicle fuel taxes (MVFT);
federal funding (from the federal fuel tax); revenue from license, permit and fee revenue;
and bonds secured by State MVFT revenues and/or backed by the full faith and credit of
The plan integrates information from multiple sources including the Washington State
Ferries’ long range plan, legislative actions on transportation funding, and the
Transportation Commission’s long-term funding study. The 16-Year transportation
capital plan is driven, in large part, by the Legislative 2003 (Nickel) and 2005 (TPA)
Transportation Project Lists.
WSDOT projects the 16-Year Transportation Financial Plan cash flows, including future
bond issues, using an Excel-based computer model. The Legislature has developed a
corresponding forecast of the 16-Year Transportation Financial Plan that is used as part
of the biennial budget development process. WSDOT also uses a debt model, which
computes the debt service withholding needed for the current biennium and 16-Year
Transportation Financial Plan, and a “monthly plan” that identifies the bond proceeds
needed during the current biennium.
2.1.1. 16-Year Financial Plan Computer Model
The 16-Year Transportation Financial Plan computer models incorporate forecast
revenues and expenditures for all 17 accounts in the Motor Vehicle Fund (as well as 25
other accounts), identifies intra-account transfers, and dollars subject to federal
reimbursement. The 16-Year Transportation Financial Plan computer model relies on
debt service withholding data generated from the WSDOT debt model and/or data
provided by the Office of the State Treasurer (OST).
Financial Assumptions and Cash Management Study |5
2.1.2. Legislature’s Debt Model
The Legislature’s budget, or debt model, replicates much of the information in the
WSDOT 16-Year Transportation Financial Plan computer and debt model. The
Legislature’s debt model can evaluate alternative bond financing assumptions, bond
issuance scenarios, and existing and planned annual debt service requirements – by
bond authorization and account. The Legislative staff utilizes the model to analyze and
determine the biennial budget and accompanying Legislative 16-Year Financial Plan.
2.1.3. OFM/WSDOT Debt Model
The OFM/WSDOT debt model aggregates all outstanding debt service and computes
semiannual debt service on all proposed bond issues – by bond authorization and
account. The debt model allows the user to determine the monthly withholding amounts
for all outstanding and proposed bond issues over the next 16 years. The monthly and
biennial withholding and estimated future debt service are used as data sources for the
OFM/WSDOT 16-Year Transportation Financial Plan and the monthly plan.
A flow chart of the OFM/WSDOT debt model is shown below.
2.1.4. WSDOT Monthly Plan Model
The WSDOT monthly plan computer model projects monthly cash flows for the
Transportation 2003 Account (Nickel Account) (550), Transportation Partnership Account
(09H), and Special Category C Account (215). The monthly plan computer model helps
determine the bond proceeds needed during the biennium based on monthly estimates of
all revenues and expenditures for the funds, including monthly debt service withholding
from the OFM/WSDOT debt model, and improvement expenditures from the Capital
Financial Assumptions and Cash Management Study |6
Project Management System (CPMS). The identified need for bond proceeds is given to
the State Finance Committee via OST, which issues bonds during the biennium sufficient
to provide the requested proceeds.
A flow chart of the WSDOT monthly plan model is shown below.
2.3. Evaluation of Bond Financing Assumptions
The 16-Year Transportation Financial Plans include estimated bond issues necessary to
finance future capital expenditures. The interest rates and costs associated with future
bond issues are not known at the present, and assumptions about their values must be
made. The primary bond financing assumptions used in the 16-Year Transportation
Financial Plan are: 1) bond interest rates, 2) costs of issuance; 3) bond premium or
discount, and 4) first year debt service withholding.
2.3.1. Interest Rate Assumption
The assumed interest rates for estimated, future MVFT bond issues that the Legislature
and OFM/WSDOT currently use in their respective financial plans are based on a
forecast of a tax-exempt interest rate index prepared by a private economic consulting
firm. Both the Legislature and OFM/WSDOT add 29 basis points (0.29%) to the interest
rate forecast. Prior to 2008, the Legislative and OFM/WSDOT financial plans added
about 75 basis points to the interest rate forecast.
Financial Assumptions and Cash Management Study |7
Legislature’s Interest Rate Assumption
The future interest rates assumed in the Legislature’s 16-Year Transportation Financial
Plan are taken from the Global Insight forecast of the Bond Buyer 20-Bond Index (BBI),
plus 29 basis points (0.29%). Global Insight is an economic consulting firm that provides
a variety of forecasts, including a 10-year quarterly forecast of the BBI. The BBI is an
average of the current yields on a basket of 20, A1-rated, tax-exempt general obligation
bonds, for a 20-year maturity.
