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Wisconsin Readies Transportation Revs as More Funding Considered

JAN 29, 2013 2:21pm ET
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CHICAGO — Wisconsin is readying the sale of up to $246 million of transportation revenue bonds as lawmakers head back to work to tackle an agenda that includes the state's pressing transportation needs.

The deal, which could price as soon as Thursday, includes an even split of new-money borrowing and refunding with the new money earmarked for statewide projects and the refunding expected to achieve traditional present-value savings in the range of 8%, said assistant capital finance director David Erdman.

 "As we were planning an advance refunding for significant economic savings, a need for some new money also came up," Erdman said. "We haven't issued new-money transportation revenue bonds since last April."

The state is limiting the size of the new-money piece as it considers increasing its floating-rate exposure in the program by increasing its use of commercial paper. Currently, only about $100 million of debt in the $1.8 billion transportation debt portfolio is in a variable rate. The state may eventually increase that to $250 million.

The state's building commission has authorized the borrowing of up to $275 million of new-money issuance backed by transportation revenues and $375 million of refunding during 2013.

Goldman Sachs is the senior manager and Ramirez & Co. Inc. is co-senior manager. Public Financial Management Inc. is financial advisor and Quarles & Brady LLP is bond counsel. The existing bonds are rated AA-plus from Fitch Ratings and Standard & Poor's and Aa2 from Moody's Investors, although none had released updated reports as of Tuesday morning.

The state intends to follow up the deal in mid-February with a refunding of between $75 million and $100 million of clean water revenue bonds. Morgan Stanley is the senior manager and Siebert Brandford Shank & Co. LLC is co-senior manager. Acacia Financial Group is adviser and Foley & Lardner LLP is bond counsel. The credit carries ratings at the high double-A level.

Erdman said the office has identified general obligation advance refunding candidates totaling more than $500 million that could achieve significant savings but it needs additional state legislative authority to act on them.

The longer the wait, the greater the "risk" that interest rate movement will chip away at savings levels, Erdman said. Citi would serve as the bookrunner on the next GO refunding with Siebert as the co-senior manager. The office has sufficient new-money GO authorization on the books to support capital projects this year and will ask the state building commission for authorization on a not yet sized new-money issue at its meeting next month.

The transportation issue comes on the heels of the release last week of a bipartisan report on the state's transportation demands that warned of the need for a boost in funding. If the commission's "preferred" recommendations were adopted, it would bolster the state's borrowing but would also raise additional revenue to cover the added debt burden.

"Without additional funding for Wisconsin's transportation programs over the next decade, network conditions and safety will deteriorate and system needs will grow in all modes," the report warns. "The state's decades-old transportation funding model is not keeping pace with current or future needs. The state has chosen to address its transportation funding shortfall with increased debt through bond issuance — a path that is unsustainable over the long term."

The 162-page report from the Wisconsin Transportation Finance and Policy Commission recommends spending at least $480 million more annually over the next 10 years. The 10-member advisory commission was created in 2011 with the charge of examining the state's transportation needs over the next 10 years and funding alternatives, including debt policy. It faced a March 1 deadline to submit its findings to Gov. Scott Walker and lawmakers.

The commission settled on a preferred package of spending levels and funding options that earmarks at least $387 million for maintenance and modernization of state highways with the remaining new funds spent on local highways, bridges, airports, harbors and bike and pedestrian paths.

The spending is the minimum needed to "maintain a safe and efficient system," the report reads. The "preferred" funding options include raising the state gas tax by five cents per gallon to generate $1.59 billion over 10 years, creating a new mileage-based registration fee for passenger vehicles to raise $2.28 billion, and increasing heavy truck registration fees to generate $591 million.

The plan also favors increasing driver licenses' fees by $20 to raise $161 million and eliminating the sales tax exemption on vehicle trade-ins to generate $917 million.

The plan relies on overall borrowing of $3.54 billion over the 10-year period as the commission recommends taking advantage of low interest rates in the near term. The infusion of new revenues from tax and fee hikes would keep debt service payments from consuming no more than 20% of transportation revenues.

"To allow for flexibility in the future, it is the commission's recommended bonding policy that debt service payments should not exceed 25 % of state transportation revenues," the report says.

Gas taxes and vehicle registration fees makeup more than 90% of state transportation revenues and at their current rates collections over the next decade are projected to remain flat due to improved fuel mileage.

Without a fresh infusion of new revenues, the cost of repaying transportation debt is expected to consume about one-quarter of all state transportation revenues by 2023 if the current borrowing pace is maintained. That's up from about 7% in 2002 and 15% in 2012.

The state's current two-year budget which runs through June 30 relied on a total of $764 million in general fund and transportation revenue debt issuance. A total of $438 million of GO borrowing included $115 million of general fund supported debt issuance with the remainder repaid with transportation revenues. The other $326 million of borrowing is through the transportation revenue bond program.

The commission also put its support behind legislation allowing regional transportation authorities to raise funds through a one-half-cent maximum sales tax if local voters approve. It also endorsed legislation to authorize a maximum one-half-percent local option sales tax for transportation purposes in counties with populations less than 100,000.

It also endorsed a proposal to amend the state constitution to halt draws on the transportation fund for non-transportation related spending. A shift to tolls remains a challenge due to federal rules governing highways previously funded with federal aid.

Lawmakers have praised the report's findings but Republicans have scoffed at many of the tax and fee increases proposed. Republicans control the Legislature and Walker is a Republican. Their focus ahead of Walker's release of a proposed two year budget on Feb. 20 is tax cuts. They want to hand back an estimated $340 million of the state's budget surplus through an income tax cut.

The state's nonpartisan Legislative Fiscal Bureau last week released new revenue projections that put the state on course to close out the current biennium June 30 with a $485 million ending balance, up by about $137 million from November projections issued by Walker's administration.

"The budget I will introduce next month will make use of this surplus by focusing on helping the private sector create jobs, transforming education, developing the workforce, reforming government, and investing in infrastructure," Walker said in a statement.

The state will close out the biennium with $135 million in reserves. Tax collections are expected to rise by 2.1% this year with a 2.4% increase expected in the next fiscal year and then 3.6% in fiscal 2015.

"Wisconsin's economy is improving. We are more fiscally sound and in a position for continued economic growth," state Sen. Alberta Darling, R-River Hills, and Rep. John Nygren, R-Marinette, the Legislature's Joint Finance Committee chairpersons, said in a statement.

The surplus means the state is not likely to turn to debt restructuring as it has to help clear out red ink in past budgets. Walker primarily used 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 current two-year $66 billion budget although it did include $339 million of debt restructuring that pushed off near-term debt service.

Ahead of a GO sale last year, Fitch Ratings affirmed the state's AA rating assigned to $6.8 billion of GOs, Moody's affirmed its Aa2 rating, and Standard & Poor's affirmed its AA rating. All assign a stable outlook. The rating reflects moderate debt levels, fully funded pensions, and a broad and diverse economy. The state's challenges remain an ongoing structural imbalance and minimally funded reserves. Net tax-supported debt totals $12.6 billion when GO, appropriation and revenue-backed borrowing is counted.

Walker's administration has also been interviewing candidates to replace retiring capital finance director Frank Hoadley but has not yet named his successor.

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