Wisconsin Moves on $338M of GOs, New Pools Following Budget Pact

CHICAGO — With a selection process underway to update its underwriting pools, Wisconsin on Wednesday will take bids on $338 million of bonds in its first general obligation sale following the adoption of a $66 billion budget that moves the state closer to structural balance.

The new-money sale Wednesday will fund “bricks-and-mortar” projects, according to state capital finance director Frank Hoadley. The bonds mature from 2013 through 2032.

Freshman Gov. Scott Walker and fellow Republicans who control the Legislature relied almost exclusively on spending cuts to eliminate a $3 billion deficit in the biennium that began July 1. That shift towards a more solid financial footing comes at the expense of local governments, school districts and public employees who face higher pension contributions and health care premiums.

“I am proud of the work done by the Legislature, which passed a budget today that isn’t built on accounting gimmicks, use of one-time money for ongoing expenses, or tax increases,” Walker said in a recent statement.

Former state leaders relied heavily on such one-time revenue sources as tobacco bond proceeds, debt restructuring, and accounting shifts to balance budgets on a cash basis. That strategy lead to a growing multibillion dollar structural imbalance that occurs when recurring revenues fail to match ongoing expenses.

The fiscal 2012-13 budget does include one substantial non-recurring revenue source, a $337 million debt restructuring in fiscal 2012, to help eliminate the budget deficit, and ratings agencies noted that maneuver as a negative.

But the budget puts Wisconsin on course to reduce its $2.5 billion structural imbalance to $250 million. The state is expected to end the fiscal biennium with a cash balance of nearly $300 million, according to an estimate from the nonpartisan Legislative Fiscal Bureau.

Ahead of the GO sale, the three major rating agencies affirmed the mid-double-A marks and stable outlooks assigned to $6.2 billion of debt. While chastising the state for its continued use of one-shots in the form of debt restructuring, analysts praised the state for tackling its structural woes.

“We anticipate that Wisconsin’s trend of fiscal discipline, which has significantly reduced budget deficits in the past several years, will continue,” said Standard & Poor’s analyst Gabriel Petek. “Furthermore, we think the state’s recently enacted budget improves its structural fiscal ­alignment.”

Fitch Ratings analysts wrote: “Structural budget imbalance has been a persistent feature of the state’s finances in recent years, with the state relying on nonrecurring items and shifting general fund expenses to other funds. The adopted budget for the fiscal 2011-2013 biennium makes progress toward structural balance.”

Whether the market will recognize the state’s fiscal strides in the same fashion it jumps on negative headlines remains to be seen. “Wisconsin is one of the few states that has fixed its structural budget problem, but in this market I don’t think the positive is as well-appreciated as deterioration,” said Matt Fabian, a managing director at Municipal Market Advisors.

Wisconsin received a record low interest rate on its sale earlier this month of $800 million of operating notes. The state received 45 bids from 15 underwriters on its July 6 note sale, capturing a 0.22% rate for a state low on note issuance, according to Hoadley.

Wells Fargo Securities won $750 million of the note offering and Goldman, Sachs & Co. won the remainder. Hoadley attributed the low rate to scant supply and strong demand “for a sovereign state that is in fairly decent financial shape.”

The notes don’t feature a general obligation pledge, but Wisconsin is obligated to deposit all general fund revenues, other than those required to pay its GO debt service, into a note-redemption fund to cover repayment.

The state’s rating recognizes its considerable resources, a diverse economy with an above-average manufacturing presence, and a moderate but above-average and rising debt burden, Fitch wrote. Economic and revenue trends are on the mend, with manufacturing and services rebounding from recessionary weakness.

Standard & Poor’s said the rating is supported by the state’s demonstrated ability to make midyear budget corrections to maintain its balanced budget and diverse economy, while the low level of operating reserves offsets its strengths.

Moody’s said Wisconsin’s fully funded pension system helps ease long-term fiscal pressures.

In the new budget, the fiscal bureau projects tax revenue will rise by 2.9% in fiscal 2012 and by 3.6% in fiscal 2013 due to strong personal income tax and sales tax collections. The budget represents a 1.8% increase over spending levels in the last biennium. It authorizes $1.36 billion of new general obligation debt and another $695 million of new revenue-backed bonding, including $342 million for transportation and $353 million for clean-water projects.

The spending plan does not include any general tax hikes and it strictly limits local property-tax hikes to keep governments from raising taxes to compensate for the state cuts. Democrats voted against the plan over concerns that it hurts local governments and school districts, which will bear the brunt of the cuts, while aiding businesses that received various breaks.

Local governments will collect $76 million less as Medicaid was trimmed by $500 million. Public school funding was cut by about $800 million over the two-year period. Another $250 million was slashed from higher education spending levels and $72 million from aid to technical colleges.

Walker has promoted his previously approved and controversial curbs on collective bargaining rights for public workers as a means for local governments and schools to offset the impact of budget cuts. At the state level, the repair bill raised employee health care premium and pension contributions to generate an estimated $200 million in savings in fiscal 2012 and 2013. 

Broker-dealers interested in working on the state’s future negotiated bond sales face a deadline of Aug. 4 to submit their qualifications to the capital finance office. The state will update its senior manager and co-manager pools to be used through June 30, 2013. “The  RFQ is so we can review qualifications and reestablish our pools of firms we choose from for certain transactions and the dealers on our floating-rate transactions” said assistant capital finance director David Erdman.

In the request for proposals, the state asks senior-manager applicants to describe their retail capabilities, to make recommendations with respect to ongoing investor relations programs and to recommend whether it should undertake an investor outreach effort on competitive sales.

Wisconsin also asks underwriters to discuss the biggest concerns for issuers when completing transactions based on recent federal legislation, rule changes and proposed regulatory changes.

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