In 2003, the New Mexico State Highway and Transportation Department became the New Mexico Department of Transportation (NMDOT), a name that more accurately reflects the increasingly diverse range of transportation services required by the State of New Mexico. In the spirit of this new strategic directive, Governor Richardson's Investment Partnership, or GRIP, was born - a $1.5 billion program of highway and mobility projects throughout the state.

The recent sale of $1.137 billion of fixed and variable rate bonds by the New Mexico Finance Authority (NMFA) on behalf of NMDOT marks an historical event in New Mexico, representing the largest bond transaction in the history of the state. Approximately $737 million of the bond proceeds (par amount of $700 million plus premiums) will be used to fund the first phase of GRIP with the balance used to restructure a portion of the New Mexico State Transportation Commission's outstanding debt. GRIP will be fully funded with the proceeds from subsequent sales, currently planned for 2006 and 2010.

Meeting Finance Challenges

NMDOT is a familiar name in the world of innovative finance, having completed the first GARVEE transaction secured solely by Federal revenues, being the first state to take advantage of program match provisions under TE-045, and the first to pledge Federal Forest Highway funds (PLH-FH) to a bond issue. Since 1996, NMDOT has issued over $1 billion of bonds to finance the Citizens Highway Assessment Task Force (CHAT), GARVEE, Waste Isolation Pilot Plant (WIPP), and Highway Infrastructure Fund (HIF) projects. Several years ago, NMDOT decided to minimize the use of state road fund revenues to pay debt service in order to preserve scarce state dollars for operations and maintenance. Declining gas tax revenues, which comprise approximately 60 percent of road fund revenues, and a reluctance by the then-current Governor to implement any tax increases put a severe strain on the limited resources available to the state and reinforced the need for alternative revenue streams. The result is that debt service has been paid from a combination of PLH-FH funds, a Department of Energy grant, revenues dedicated to the HIF, and Federal revenues. Of the total annual debt service amount of approximately $122 million, $94 million has been paid with Federal highway funds, representing 35 percent of the approximately $270 million per year New Mexico receives in obligation authority. While NMDOT legally had capacity available to issue additional debt, its conservative approach to debt management and commitment to fund operations and maintenance meant that additional debt would not be issued without new revenues.

GRIP Funding Plan

It was within these parameters that NMDOT was challenged to fund GRIP. Authority for GRIP was provided by the legislature in its 2003 special session. The legislation provided the financial platform for funding GRIP and created a new mechanism for the issuance of NMDOT debt. The legislation provided that upon the direction of the Transportation Commission, all debt would be issued through the NMFA, a strategy designed to allow each participant in the transaction to stay within its core competencies, namely NMDOT to manage the projects and NMFA to manage the debt. In addition to providing authority for NMDOT to issue up to $350 million in bonds per year, the legislation also provided the much-needed new revenues to the state road fund. These new revenues are estimated to bolster the road fund by approximately $60 million per year, effectively increasing state road fund revenues by almost 20 percent after phasing in of all new fees. However, NMDOT decided to use only a portion of these new revenues for debt service, preferring to keep some new revenues to help meet the increasing demand for operating and maintenance funds. Accordingly, NMDOT charged its finance team to come up with a plan to implement the $1.5 billion GRIP program by 2010 with only $40 million of new revenues.

The solution was to restructure a portion of the outstanding debt and to use an appropriate amount of " synthetic" debt to lower interest costs. Annual debt service is capped at a maximum of $162 million ($122 million currently being paid, plus $40 million of new revenue).

GRIP Funding Features

A new Indenture of Trust was created in which all state and Federal funds paid into the state road fund are pledged to bondholders;

Over $202.2 million of outstanding CHAT Bonds have been restructured;

All of the 1998 and 2001 GARVEE Bonds have been refunded;

Nearly $28.2 million of outstanding HIF Bonds have been restructured;

The program will consist of a combination of fixed rate, natural variable rate, and synthetic fixed rate debt; and

Subsequent bond issues are anticipated in 2006 and 2010.

The restructuring and refunding of outstanding debt accomplished two goals - it created the additional capacity required to implement GRIP and it removed the lien on Federal revenues created by the 1998 and 2001 GARVEE bonds. Removing prior liens on Federal revenues allowed these revenues to be pledged solely to the GRIP program.

The combined pledge of state and Federal funds and the resulting high coverage levels provided the framework for the bonds to achieve the same high ratings of Aa2/AA+ by Moody's and Standard & Poor's, respectively, for the Senior Lien Bonds and ratings of Aa3/AA- for the Subordinate Lien Bonds, a notch higher than the previously issued subordinate lien bonds. These high underlying ratings made the use of insurance extremely affordable and the Senior Lien Bonds were insured by MBIA, while the Subordinate Lien Bonds were insured by AMBAC.

A summary of each series of the 2004 transaction is shown below. The average all-in interest cost for all three series of bonds is approximately 4.64 percent.

Series Lien Par Amount

(in Millions) Mode Purpose Final Maturity

Series 2004A Senior $700 Fixed GRIP Projects 2024

Series 2004B Subordinate $237 Fixed Refunding 2014

Series 2004C Subordinate $200 Synthetic Fixed Refunding 2024

The long-term finance plan has been structured to maximize debt service at the senior lien level. Any variable rate or refunding bonds will be issued at the subordinate lien level, while maintaining maximum annual debt service at less than $162 million.

The use of Federal highway revenues for debt service for the new GRIP program will be continued and was approved through a new Memorandum of Understanding (MOU) with FHWA. The MOU permits NMDOT to continue the use of present value methodology for calculating state match on the refunded bonds as had previously been approved through a TE-045 project, and lays the framework for future management of GRIP.

The GRIP program will fund the Governor's transportation initiatives in a prudent and fiscally responsible manner that has been recognized by the rating agencies in their assignment of high double-A category ratings. The assignment of such ratings was based on a review of the entire program as well as the fact that the pledged state and Federal revenues provide coverage in excess of four times annual debt service. This level of coverage provides a high degree of liquidity for the Department to manage other areas of operations and maintenance.