CHICAGO – Wisconsin is taking advantage of record low interest rates with about $915 million of general obligation and appropriation-backed refundings this week and next.
The GO refunding of up to $317 million is first up, selling Wednesday or Thursday for traditional present-value savings. RBC Capital Markets will run the books with Siebert Brandford Shank & Co. as co-senior manager. Foley & Lardner LLP is bond counsel and Public Financial Management Inc. is advising the state.
The refunding of up to $598 million of appropriation-backed paper will follow as soon as next week in two series, one for $400 million and the second for $198 million, said Wisconsin Capital Finance Director David Erdman. Both are taxable.
The $198 million portion is a straight refunding of tax-exempt 2009 debt for present value savings. It can't be advance refunded until next year so the state is forgoing tax-exemption with still healthy savings expected.
The $400 million segment will set a long-term structure for the 2018 bullet maturities built into an issue that took out auction-rate securities following the collapse of that market in 2008.
Stifel will run the books with Ramirez & Co. Inc. as co-senior manager. Quarles & Brady LLP is bond counsel and Acacia Financial Group Inc. is advising the state.
"The market is definitely driving this, the continued low-interest-rate environment," Erdman said.
In addition to savings on various pieces of outstanding debt, current rates offer the state an affordable opportunity to deal with the bullet maturities. "The market is at a point where we and our advisor feel it's time to move forward eliminate any market risk that may happen between now and 2018," Erdman said.
The yield on the 10-year muni general obligation benchmark remained at 1.45% Monday, while the yield on the 30-year muni was flat at 2.15% to the Municipal Market Data's triple-A scale.
The GO refunding joins a moderate slate of $5.95 billion of financings this week as the Federal Open Market Committee holds its two-day policy meeting. The Federal Reserve is expected to leave interest rates alone.
Erdman said he was comfortable pricing this week despite the open market meeting since it didn't appear that market-moving news loomed and it could pose an "opportunity" given that some issuers traditionally avoid such weeks to jump into the market.
The $317 million GO refunding will tap about half of the capital finance office's $595 million of GO refunding authorization so Erdman said he may seek additional authority from the State Building Commission at its meeting next month should additional refunding candidates surface.
The state is a frequent GO borrower, and sold about $80 million of new money earlier this month with plans to return with a deal in the range of $300 million in September, but it hasn't issued appropriation-backed bonds since 2012, Erdman said.
Ahead of the GO sale, the rating agencies – including Kroll Bond Rating Agency -- all affirmed the state's AA-level ratings. Moody's Investors Service assigns Wisconsin a positive outlook while the others are stable. Fitch Ratings, Moody's, and S&P Global Ratings all rate the state's appropriation bonds one notch lower at AA-minus or Aa3.
"While revenue performance weakened in fiscal year 2015, recent improvements in liquidity, conservative management of retiree benefits that limits future budgetary pressures, and reductions in the state's long standing negative GAAP fund balance, if continued, would allow the state to improve its reserves and balance sheet," Moody's wrote.
"The AA rating on Wisconsin's GO bonds reflects our view of the state's demonstrated ability to make midyear budget corrections and moderate-to-moderately high debt burden," said S&P Global Ratings analyst Carol Spain.
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. Reserves of $280 million, equal to only about 1.9% of fiscal 2015 tax revenues, help offset some concern, but analysts remain worried.
The low balances "are out of sync with the mature phase of the economic recovery and pose some risk of downward pressure on the state's credit quality if economic or revenue conditions continue to underperform the budget," Spain wrote.
Wisconsin's credit profile benefits from considerable resources and power to control its budget, its broad and diverse economy, and a low liability burden, with above-average debt levels offset by fully funded pensions, Fitch Ratings said. The pension system enjoys more flexibility then many managed by other states as both employee payments and annuities can be altered to reflect the health of the system.
Kroll said the credit benefits from one of the strongest funded pension systems in the country, a strong liquidity position when all available cash is counted – which allowed the state to forgo in recent years cash flow borrowing—and reduced use of one-time revenues. Its GAAP deficit is viewed negatively.
Based on January 2016 revenue projections, the general fund was on pace to close out fiscal 2016 on June 30 with an undesignated budgetary balance of $284 million or 1.8% of fiscal 2016 budgeted appropriations.
Personal income tax collections account for about half of the state's general fund with sales and use taxes making up another 30%. An expected surplus in the last biennial budget was tapped for tax cuts.
"The state has now absorbed the impact of the last biennium's tax rate changes, but in Fitch's view the full impact of recent changes on the state's finances will only be clear through a full economic cycle," analysts wrote.
Tax revenues are forecast to rise 4.6% in fiscal 2016 and a further 3.8% in fiscal 2017.
Tax-supported debt levels remain moderate at $13.4 billion despite the addition of $1.8 billion of appropriation bonds in 2003 that eliminated the state's unfunded pension liabilities and the 2009 appropriation-backed borrowing that restructured the state's tobacco settlement bonds. More than half of the $13.4 billion is GO-backed.
In 2015, Gov. Scott Walker signed a two-year $72.7 billion state budget into law so work on a new budget lies ahead when the Republican governor and lawmakers return to work in 2017.
Walker enjoys a Republican majority in both chambers but he could face a dispute over transportation funding.
Walker recently told state Transportation Secretary Mark Gottlieb to submit early his budget proposal, to look for areas to cut costs, not to rely on any tax or fee hikes, and to minimize spending on "mega" projects in southeastern Wisconsin. Bonding also should be limited, Walker's letter to Gottlieb said.
"To maintain our good financial standing, hold bonding to a reasonable level in your budget. Roads built to last for decades can reasonably be paid for by the users of those roads over the roads' lifetimes. Overall, we want to keep new bonding levels low," Walker wrote.
Some legislative Republicans, including Assembly Speaker Robin Vos, disagree with Walker and have said raising the gasoline tax and registration fees should be on the table.
