Railroad can make payments for now, uncertainty remains
Although Congress is considering a $30 million annual cut in funding to the Alaska Railroad Corp., the company has enough cash on hand to make scheduled debt payments Aug. 1 and next February. The bond rating for ARRC was downgraded in March after the Senate passed the cut, and now ratings agencies are taking a look at similar bonds around the country with debt backed by annual federal funding.
The uncertainty over continued federal funding for the state-owned Alaska Railroad Corp. is playing havoc with the railroad’s Fiscal 2013 capital budget, but payments on bonds backed by receipt of the federal funds is not an immediate problem, railroad officials say.
A payment of $16 million is due this year for debt service on a $136.6 million balance for $168 million in revenue bonds sold in 2006 and 2007, but enough federal money is in hand to make a scheduled Aug. 1 payment and another due next February, according to Bill O’Leary, the railroad’s vice president for finance.
The uncertainty has meanwhile affected other budgets, however. Plans to replace 50,000 railroad ties next year has been cut back to 10,000 ties, for example. Summer hiring has been cut by half, although there will be no curtailments of passenger service this year.
O’Leary believes the impasse in Congress over renewal of the federal surface transportation program, which also provides funding for railroads, will be resolved but it could also happen that a series of short-term extensions may also occur, which will prolong the uncertainty.
A congressional conference committee is now working on resolving differences between the Senate version of the transportation bill — which eliminated $30 million in annual track maintenance-support funding for the railroad — and the House-passed version of the bill that continues the funding.
Alaska Rep. Don Young is on the conference committee and is pressing the case for the railroad funding. A concern is that if the funding is not continued it will be difficult for the railroad to make the debt service payment out of other income, and a default on the bonds could hurt the image of the state and other independent state corporations like the railroad in credit markets.
O’Leary said the bonds, the railroad’s only outstanding long-term debt, are linked to federal revenues for repayment and, even if default were to occur, would not legally fall back on the railroad, or the state itself.
However, it would not be good to let this happen.
State revenue commissioner Bryan Butcher said it would not injure the credit rating of the state or other state corporations.
“It would certainty raise a lot of questions, though, on why the state let this happen to one of its corporations with all the other financial resources Alaska has,” Butcher said.
O’Leary said these bonds were sold to pay for an accelerated track maintenance program and have essentially paid for the major upgrade of track that had been done on the heavily-used Anchorage-to-Fairbanks portion of the railroad route, which also extends south of Anchorage to Whittier and Seward.
The railroad started receiving federal funds in 1996, an accomplishment of then-president and former Alaska Gov. Bill Sheffield. Other U.S. railroads have long received federal funding to support passenger service but not the Alaska Railroad.
O’Leary said the railroad became eligible under the Federal Transit Authority formula for rail funds in 2000 and in 2005 the railroad’s eligibility was made official when it was mentioned in the 2005 extension of the surface transportation act, known as SAFETEA-LU.
That mention, however, contributed to the current problem because some in Congress saw it as an “earmark” and pushed for its elimination this year as a way of getting back at the late U.S. Senator Ted Stevens, even though other U.S. railroads will continue to receive passenger funding.
O’Leary said the railroad issued the bonds as a way to accelerate its program to upgrade tracks, which were received in poor condition when the federal government transferred the Alaska Railroad to the state in the 1980s.
“The federal funds we received were always dedicated to track upgrades and maintenance but it was always slow going given the amount of funds available each year,” and it would have taken many years to complete the high-priority Anchorage-Fairbanks upgrade.
It has become commonplace, meanwhile, for states and public railroads to sell bonds based on the anticipated receipt of scheduled federal revenues. Many states including Alaska have sold revenue bonds pledged to federal transportation funding to accelerate road projects.
O’Leary said several Lower 48 public railroads have done just what the Alaska Railroad did with its bonds pledged to federal rail funds.
Butcher said Alaska is now gaining some allies in other states on the issue because the Senate’s action to cut the Alaska Railroad funding despite its being linked to outstanding bonds has set off alarms in rating agencies on other state and local debt linked to federal funds.
“Fitch Ratings has issued a negative outlook report on these kinds of bonds that are negatively affecting half a dozen states including states with large populations like California,” Butcher said.
Butcher is optimistic that this will get worked out in the conference committee, but the administration has meanwhile done a lot of internal thinking on what to do if it doesn’t.
Options on table
Several options are being considered. For example, rather than allow the railroad bonds to default the state may buy them or provide some form of payment guarantee, he said. A similar action was taken a few years ago to prevent a default of bonds issued by the state student loan corporation, Butcher said.
Meanwhile, the railroad has had to issue an advisory to holders of its bonds that a potential development has occurred – the passage of the Senate bill – that could jeopardize scheduled payments.
The bonds are not in any kind of default, O’Leary said, but this notification caused Moody’s Investor Services, another rating agency, to downgrade the rating on these particular bonds from A1 to A2. This won’t immediately affect the railroad because no new bond issues are proposed but the lower rating could affect existing bondholders if for example they resell the bonds, O’Leary said.
The railroad’s $168 million in bonds are the first time the Alaska Railroad has issued bonds and is also the first test of a previously-unused and unique authority to issue tax-exempt industrial-development type bonds.
Years ago Congress eliminated the ability of states, municipalities and public corporations to sell tax-exempt revenue bonds for industrial development although tax-exempt debt can be sold for certain public purposes, like docks and pollution-control facilities.
However, when the federal government sold the Alaska Railroad to the state of Alaska, the railroad’s authority to issue tax-exempt debt, which has existing under federal ownership, was also transferred.
It was never used, however, until the $168 million in bonds were sold. The approval of these bonds by the Internal Revenue Service was seen as an important verification that the railroad could sell tax-exempt bonds.
The railroad has since then considered using the authority for other purposes, even for projects not directly relate to the railroad. A few years ago the railroad working with Agrium Corp., for example, on railroad financing for a large coal gasification project at Agrium’s Kenai Peninsula fertilizer plant that would have allowed the plant to continue making fertilizer.
The railroad’s only connection was that it would haul coal from the Usibelli coal mine at Healy to a point where it could be transshipped across Cook Inlet to the Kenai plant. The coal gasification project did not procees, however, and Agrium has since closed its plant.
Meanwhile, state officials working on plans to encourage a large natural gas pipeline have also considered the railroad’s tax-exempt authority for industrial bonds as way to finance parts of the pipeline, which could involve tens of billions of dollars.