CHICAGO — Minnesota will take competitive bids Tuesday on $658 million of general obligation paper in its annual sale to fund capital projects.
Though the state lost its top credit marks last year, it’s still high-grade paper, with high to mid-double-A ratings and while the deal may not satisfy investors looking for higher yields, it should draw strong attention from buyers focused on solid credits.
“We’re expecting a strong sale based on our improved financial position and fully funded reserves,” said state debt manager Kristin Hanson. The bonds mature serially with a final 20-year maturity.
In one sign of the state’s improved fiscal picture, officials opted not to renew a $600 million line-of-credit with US Bank that expired June 30. The state set up the line in 2010 for cash-flow purposes, but never tapped it.
Ahead of the sale, all three rating agencies affirmed the state’s high double-A ratings. Fitch Ratings and Standard & Poor’s assign a stable outlook to the credit while Moody’s Investors Service assigns a negative outlook.
The sale is broken into three tranches, including $422 million of GO-backed various-purpose bonds, $234 million of GO-backed trunk highway bonds that are repaid with transportation-related fees and taxes, and $2.5 million of taxable GO state bonds.
Kutak Rock LLP is bond counsel and Public Resources Advisory Group is financial advisor.
Proceeds of the sale will finance capital projects across the state that lawmakers have approved in recent capital budgets referred to locally as bonding bills.
Gov. Mark Dayton this past spring signed the state’s latest program, a $566 million package that provides funds for public university projects, renovations to the state capitol building, natural resources and transportation.
The Legislature typically takes up a capital plan in the year after it adopts a two-year operating budget. However, last year it approved a $500 million supplemental bonding bill as part of an agreement that ended a stalemate and a government shutdown over how to deal with red ink in the fiscal 2012-13 budget beginning July 1, 2011.
Fitch and Standard & Poor’s downgraded the state, punishing it for an ongoing reliance of one-shots to balance its budgets, while Moody’s changed its outlook to negative on the state’s more than $5 billion of GO debt.
The latest revenue figures show Minnesota closed out 2012 ending June 30 with $336 million more than predicted when the annual February forecast was released, and the state expects this year to rebuild its reserves with $1 billion in its rainy-day fund.
While economic indicators suggest the state’s economy has stabilized, the February forecast still projects a $1.1 billion deficit in the 2014-15 biennium amid an uncertain economic climate.
“In our view, Minnesota has a solid track record of making budget adjustments in a timely manner,” said Standard & Poor’s analyst Henry Henderson. “This will be an important credit consideration in the next several years, in our opinion, given the state’s diminished financial flexibility.”
While Moody’s acknowledges the state’s improving economy and revenue picture, it views the credit as negative because of ongoing structural budget woes. “The state relied heavily on one-time budget balancing measures, leaving it with a structural imbalance for the next biennium and an outstanding liability related to school aid payment shifts,” Moody’s wrote.
The rating is supported by a solid debt structure, a broad-based economy with above-average wealth levels and a track record of management that is sensitive to changes in the state’s fiscal environment.
Its pension funding levels are adequate and will benefit from 2010 changes that have been upheld by local courts.