CHICAGO – Wisconsin hits the market with its first sale of 2017 to refund $523.6 million of appropriation-backed bonds with hopes of hitting double-digit savings even with the post-election rise in rates.
The sale of general fund annual appropriation bonds offers $427 million in a taxable series and $96.6 million in a tax-exempt series. The bonds will refund some of the state's 2009 tobacco securitization restructuring. Some of the bonds were previously advance refunded, leaving the state to go with a taxable structure on a portion of the upcoming deal, said capital finance director Dave Erdman.
Ramirez & Co. is senior manager and Stifel Nicolaus & Co. Inc. is co-senior. Acacia Financial Group is advising the state and Quarles & Brady LLP is bond counsel.
"Even with the market we've had post-election there are still some good candidates" that has the state is hopeful it can capture about 10% of present value savings on, Erdman said. While rates could fall if the state waited or it could wait until call dates for a current refunding, officials don't want to run the risk that yields are only headed up.
The A series matures serially between 2020 and 2033 with a term bond in 2036 with the B series maturing serially between 2020 and 2036. The taxable piece will include a make-whole call for maturities between 2020 and 2026 and may include a traditional municipal 10-year par call on the remainder.
The state opted to forgo the traditional call on a taxable appropriation backed refunding last summer as officials figured there was little value with rates at such near record lows. With interest rates now up, Erdman said there may be value in including the traditional call.
In a recorded investor presentation, the state highlights four security features that support the state's $3.1 billion of outstanding appropriation bonds. They include high priority repayment status in the budget and the state's continuing authority to make payments in the absence of a budget. The appropriation credit is also supported by a moral obligation repayment pledge.
The "features are supported by the trust indentures and furthermore included in Wisconsin statutes," Erdman said.
Only debt service on general obligation and operating notes as well as state payroll hold a higher priority on general fund revenues than the GFAABs, with 82% of general fund expenses subordinated. In the event the state enters a new biennium without a budget in place as it did a few years ago, prior biennial appropriations continue.
The appropriation credit carries existing ratings of Aa3 with a positive outlook from Moody's Investors Service and AA-minus from both Fitch Ratings and S&P Global Ratings. All are one notch lower than the state's GO ratings.
The state also highlights its fully funded pension system and improved liquidity that's allowed it to forgo the issuance of operating notes since fiscal 2012. The state ended the last fiscal year with a $331 million balance and is projected to close out fiscal 2017 on June 30 with a $105 million balance.
Revenue collections have fallen short of budgeted projections, which will impact the next biennium budget. Fiscal 2016 revenues were projected at 4.6% growth but rose 3.8%. Fiscal 2017 revenues were projected at 3.8% but are now expected to land at 2.3%, according Gov. Scott Walker's administration.
Collections in recent months have continued to lag and could cut into the projected ending balance or land the state in the red. The state currently operates on a two-year $72.7 billion budget.
While the state has cut a structural budget imbalance, it continues to carry a $2.4 billion deficit based on generally accepted accounting principles and has narrow general fund balances and has just modest reserves.
Walker will release his budget in February. Agency requests for the next biennium exceeded revenue by nearly $700 million although it's normal for requests to come in at a higher level than what's included in the final budget package submitted to the legislature.
Walker is a Republican and enjoys a majority in the Legislature although he has butted heads with some fellow party leaders over issues like transportation spending. The state faces a $1 billion shortfall in needed transportation related spending in the next biennium.
Wisconsin Assembly Republicans recently laid out an agenda that includes tax reforms, revising the state's school aid formula and work on transportation funding. Some lawmakers have suggested the state should raise its gasoline or vehicle taxes but Walker opposes such a move unless there's a corresponding tax decrease elsewhere.
Lawmakers are expected to consider tolling options. A recently released state-commissioned study found more than $40 billion of new revenue could be raised over three decades for transportation projects by tolling its five interstate highways. Federal approval would be needed to enable tolls on existing roadways.
