Minnesota Going to Market With $465 Million GO Deal

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CHICAGO - Minnesota tomorrow will competitively sell $465 million of new-money and refunding general obligation bonds to raise funds to pay for projects included in the more than $800 million capital budget approved this year or from past spending plans.

The deal is the first state bond sale under the leadership of Kathy Kardell - who took the position as assistant commissioner for treasury in February following the retirement of the state's long-time debt steward, Peter Sausen.

In a shift from past practices, Minnesota will issue separate series of various bond types, instead of blending them together in one series as had been the practice. The GO transaction includes a $275 million new-money various-purpose series, a $33.5 million new-money trunk highway series, and a $156 million advance refunding series that will refinance debt sold in 1999 and 2000. The state hopes to achieve roughly $10 million of present value savings.

The trunk highway bonds carry the state's full faith and credit pledge of repayment but debt service is repaid with transportation-related revenues. The state will now differentiate between its various-purpose and trunk highway GOs in separate series going forward due to the significant increase in trunk highway issuance expected in the coming years.

The Legislature last spring approved a $6.6 billion transportation package that includes $1.8 billion of trunk highway bonding. The package relies on an increase in the state's gasoline tax by 5.5 cents this year with room to phase in an additional three-cent increase until new trunk highway borrowing is retired. License renewal fees for some vehicles also were raised.

The separation of trunk highway and various-purpose bonds will ease potential structuring conflicts due to the different requirements in the state's general fund-supported and trunk highway debt statutes, Kardell said. The separation of new-money and refunding bonds in individual series will eliminate the complications of restructuring an issue ahead of a sale should market conditions prompt the state to pull refunding bonds.

"In volatile market conditions, we could now hold the series without having to restructure the whole deal, and notify bidders," Kardell said of the change.

With the upcoming sale, Minnesota also is instituting some revisions to the layout of its offering statements, although the makeover is not fully completed.

"We are consolidating some information, moving some information around, trying to make information more easily accessible and our disclosure easier to read," Kardell said.

Public Financial Management Inc. is serving as financial adviser on the refunding piece of the deal, and Dorsey & Whitney LLP is bond counsel. The state will follow up the sale with another in the fall for arojnd $500 million, including $400 million of various purpose bonds and $100 million of trunk highway bonds, based on preliminary cash-flow estimates.

Ahead of tomorrow's sale, Fitch Ratings affirmed the state's top rating on $4.1 billion of outstanding GO debt. Moody's Investors Service affirmed its rating of Aa1 with a positive outlook, and Standard & Poor's affirmed it AAA rating.

Fitch wrote that the state's credit is supported by a broad-based economy similar to the national economy, with a significant presence of the manufacturing, service, and trade sectors, and above-average wealth levels.

Minnesota benefits from management that is "highly sensitive" to economic changes but is challenged by its use of about $500 million from its budget reserve to help eliminate a $935 million shortfall in the current $34 billion two-year budget. The state tapped non-general fund account balances, cut spending, and modified its corporate tax to eliminate the rest of the deficit.

Minnesota currently expects to end the biennium June 30 with $153 million in the budget reserve and $350 million in the cash flow reserve, for a combined 3% of fiscal 2009 estimate revenues. The state's next formal revenue forecast is in November.

Lawmakers earlier this year approved a more than $900 million capital budget, but Gov. Tim Pawlenty trimmed it by $200 million because of a decrease in expected revenues. The state later adopted a $105 million supplement to fund several projects left off the original bill.

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