The Legislature uses the Global Insight forecast of BBI plus 29 basis points based on a
historical comparison of the combined, average interest rate (i.e., the true interest cost or
TIC) on both State Various Purpose (VP or GO bonds) and MVFT bonds to BBI. The
Legislature found that over the last three fiscal years (FY 2005 to FY 2007), the TIC on
State “new-money,” tax-exempt MVFT bonds averaged about 29 basis points above BBI.
The following table shows the average life, bid TIC, and BBI for all Washington State VP
and MVFT general obligation bonds issued in FY 2005-06 through FY 2007-08, which
were new-money, tax-exempt, and current interest bonds (as opposed to refunding,
taxable, or capital appreciation bonds). The State’s bid TIC has averaged 5 basis points
(0.05%) higher than the BBI during this period. It should be noted that the average is
skewed downward as a result of the September 12, 2007 bond sales, where the bid TIC
was 11 and 14 basis points lower than BBI. Although the bid TIC was significantly lower
than BBI on these dates, this does not indicate the bonds priced better relative to the
overall market. The BBI is determined weekly and does not reflect changes in market
interest rates that occur during the week. The BBI for the following week (reset
September 13, 2007) was 4.46% or 11 basis points lower.
Financial Assumptions and Cash Management Study |8
TIC vs. BBI
Washington State General Obligation and MVFT Bonds
Series Sale Date Average Life Bid TIC BBI TIC vs. BBI
Various Purpose 2006A 8/16/05 18.20 4.44% 4.37% 0.07%
MVFT 2006B 8/16/05 15.28 4.38% 4.37% 0.01%
Various Purpose 2006D 1/24/06 15.27 4.43% 4.33% 0.10%
MVFT 2006E 1/24/06 15.27 4.42% 4.33% 0.09%
Various Purpose 2007A 7/18/06 17.91 4.72% 4.62% 0.10%
MVFT 2007B 7/18/06 15.45 4.69% 4.62% 0.07%
Various Purpose 2007C 1/23/07 15.31 4.41% 4.25% 0.16%
MVFT 2007D 1/23/07 15.31 4.41% 4.25% 0.16%
Various Purpose 2007F 5/15/07 15.55 4.40% 4.24% 0.16%
Various Purpose 2008A 9/12/07 16.99 4.46% 4.57% -0.11%
MVFT 2008B 9/12/07 15.24 4.43% 4.57% -0.14%
Various Purpose 2008C 1/8/08 15.38 4.31% 4.32% -0.01%
MVFT 2008D 1/8/08 15.38 4.31% 4.32% -0.01%
1 – The weighted average maturity of the bonds. The series include bonds that mature from 1 to 25 years.
In comparison to an estimate of tax-exempt interest rates that reset daily, the correlation
of the interest rate on the State’s GO and MVFT bonds to national averages is more
apparent. The following table shows the bid TIC in comparison to the Municipal Market
Data (“MMD”) estimate for a 15-year “AAA”-rated, tax-exempt, general obligation bond.
The MMD “AAA GO” interest rates are a widely used benchmark for the pricing of tax-
exempt bonds. The bid TIC on the State’s new-money, tax-exempt, GO and MVFT
bonds have been between 40 and 50 basis points of the 15-year MMD since August
Financial Assumptions and Cash Management Study |9
TIC vs. 15-Year MMD AAA GO
Washington State General Obligation and MVFT Bonds
Series Bid TIC MMD TIC vs. MMD
Various Purpose 2006A 4.44% 3.94% 0.50%
MVFT 2006B 4.38% 3.94% 0.44%
Various Purpose 2006D 4.43% 3.93% 0.50%
MVFT 2006E 4.42% 3.93% 0.49%
Various Purpose 2007A 4.72% 4.29% 0.43%
MVFT 2007B 4.69% 4.29% 0.40%
Various Purpose 2007C 4.41% 3.94% 0.47%
MVFT 2007D 4.41% 3.94% 0.47%
Various Purpose 2007F 4.40% 3.95% 0.45%
Various Purpose 2008A 4.46% 3.99% 0.47%
MVFT 2008B 4.43% 3.99% 0.44%
Various Purpose 2008C 4.31% 3.81% 0.50%
MVFT 2008D 4.31% 3.81% 0.50%
OFM/WSDOT’s Interest Rate Assumption
WSDOT currently uses the same assumption for future interest rates as was adopted by
the Legislature in the 2008 session. Prior to last session, the Legislature and
OFM/WSDOT used a higher interest rate assumption as proposed by WSDOT that
(according to WSDOT) was arbitrarily defined and was not tied to the Global Insight BBI
Survey of Interest Rate Assumptions
WSDOT can benchmark its interest rate assumptions to those used by other state DOTs,
in order to test the reasonableness of the assumption. Benchmarking can help WSDOT
determine if the interest rates are common for state transportation departments.
