Regional News

Wisconsin's BAB Experiment

CHICAGO - Wisconsin will competitively sell $102 million of general obligation bonds as soon as Tuesday in a deal divided into two series, with the state accepting both tax-exempt and taxable bids on the later maturities to evaluate the worth of using the taxable Build America Bonds program.

The state will accept only tax-exempt bids on its A series for $31.9 million that matures between 2012 and 2019 and either taxable or tax-exempt bids on the B series for $70.1 million that matures serially from 2020 through 2030 and is callable in 2019.

If the taxable bids are lower, once the 35% interest subsidy offered by the federal government's BAB program is applied, the state will accept that bid and issue the bonds under the program included in the federal stimulus package and apply for the direct subsidy.

The state will accept bids through Ipreo LLC's Parity system. Foley & Lardner LLP is bond counsel.

The deal is the latest evolution in competitive BAB sales. Other issuers, such as Oshkosh and De Pere, both in Wisconsin, have accepted tax-exempt and taxable bids on recent deals. The state's sale is similar in that it will accept both forms of bids but different in that the dual bids are being sought only on the later maturities.

"It's clear from past deals that the value of BABs is on the long end, so we are taking the short end out of the equation," said the state's capital finance director, Frank Hoadley.

Whether a tax-exempt bond or a taxable BAB security offers the lowest cost of borrowing "will depend on where the market is," determined in a side-by-side comparison of tax-exempt bids and taxable bids once the subsidy is applied, Hoadley said. "We have spent some time talking to the major underwriters about the structure, and there seems to be strong interest."

The state is using a traditional municipal structure - with serial maturities and a 10-year call feature - on the B series. Many other BAB deals, all below $100 million, were similarly structured, but larger sales have favored corporate-like features including bullet maturities and make-whole calls that limit refunding opportunities.

Hoadley said he prefers the traditional structure, given the size of the state's transaction. "We will be comparing apples to apples and oranges to oranges," he said, to determine the lowest interest rate, and he added that he believes the divided series and traditional structure allow for the clearest determination of potential BAB savings. "To a degree, the evaluation of savings has been somewhat obscured because there are no savings in the short-term maturities and they then tend to get blurred when you try to compare rates when deals have make-whole calls."

In discussions with market participants, Hoadley said he is comfortable that, given the size of the transaction, it will not face interest rate penalties over a BAB with a more corporate-like structure. The state also reserves the right to shift maturities in either the A or B series depending on market conditions on the day of pricing.

Proceeds of the sale will finance various capital projects throughout the state. The state carries GO ratings of Aa3 from Moody's Investors Service, which assigns a negative outlook, AA-minus from Fitch Ratings, and AA from Standard & Poor's.

The deal comes as Gov. Jim Doyle and lawmakers grapple with a $6.6 billion deficit in the current and next biennium, which starts July 1. Doyle and legislative leaders last week announced additional cost-cutting plans in light of the latest revenue estimates this month by the Wisconsin Legislative Fiscal Bureau, showing that the deficit had grown by $1.6 billion, to $6.6 billion. The bureau warned that tax revenue in fiscal 2009 would fall another $408 million below the last estimate, $573 million more in fiscal 2010, and $622 million in fiscal 2011.

Doyle's plan to address the latest deficit relies on $670 million of cuts in agency spending, shared revenue with local governments and school aid; $224 million in savings from unpaid employee furloughs and a rollback in nonunion employees' raises that were to take effect next month.

The plan also relies on $285 million of debt service savings through debt restructuring that would probably be achieved by pushing off some near-term principal payments. The state is also looking at financing with debt some transportation rehabilitation projects now slated to be paid for with cash on hand and at additional debt savings opportunities using the BAB program.

The budget fix also would tap $100 million from the new 75-cent 9-1-1 fees surcharge and $165 million from the new assessment fee on hospitals aimed at leveraging more federal dollars. An additional 400 employees - on top of the 1,000 head-count reduction already planned - could be cut if unions do not agree to concessions.

"My priorities in addressing this historic budget deficit are clear - first, I am not proposing any new taxes," Doyle, a Democrat, said in an announcement along with legislative leaders late last week. Democrats control the legislative chambers. "Second, we must make deep cuts to state government spending. Third, we must preserve our essential services such as education and public safety."

Republicans praised the spending cuts but contradicted the assertion that no new taxes are part of the budget fix, pointing to the plan's reliance on the new hospital assessment and the 9-1-1 surcharge. They also criticized the Democratic-controlled Joint Finance Committee's plan to meet over the holiday weekend to approve various budget items.

Doyle's proposed $62.7 billion budget for the next two years eliminates what was originally a $6 billion deficit through spending cuts, federal stimulus dollars, and a series of tax and fee increases. An across-the-board 1% spending cut would save $2.2 billion; $2.1 billion in new revenue would come from the stimulus, and $1.35 billion from a series of tax increases.

They include $312 million from a tax increase on the state's top 1% of earners, $344 million from a 75-cent increase in the tax on a pack of cigarettes and other tobacco products, and $180 million from changing the capital gains exclusion to 40% from 60%. The state also would raise $544 million by imposing a new tax on excess oil company profits.

The state would also save another $245 million through various measures, including $214 million by restructuring a short-term debt payment and through other payment shifts and fee increases. The operating budget includes nearly $1.5 billion of bonding authority, including $778 million of GO borrowing and $720 million of revenue-backed borrowing.



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