CHICAGO — Wisconsin will competitively sell $800 million of one-year operating notes tomorrow and is gearing up to issue about $200 million of new-money transportation revenue bonds next month, while a planned general obligation refunding remains on hold.
The notes do not carry a GO pledge, but all general fund revenues not used for debt service on outstanding GOs are pledged to repayment. “The notes cover the ups and downs of cash flow over the year,” said capital finance director Frank Hoadley.
Ahead of the sale, Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s assigned top short-term marks to the financing. In assigning its F1-plus rating, Fitch said the note structure benefits from strong legal provisions, including impoundment provisions and monthly revenue tests.
“Although the state expects to end fiscal year 2011 with a cash deficit, the availability of interfund borrowing in an amount greater than note principal provides a cushion,” Fitch wrote, noting that the projected coverage ratio is at least 1.8 times. The notes mature June 15, 2011, but a repayment account will be fully funded 16 days before maturity.
The borrowing is the same size as last year’s. The state’s flexibility in managing through the ebb and flow of revenue collections and bill payment has narrowed due to its struggles to keep its current two-year budget balanced.
The $61.8 billion budget for fiscal 2010-11 signed into law last year by Gov. Jim Doyle relied on the restructuring of $285 million of debt along with a mix of federal stimulus funds, spending cuts, and tax and fee increases to wipe out a $6.6 billion deficit. The state expects to end fiscal 2010 with a $207 million ending balance and a $476 million cash deficit in fiscal 2011.
Wisconsin’s GOs are rated AA by Fitch and Standard & Poor’s and Aa2 by Moody’s. Strengths include the state’s diverse economy and moderate debt levels. Weaknesses include an ongoing structural budget imbalance, weak reserve levels, and the recession’s effect on revenue.
The state will follow up the note issue with the sale of about $200 million of transportation revenue bonds as soon as July. Hoadley said he expects to use a negotiated sale on the transaction, though a team has not yet been named. He said it’s likely the deal will mirror the same structure he has used on recent new-money transactions that offer tax-exempt bonds on the short end and taxable Build America Bonds on the longer end.
Hoadley — who chairs the Government Finance Officers Association’s debt management committee and has been a critic of some enforcement measures being pushed by Internal Revenue Service on BABs — said he remains a fan of the product because of the savings it offers. The state has also drawn more interest from buyers on its competitive GO BAB sales, increasing the number of bidders to nine to 12 from five to seven.
The state has had a GO refunding of about $184 million on hold since March due to negative arbitrage cutting into the interest rate savings. Citi is the lead manager and Loop Capital Markets LLC is co-senior manager. Acacia Financial Group is financial adviser.
On Friday, Doyle announced the resignation of Department of Administration Secretary Michael Morgan. He elevated deputy secretary Dan Schooff, who previously served three terms in the state Assembly, to fill the position. The capital finance and budget offices both are part of Administration. Morgan is taking a position as senior vice president for administration and fiscal affairs at the University of Wisconsin System.
“As deputy secretary of DOA, Dan has been an invaluable leader on many key issues, including the state’s energy program, the budget, and Wisconsin’s recovery efforts,” Doyle said in a statement. “I know he will bring the same dedication to his service as the secretary of DOA.”
Doyle praised Morgan for his tenure, saying he has “been a leader within this administration and has played a crucial role in our efforts to cut the cost of state government, while providing the people of Wisconsin with vital services.”