As part of this study, PFM complied a small sampling of state transportation department
long-term financial plans that include future debt financing. The following table
summarizes the interest rate assumptions used for the states of Florida, Maryland, and
Virginia. Each of these states use a Bond Buyer index or forecast of the index, plus a
Financial Assumptions and Cash Management Study | 10
State Interest Rate Assumption
State of Florida Global Insight BBI forecast plus 10 basis points;
(Right of way Acquisition & Bridge Construction five-year financial plan; “full faith and credit”
Trust Fund) bonds
State of Maryland Moody’s Economy.com BBI forecast less 60
(Transportation Trust Fund) basis points; six-year financial plan; 15-year
general obligation bonds
State of Virginia Bond Buyer 11 Bond Index average for last
(Commonwealth Transportation Board) eight quarters plus 50 basis points; 20-year
transportation trust fund bonds1
Sources: Florida Department of Transportation, Right of Way Acquisition and Bridge Construction
Trust Fund Adopted Work Program, Fiscal Year 2007-08 Through Fiscal Year 2011-12; State of
Maryland Department of Transportation, 2008-2013 Consolidated Transportation Program;
Commonwealth of Virginia Debt Capacity Advisory Committee, Report to the Governor and General
Assembly, December 17, 2007.
– The Bond Buyer 11 Bond Index is an arithmetic average of a selected 11 tax-exempt GO bonds
rated Aa2 by Moody's that mature in 20 years.
Finding 2.1 The Legislature’s interest rate assumptions that have been
used beginning in 2008 (and subsequently adopted by OFM
and WSDOT) are similar to those used by other state
Survey of Interest Rate Forecasts
The determination of the Legislature’s interest rate assumptions is a function of a tax-
exempt interest rate forecast prepared by the economic forecasting firm Global Insight. A
comparison of the Global Insight forecast to other forecasts can help determine if it is
aligned with other interest rate forecasts.
Many of the largest commercial banks prepare short-term interest rate outlooks for key
benchmark securities, such as the 10-year Treasury Note. The rate on the 10-year
Treasury serves as an indicator of the general level of interest rates. Other firms that
prepare interest rate forecasts include Moody’s Economy.com, which forecasts the BBI.
Summarized in the following table are selected forecasted quarterly interest rates for the
10-year Treasury Note. The forecasts show an expected increase of 5 to 40 basis points
from the 4th quarter 2008 to 2009, due in part to increased inflation. This general interest
rate outlook is consistent with the Global Insight forecast of a 53 basis point increase for
Financial Assumptions and Cash Management Study | 11
Survey of Interest Rate Forecasts
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
10-Year Treasury Note:
Royal Bank of Scotland - - 4.30 4.50 4.60 4.70 4.50 4.55
Wachovia - - 4.00 4.00 4.10 4.25 4.25 4.40
Wells Fargo - - 4.12 4.33 4.45 - - -
Global Insight BBI - - 4.43 4.29 4.21 4.22 4.46 4.82
Source: Royal Bank of Scotland, Financial Market Forecasts, July 2, 2008; Wachovia Economics Group,
Monthly Outlook, July 09, 2008; Wells Fargo Economics, Financial Market Strategies, July 28, 2008.
Finding 2.2 While no interest rate forecast has been shown to be an
accurate predictor, the base interest rate forecast that
OFM/WSDOT and the Legislature rely upon (Global Insight’s
BBI forecast) is at least consistent with the interest rate
forecasts from major financial institutions.
Any comparison of the bid TIC to the BBI or any comparison of the bid TIC to a single
maturity MMD such as the 15-year MMD AAA requires a certain set of cautions as
Timing. The BBI is published weekly, while interest rates can change considerably
on a daily basis.
Single Maturity. The BBI is a single maturity (20 years) while the State issues bonds
with maturities ranging from 1 to 25 years. Similarly, a single maturity MMD only
captures one maturity (e.g., 15 years) versus the State’s 1 to 25 years.
Yield Curve. The TIC on a state bond issue is influenced by the shape of the yield
curve (i.e., the difference between short-term and long-term interest rates), which is
not captured by a single maturity index such as the BBI or a single maturity MMD.
As such, a comparison of the bid TIC (1-25 years) to the BBI (20 year only) or a
comparison of the bid TIC (1-25 years) to a single maturity MMD (e.g., 15 years) would
not be suitable for monitoring the performance of the State’s bond sales relative to the
However, for a less precise application, such as a forecast of future interest rates, the
BBI is well suited (assuming 25-year, level debt service). The BBI forecasted through the
Financial Assumptions and Cash Management Study | 12
OFC also has the additional benefits of providing a transparent, standard, independent,
and auditable way of obtaining an estimate of the projected interest rates.
Ultimately, the size of the interest buffer is a policy choice. Buffers from 25 basis points
to 75 points or higher may be appropriate depending upon the unique facts and
circumstances of the financing plan, including the types and timing of the projects
contemplated, and the level of risks that would be acceptable.
