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Wisconsin Readies GO and Appropriation-Backed Sales

OCT 16, 2012 5:49pm ET
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CHICAGO — Wisconsin will take competitive bids Wednesday on $302 million of general obligation bonds with a $250 million taxable appropriation-backed sale waiting in the wings.

The state has also identified plenty of advance refunding opportunities but has exhausted its legislative authority on refunding and needs lawmakers to act.

“We are hopeful the additional refunding authority will be one of the first items legislators take up when they return in January,” said assistant capital finance director David Erdman.

Wendesday’s GO sale Wednesday offers serial maturities between 2022 and 2033. The state uses extendible municipal commercial paper to raise funds on the shorter end of the yield curve. “It’s a tactic we employ that allows us to have all our GO obligations callable,” Erdman said.

Proceeds will finance bricks and mortar building and transportation projects across the state. Foley & Lardner LLP is bond counsel.

Wisconsin will return to the market later this month or next month to pay off a roughly $250 million bullet maturity due in May from its 2003 pension-related debt sale. Jefferies & Co. is the senior manager with Citi and Samuel A. Ramirez & Co. serving as co-senior managers. Acacia Financial Group Inc. is the adviser and Quarles & Brady LLP is bond counsel.

The state could wait to restructure the bullet as it doesn’t come due until May, but with rates so attractive officials decided to act. “We are close enough and decided to go ahead before something beyond our control” potentially disrupts the market, Erdman said. The state will amortize the bullet in fixed-rate serials.

The bullet maturity was part of the state’s $1.8 billion sale that cleared out its unfunded pension-related liabilities. The 10-year bullet was popular among taxable buyers, providing a very liquid, highly tradable investment comparable to a 10-year Treasury.

The state used $700 million of the proceeds to wipe out its unfunded pension liability to the Wisconsin Retirement System and the remaining $782 million to clear out its liability under a program that compensates retiring employees for their unused sick days. The state restructured a portion of the deal that was originally issued as auction-rate securities in 2008 after the collapse of that market.

The state’s fully funded pension system, as of its most recent valuation at the end of 2010, is one of its most positive credit features. It’s the only state to benefit from a fully funded system, according to the Pew Center on the States.

Wisconsin’s system also benefits from a unique cost and risk-sharing feature that allows for annuity payments to be altered depending on available resources. That insulates the plan from large swings in annual contribution rates or funding levels.

The GO issue comes quickly on the heels of the state’s release Monday of its annual fiscal report for fiscal 2012 on a budgetary basis. The report from the Department of Administration showed revenues picked up a faster clip than expected in the last fiscal year, resulting in a $342 million ending balance and $109 million deposit into the state’s rainy-day fund.

Though still lean, it represents the largest contribution to the fund.

“It’s also the first time the state has added to the fund in two back-to-back years. This is critical, because as we’ve seen, the economy can change rapidly,” Gov. Scott Walker said in a statement.

Ahead of the sale, Fitch Ratings affirmed the state’s AA rating assigned to $6.8 billion of GO bonds, Moody’s Investors Service affirmed its Aa2 rating, and Standard & Poor’s affirmed its AA rating. All assign a stable outlook.

The rating is driven by moderate debt levels, fully funded pensions, and a broad and diverse economy, Fitch said. The state credit benefits from Walker’s fiscal 2012-2013 budget progressing towards a structurally balanced budget after a long reliance on one-time revenues to achieve balance.

Walker’s budget relied on deep cuts in aid to local governments and increased employee payments for healthcare premiums and pensions to help close a $3.6 billion deficit in the two-year $66 billion budget.

The plan did rely on a significant one-shot in the form of $339 million of debt restructuring that pushed off near-term debt service payments. The state did however repay some longstanding obligations including $59 million to Minnesota under a terminated tax reciprocity agreement and $234 million to repay a past interfund transfer.

The state’s challenges remain an ongoing structural imbalance and minimally funded reserves.

The latest figures show revenue grew at a faster clip as the economy continues its slow mend. The general fund balance for fiscal 2012 was $50.5 million higher than previously predicted. General-purpose revenue taxes totaled $13.5 billion compared to $12.9 billion in the prior year, marking a 4.7 percent increase. Individual income and sales tax collections were up by 5.1% and 4.4%, respectively. Growth was originally estimated at 3 % in fiscal 2012. The budget depends on 3.6% growth in fiscal 2013.

General-purpose expenditures totaled $13.4 billion compared to $13.6 billion the year before, marking a 1.4 % decrease. Local aid to governments and school districts accounted for more than 50% of general purpose spending while the University of Wisconsin accounted for 6.8 %.

Net tax-supported debt totals $12.6 billion when GO, appropriation and revenue-backed borrowing is counted. “We view positively the revenue rebound and somewhat stronger reserve position than the state originally anticipated,” S&P analyst Gabriel Petek said. “Even when the state’s revenue had a weaker forward trajectory, the state’s recent proactive response to its budget shortfalls was supportive of the state’s credit quality.”

The offering statement on Wednesday’s sale informs investors of the status of pending litigation involving the controversial law, Wisconsin Act 10, that required higher pension and health care premium payments and stripped many unions of their collective bargaining rights.

Democratic opposition to the Republican governor’s proposal led their senators to flee the state last year in an attempt to stall passage and prompted large protests at the state capital. Democrats and unions also led a petition drive to force Walker to face a recall election. Walker survived the recall in a May vote. The state discloses in its offering statement that the budget “does not currently assume any settlement of this matter or other means to address the impact of any negative decision.”

Court rulings so far have not had a state- level impact, but Moody’s warned that a state court ruling overturning portions of the law could negatively impact local governments if it stands. Dane County Judge Juan Colas overturned portions of the law affecting local governments as part of a lawsuit filed by unions in Milwaukee and Madison, finding they violated free-speech rights and the equal protection clause of the state constitution because safety personnel unions were excluded. Wisconsin has appealed the decision and is asking the court to stay the lower court ruling.

Wisconsin also continues its search to fill the big shoes of state debt manager Frank Hoadley, who intends to formally retire at the end of the year.

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