CHICAGO — Michigan will hit the market Wednesday with $1.1 billion of short-term general obligation notes in what has become the state’s annual borrowing to cover expenditures while it awaits tax revenues.
This is the eighth consecutive year Michigan has issued short-term debt to cover cash-flow shortfalls in its two main funds, the general fund and the school aid fund.
The transaction comes at the beginning of the state’s fiscal year, which starts Oct. 1. It is expected to be the only cash-flow note sale for the year.
The debt matures Sept. 30, 2011, the last day of the current fiscal year.
This year’s borrowing is down from last year’s $1.26 billion issue, reflecting the smaller amount of general fund revenue that flowed into the state’s coffers in fiscal 2010. The state is constitutionally allowed to borrow only up to 15% of the previous year’s undedicated general fund revenues.
So far in fiscal 2011, Michigan has seen a slight uptick in revenues.
The state achieved a record-low interest rate of 0.53% in last year’s note sale and hopes to see similarly low rates this time, said Wayne Workman with Robert W. Baird & Co., the state’s financial adviser.
“The short-term interest rates are even lower than last year, and we expect the deal to be well-received by the market,” Workman said.
Goldman, Sachs & Co. is senior manager on the deal, leading six additional firms on the underwriting team. Miller Canfield, Paddock and Stone PLC is note counsel.
The investor road show marketing the debt highlights the state’s experience in managing short-term borrowings and its current fiscal position, Workman said. While assigning top short-term ratings to the note issue, Moody’s Investors Service warned that Michigan’s reliance on cash-flow notes “underscores a financial position weakened by an arduous period of economic underperformance.”
The state’s struggles are offset by a history of strong fiscal management and its practice of setting aside funds for note prepayment prior to maturity, Moody’s said.
Standard & Poor’s rates the debt SP-1-plus.
The state sold $291 million of GO bonds with a final maturity of 2021 two weeks ago. The total interest cost on the debt was 3.14%.