Risks of a Lowered Interest Rate Assumption
The lower interest rate assumption in the current 16-Year Transportation Financial Plan
reduces the projected debt service and increases projected resources available for other
purposes. If actual interest rates are higher than assumed, actual debt service will be
greater than estimated in the 16-Year Transportation Financial Plan, which could
indefinitely delay identified capital projects or other expenditures. Conversely, if actual
interest rates are lower than estimated, the State will have additional resources that could
have been allocated to currently identified needs.
The following chart shows the potential debt service impact of alternative interest rate
outcomes for the Nickel Account. Debt service is shown at the Global Insight BBI
forecast + 29 basis points (under the currently assumed $1.15 billion of additional
borrowing in the 16-Year Transportation Financial Plan), and plus and minus 100 basis
points. If interest rates are 100 basis points higher than currently assumed, WSDOT
would expend an additional $58.15 million on debt service, or 4.9% more, during the next
16 years. Conversely, if interest rates are 100 basis points lower than currently
assumed, WSDOT would save $56.9 million, or 4.8%, in debt service payments over the
next 16 years.
Financial Assumptions and Cash Management Study | 13
Projected Debt Service
Alternative Interest Rates
09-11 11-13 13-15 15-17 17-19 19-21 21-23 23-25
Although inaccurate interest rate assumptions can reduce or add to the amount of capital
or other spending that is currently contemplated in the plan, the State can take the
following future actions to offset the impact of higher interest rates.
Refund debt for savings: The State has historically refunded (i.e., refinanced)
outstanding debt when it can achieve interest rate savings. In the event that interest
rates are higher than the Global Insight BBI plus 29 at the time bonds are sold,
subsequent interest rate decreases, if any, can allow for a refinancing of the bonds at
a lower interest cost.
Extend maturity schedule: The State historically issues the MVFT current interest
bonds with a 25 year maturity schedule, where principal amounts in each year are
sized to produce approximately equal annual payments of principal and interest. The
State can potentially extend the final maturity of its MVFT bonds to 30 years, which
would reduce the annual debt service requirement and offset the cash flow impact of
higher than expected interest rates. As an example, if the currently planned bond
issues for the Nickel Account have 30 year maturity schedules instead of 25 years,
debt service would be $89.57 million less during the planning horizon of the 16-Year
Transportation Plan. However, total debt service over the life of the issue would
There are certain policy and cost implications to these potential actions. A discussion of
these implications is beyond the scope of this study.
Financial Assumptions and Cash Management Study | 14
Conclusions and Recommendations
PFM believes that the current interest rate assumption the Legislature and OFM/WSDOT
use is reasonable and would not recommend any changes, given the interest rate
forecast is consistent with forecasts prepared by other major financial institutions and is
also used by other state forecasting entities. In addition, the underlying interest rate
index is correlated with the average interest rate on the State’s general obligation bonds.
The Legislature’s lower assumed interest rate (lowered from approximately 75 basis
points to 29 basis points above the base interest rate forecast) reduces the projected
interest on MVFT bonds and increases the amount of transportation capital that can be
leveraged from projected revenues. At the same time, the lower assumed interest rate
increases the risk that transportation capital projects cannot be completed as scheduled
or other expenditures must be delayed if the actual interest rates on future MVFT bonds
are higher than assumed. However, in the event future interest rates are higher, the
State can take future actions to offset this cost, including refunding debt at a lower
interest cost, delaying the amortization of principal, or extending the term of the bonds.
Recommendation 2.1 The Legislature’s lower interest rate assumption that has been
used beginning in 2008 (and subsequently adopted by OFM
and WSDOT), which adds 29 basis points to the Global Insight
BBI forecast, appears reasonable and is not overly
aggressive, as the TIC on appropriate State MVFT bonds has
been just 5 basis points higher than BBI over the last three
years, and we do not recommend a change to the assumption.
Recommendation 2.2 The Legislature should continue to monitor the relationship
between future State MVFT bond issues (new-money, non-
AMT tax-exempt, current interest bonds) and the BBI, and
revisit the Legislature’s interest rate assumption in the event
the TIC exceeds the BBI by more than 29 basis points. The
Legislature should consult with the OST, who can confer with
its financial advisors and bond underwriters, to identify and
evaluate any credit or bond market changes that caused the
increased spread to BBI.
2.3.2. Costs of Issuance
The State incurs costs for each of its public bond sales for the bond underwriters’
commission and other professional services fees. In addition, the bond underwriters
have historically purchased bond insurance and pass this cost to the State as part of their
purchase price for the bonds. However, the bond underwriters did not purchase
insurance for the most recent January 2008 and July 2008 bond sales. The use of
insurance has generally declined since late 2007 due to the rating downgrades
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