CHICAGO — Minnesota will take bids Tuesday on $920 million of general obligation debt in a long-planned deal that grew as refunding opportunities arose and lawmakers approved additional public works spending as part of the budget deal that ended a partial government shutdown.
Next week’s deal offers five series including $445 million of new-money various purpose GOs, $320 million of trunk highway GOs that are repaid with transportation-related revenues but carry the state’s full faith and credit pledge, and $4 million of taxable GOs.
The refunding pieces come in two series for $44.8 million and $108 million. The advance refunding of bonds will generate at least 5% in net present-value savings, according to Kristin Hanson, assistant commissioner for treasury in the Minnesota Management and Budget office.
The new-money bonds mature serially from 2012 through 2031 with the taxable series maturing in 2016. The refunding bonds tentatively offer maturities from 2012 through 2023. Public Resources Advisory Group is the financial advisor on the transaction and Kutak Rock LLP is s bond counsel.
The state has published an addendum to the offering statement notifying potential buyers of the possible adverse affects on tax-exempt issuance of President Obama’s proposal to cap the amount of interest excluded from taxation. If enacted, the proposed American Jobs Act of 2011 “would limit the amount of exclusions (including tax-exempt interest) and deductions available to certain high income taxpayers for taxable years after 2012, and as a result could affect the market price or marketability of the Bonds,” the supplement reads.
The new-money proceeds will fund projects approved in the state’s various bonding bill packages and highway projects. The state typically passes an operating budget in odd-numbered years and a bonding bill in even years, although a supplemental package is also often passed in the odd years. The 2010 bonding bill package totaled $680 million.
The size of the long-planned annual GO borrowing this summer rose from an original estimate of $600 million to $700 million.
“The size is more than we originally expected on the new-money portion because of the passage of a $500 million 2011 bonding bill, and like everyone we watch the market for refunding opportunities,” Hanson said.
The bonding bill was part of the budget deal between Gov. Mark Dayton and Republican lawmakers that ended a three-week government shutdown. Dayton signed the final bills that make up the two-year, $35 billion budget in July, ending a 20-day shutdown that began when the new fiscal biennium started without a budget in place. The budget compromise relied on one-time revenues, for which the state has shown a proclivity during its years of politically divided government
Dayton, a member of the Democratic-Labor-Farmer party, sought a mix of cuts and an income tax hike on top earners to erase a $5 billion deficit. The GOP, which controls the Legislature, refused to go along with any tax increase.
The two sides whittled their differences down to $1.4 billion through cuts and school payment delays, but they were stuck there until Dayton agreed to go along with a Republican proposal for further school payment delays and a tobacco bond sale. The GOP agreed to several concessions, including passage of the $500 million bonding bill.
In addition to authorizing the sale of $800-$900 million of tobacco bonds with the goal of raising $640 million for budget relief, the two-year legislative package extended for another two years the state’s ability to use negotiated sales on GO issues. The approval was first granted in the last budget due to market volatility.
Minnesota opted for a competitive sale in the upcoming transaction. “Given the favorable interest-rate environment, and that competitive sales have traditionally resulted in the lowest cost of financing for strong credits like the state’s, we believe a competitive sale is in the best interest of the state,” Hanson said.
Rating agencies had not released updated credit reviews by press time Tuesday, but the state’s political gridlock and heavy use on non-recurring revenues have already taken a toll on its gilt-edged ratings. Fitch Ratings stripped the state of its top AAA rating, lowering it one notch to AA-plus in July after the shutdown.
Moody’s Investors Service in early August revised its outlook on the state’s Aa1 rating assigned to $6 billion of GOs to negative from stable. Standard & Poor’s has left the state’s AAA rating intact.
In its report, Moody’s said the outlook change stems from Minnesota’s growing structural budget woes and “political intractability” that drove its reliance on one-shots to solve the deficit and the likelihood of future structural budget gaps.
“These negative factors put the state in a weaker position relative to other states within the same rating category,” Moody’s analysts said.
Cuts made up about 46% of the overall budget solution while one-time maneuvers accounted for the remainder. In addition to the tobacco borrowing, the state will push off payment of $2.1 billion in school payments. Minnesota has nearly depleted its once-healthy reserves, drawing them down to around $275 million.
While it struggled with liquidity issues earlier this year, the state took action to ease the pressure by conserving cash. The government delayed some tax refunds and other payments and opened a $600 million line of credit with USBank.
The state’s still-high rating remains supported by a fundamentally strong economy with diverse employment and high wealth levels, quarterly forecasting, and the ability of the governor to enact mid-year cuts. Minnesota’s jobless rate for June was 6.6%, compared to a national rate of 9.2%.
The state had a fairly well-funded pension fund ratio of 84% at the close of fiscal 2010 and pension reforms enacted last year are expected to save $2 billion over the next five years. State courts recently upheld the legality of changes to the cost of living increases doled out to retirees.
Minnesota will bring its first tobacco bond securitization to market later in the fall as the finance team continues to work on structuring issues, Hanson said.
The state recently selected Barclays Capital to lead a team of eight underwriting firms for the transaction. Bank of America Merrill Lynch and Jefferies & Co. will serve as co-senior managers. Public Financial Management Inc. is financial advisor and Kutak Rock is transaction and bond counsel.
The state recently conducted a request- for-proposal process to establish updated underwriting pools on negotiated GO sales through June of 2013 and is still reviewing the submissions, according to Hanson.
Next week’s deal is the first Minnesota GO issue in decades not to use Dorsey & Whitney LLP in the role of bond counsel.
In a move first reported by The Bond Buyer last month, Attorney General Lori Swanson — whose office holds sway over bond counsel choices for the state and some of its agencies — terminated Dorsey and hired Kutak Rock. Sources said the change stemmed from conflicts with the firm’s representation of corporate clients and over pricing issues.
