CHICAGO — Wisconsin today will competitively sell $456 million of tax-exempt general obligation debt and taxable Build America Bonds, marking its first chance to benefit from a change in state law allowing the capital finance department to drop purchase-price limits on GO issues.
By eliminating a limit Wisconsin will allow buyers to offer a higher coupon, in turn lowering yields paid by the state. The state previously limited the purchase price to not more than 106% of the par amount because it was required to deposit the purchase premium into a bond security redemption fund.
The price limit reflected the state's need to spend the proceeds in the redemption fund earmarked for interest within the time restrictions set under the federal tax code. Wisconsin lawmakers recently changed the law to allow the state to deposit the funds directly into its capital improvement fund, where they can more quickly be exhausted to finance approved projects. That eliminates the concern that the state could run afoul of the tax code.
"We think this change will result in more favorable bids with lower yields for the state," said David Erdman, Wisconsin's assistant capital finance director.
The cap typically limited the size of coupons to under 5%. "Now broker-dealers can place bids with higher coupons," he said, "and we've seen a demand for coupons over 5% so we would expect better yields." The state still limits the purchase price to not less than 98.5%.
Market conditions should also help the offering, as municipal market yields have been falling all month. Municipal Market Data's triple-A yield curve for tax-exempt debt Monday was yielding a record-low 2.39% in 10 years.
Wisconsin's Tuesday GO sale is divided into two series: $146.7 million of tax-exempt paper that matures between 2012 and 2019, and $309.7 million of taxable BABs that mature between 2020 and 2041. Broker-dealers can also submit tax-exempt bids on the second series. The division between the tax-exempt and taxable pieces is also subject to change, depending on interest rates.
"This is our fourth set of GO bonds to be sold this way with the split in maturities where we think the break-even point is where BABs become more economical than tax-exempts," Erdman said.
Proceeds will finance various bricks-and-mortar projects approved by the state building commission. The state typically sells two such issues annually.
Wisconsin 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 lead manager and Loop Capital Markets LLC is co-senior manager. Acacia Financial Group is financial adviser. Foley & Lardner LLP is bond counsel.
Fitch Ratings, Standard & Poor's and Moody's Investors Service all affirmed their double-A ratings on Wisconsin's GOs. Credit strengths include a diverse economy and moderate debt levels, while weaknesses include an ongoing structural budget imbalance, weak reserve levels, and the recession's effect on revenue.
The state has no reserves and its $61.8 billion budget for fiscal 2010-11, which was signed into law last year by Gov. Jim Doyle, is narrowly balanced. It 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.
In its recent report, Moody's noted that the state closed out fiscal 2010 with a $383 million cash balance but that number will fall to a negative $299 million for fiscal 2011. Total revenue for the biennium that runs through June 30 is expected to drop by about 1%, or $310 million from budgeted amounts.
"Further revenue shortfalls and economic weakness could strain resources," Moody's analysts wrote. In the state's favor are its well-funded pension funds, a diverse economy, and a strong export manufacturing sector.
In its report, Fitch said Wisconsin's rating recognizes its considerable resources, a diverse economy, and a moderate but above-average and rising debt burden.
"Although progress in restoring fiscal balance was made with the fiscal 2009-2011 biennium budget, the downturn exacerbated a lingering structural budget imbalance, reflecting historical reliance on nonrecurring items and the shift of general fund expenses to other funds," Fitch said in its report.
The state has $6.5 billion of outstanding GO debt. Adding to the strain on its balance sheet is a Wisconsin Supreme Court decision in July that overturned the state's diversion of $200 million from a medical malpractice fund. The decision will force a new round of budget cuts, Doyle's administration has warned. Officials are waiting for court direction on a repayment plan.
In a 5-to-2 ruling, the court ruled that the 2007 transfer violated Wisconsin's constitution and it remanded the case back to a Dane County judge, who must direct the state to replenish the fund with interest. The state transferred the money to the Medical Assistance Trust Fund to leverage an additional $300 million in federal matching funds, then withdrew the $200 million to help balance the budget by paying for health-care related costs.
The Wisconsin Medical Society, which represents doctors who pay into the compensation fund, filed a lawsuit in state court challenging the withdrawal.
