CHICAGO - With a credit warning in tow as it grapples with a record budget deficit, Minnesota will take competitive bids on a $400 million new-money general obligation issue, a slightly scaled-down version of the financing it put on hold last fall amid the market freeze on new issues.
The deal comprises three individual series on which the state will take separate bids: a $5 million taxable piece, $70 million of state trunk highway bonds that carry a GO pledge, and $325 million of general purpose GOs. The state will stagger the bidding times, said debt manager Kathy Kardell.
The trunk highway bonds carry Minnesota's full faith and credit pledge of repayment, but debt service is repaid with transportation-related revenues. The state, which typically issues two large GO deals annually, put off the sale last October. Watching the market then, Kardell was nervous about the lack of large competitive deals of more than $100 million.
Minnesota was then forced to wait until the New Year due to reporting issues. Its annual November revenue forecast is released in early December and the comprehensive annual financial report is released later in the month.
Kardell said she was heartened to see the return of market interest and the success over the last month of other competitive transactions of more than $100 million. At least six to seven broker-dealers have expressed preliminary interest in bidding today, she said.
"We are calling potential bidders to see if there are any questions," she said.
If the state did not move on the deal in early or mid-January, it would be forced to wait until the close of the Legislature as a new budget is to be released and the annual February forecast will come in the first quarter. Kardell opted to trim about $43 million off the originally planned size since the $400 million will provide sufficient proceeds to keep projects funded until the next GO sale in the summer.
Ahead of the sale, Fitch Ratings revised its outlook to negative from stable on Minnesota's AAA rating, while Moody's Investors Service revised its outlook to stable from positive on its Aa1 rating. Standard & Poor's rates the state's $4.3 billion of GOs AAA with a stable outlook.
Fitch attributed its negative outlook to the magnitude of the state's "budgetary challenges in an environment of a large fiscal 2009 operating imbalance and depletion of reserves, and likely further negative forecast revisions."
Moody's analysts agreed, attributing its revision to the state's "declining revenues, increasing expenditures and complete use of the state's substantial budget reserve."
Moody's also fears a return to the legislative gridlock seen in 2005 that resulted in a partial government shutdown and the use of non-recurring revenues to close a budget gap.
The governor is a Republican and the Legislature is controlled by Democrats.
Kardell said the rating reports accurately reflect the state's situation and provide a warning for the state and its lawmakers. "Certainly the way the budget deficit is resolved will potentially impact our credit rating," she said.
The state's ratings remain supported by its strong debt structure, broad-based economy, above-average wealth levels, and strong management, the agencies said.
The November revenue forecast warned that the state faces a record $5.2 billion deficit in its current budget and through the next two-year spending cycle, including a $426 million shortfall in the current budget. Economic advisers also now anticipate a $4.8 billion deficit in the next two-year budget.
Gov. Tim Pawlenty ordered government agencies to cut spending to save $25 million to $50 million. Minnesota also will tap the $155 million that remains in its once flush reserve. The governor will present his next two-year budget to lawmakers on Jan. 27.
