Michigan Authority Joins Refunding Parade

DALLAS – The Michigan State Building Authority is joining the parade of borrowers capitalizing on the market's attractive rates with plans to sell about $660 million of mostly refunding bonds next week.

The deal will primarily refund commercial paper and authority debt from 2006 and 2008 for estimated net present value savings of at least 20%, according to authority officials, who cautioned the estimates could change based on rates next week. The deal is also expected to provide $100 million for new projects including an addition to a psychiatric hospital and a bioengineering facility at a state university.

The bonds are secured by lease payments made by the state through an annual appropriation by the state legislature. The SBA owns the facilities and leases them to the state. Under a trust indenture and bond resolution, the SBA pledges the lease payments to meet debt service on the bonds. The state is obligated to include the lease rental revenue in its budget.

Morgan Stanley is the senior manager and Citi is co-senior manager for the transaction. Robert W Baird & Co. is the financial advisor.

SBA provides financing for state projects, mostly at state's universities and community colleges and for state facilities. It had approximately $3.2 billion in bonds and commercial paper notes outstanding as of Sept. 30, 2015.

Its bonds are rated one notch below the state of Michigan. Moody's Investors Service assigns the building authority bonds its Aa2 rating. Fitch Ratings and S&P Global Ratings both assign AA-minus ratings. All cite the state's strong fiscal position.

The authority highlights those strengths in an investor presentation. "Michigan's economy is doing very well and the state's financial position is very solid," said Jay Wortley, chief economist at the Office of Revenue and Tax Analysis, said.

The state has earned points from rating agencies for wrapping up work on a balanced budget on schedule for six straight years. The budget for the new fiscal year that begins Oct.1 was signed by Gov. Rick Snyder in June, months ahead of schedule.

"[Michigan] has steadily built up its rainy day fund, and liquidity and fund balance are once again healthy," said Moody's. "The state has achieved budgetary surpluses as personal income tax receipts have flourished during the economic expansion."

The state has been growing reserves since 2011. It finished fiscal 2015 with $498 million in the rainy day fund and projects growth to $611 million for fiscal 2016.

The state's roughly $23 billion operating budget, which is combination of general fund and school aid fund, is funded primarily by the personal income tax and sales and use tax. Both these tax sources have been increasing over the past few years and consensus forecasts show continued increases of around 3% annually.

Over the past decade the state has experienced both economic and fiscal improvements. Unemployment, for example, dropped to below the national rate in September after climbing to more than 4 percentage points above the U.S. rate in 2009.

However Michigan faces some fiscal uncertainty over the long-term costs of Flint's water contamination crisis and rescuing Detroit Public Schools.

The 2017 budget includes $234 million to help provide both short-term and long-term solutions for Flint.

Flint's water crisis began after the city, under oversight of an emergency manager, broke off from the Detroit Water and Sewerage System in 2014 to save money when its contract to receive Detroit-supplied water ended. The city began pulling water from the Flint River and intended to use it until later this year when it will get its water from a new Karegnondi Water Authority pipeline. The Flint River water wasn't properly treated and corroded pipes throughout the system.

The city with state financial help reconnected to Detroit's system last year but it did not solve the city's problems because the delivery system's pipes had been contaminated with lead.

In the investor presentation, Wortley acknowledges pending lawsuits and the potential for additional costs, but said the state can't predict the ultimate burden. "Multiple lawsuits have been filed against the state, city and federal government but it is too early to tell if the cases will result in material state expenditures," he said.

The final price tag for the Detroit school rescue package has also been challenged by Detroit legislators and other Democrats who say it falls short of what the district really needs to get back to working order.

On June 21 Michigan Gov. Rick Snyder signed a $617 million legislative package that outlines a restructuring of DPS. The school district, which has been under state emergency management oversight for the last seven years, risked not being able to open doors in the fall and defaulting on debt payments. Under the rescue plan, the state will pay off $467 million of accumulated DPS operating debt. A new, debt-free school system will be established with an additional $150 million provided to cover transitional operating costs.  However the district's transition manger Steven Rhodes has told lawmakers that $200 million "is the minimum amount" the district needs to have a reasonable opportunity to launch the new school system.

The $617 million DPS rescue is being paid out of the state's settlement fund with tobacco companies. Any additional costs will be shouldered by the state taxpayers through the state's general fund according to the House Fiscal Agency.

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