The Kentucky State Property and Buildings Commission will price $663.5 million of bonds Tuesday.

BRADENTON, Fla. - Kentucky expects to bring a $663.5 million new money and refunding deal to market as one of the larger negotiated offerings the week of Feb. 29.

The State Property and Buildings Commission will price the bonds Tuesday starting with a retail order period.

It is the first of three financings slated by the state this month.

The SPBC deal is structured in two series.

Proceeds of $112.8 million in new money revenue bonds will be used to finance Project 112, which will fund the state's portion of a $265 million research building for the University of Kentucky, the state's flagship higher education institution.

Another $550.65 million of revenue bonds will advance refund prior debt for an estimated $60.5 million in present value savings, or 10% of refunded par, said Ryan Barrow, executive director of Kentucky's Office of Financial Management.

"Our underwriting team expects the Project 112 Bonds to be received well by the market and we expect broad based participation in line with our recent experience on other State Property and Buildings Commission Bonds," said Ryan Barrow, executive director of Kentucky's Office of Financial Management.

The new money bonds will have maturities between 2017 and 2036, while the refunding bonds will have maturities beginning this year until 2028. They are exempt from state and federal taxes.

Both series of bonds are secured by lease-rental payments, subject to annual appropriation by the Legislature.

The General Assembly state has never failed to appropriate funds for debt service, according to state officials. Some $5.2 billion of state debt is outstanding under a similar lease-appropriation structure; $3.6 billion was issued by the SPBC.

The bonds are rated A-plus by Fitch Ratings, Aa3 by Moody's Investors Service, and A by Standard & Poor's. All have stable outlooks.

S&P also affirmed all Kentucky ratings, including the state's A-plus issuer credit rating and its A ratings on the state-aid intercept programs for schools and universities.

Analysts said the state's economy is improving, revenues are coming in over estimates, and the state budget is nearing structural balance.

However, they also renewed concern about Kentucky's outsized unfunded pension obligations, which are among the highest in the nation.

"In our view, Kentucky's pensions remain sizable and, notwithstanding efforts to reform its pensions, the state still faces challenges that we expect will remain a source of financial pressure," said S&P analyst Carol Spain.

The Kentucky Teachers' Retirement System plan remained the most underfunded in fiscal 2015 at $13.9 billion, for a state-funded ratio of 55.3%.

The state has consistently underfunded its annual required contribution to KTRS, providing $559.6 million of the $913.7 million ARC last year, according to bond documents.

The Kentucky Retirement Systems was underfunded by $10.8 billion, for a state-funded ratio of 22.6% even though the ARC was paid. Last year, the state contributed $582.2 million to the required payment of $580.8 million.

Gov. Matt Bevin, a Republican who took office in December, proposed in his first budget reducing base state spending by 9% over the next two years to reduce overall expenses by $650 million. Much of the savings will go toward boosting KTRS contributions and improving the state's reserves.

Restoring reserves is a key credit concern, said Fitch analyst Eric Kim.

Bevin's plan proposes $89 million in direct contributions in each year of the biennium to the budget reserve trust fund. Contingent appropriations, available if revenues reach forecasted levels, could provide an additional $135.7 million, Kim said.

Bevin also recommends budgeting about 99% of forecasted revenues and appropriating any revenues above that evenly between the reserve fund and pensions, which would bring the reserve to a record high of $523.8 million or 4.8% of forecast general fund revenues, according to Fitch.

Citi will be the book-runner for Tuesday's offering. Other firms on the deal are Fifth Third Securities, First Kentucky Securities Corp., FTN Financial Capital Markets, J.J.B. Hilliard, W.L. Lyons LLC, Morgan Stanley, PNC Capital Markets LLC, Raymond James & Associates Inc., and Ross Sinclaire and Associates.

Bond counsel is Dinsmore & Shohl LLP. Stites & Harbison PLLC is underwriters' counsel.

The Kentucky Turnpike Authority plans to issue $215.7 million of refunding revenue bonds on March 16, and the Kentucky Infrastructure Authority expects to price $58 million of refunding bonds on March 30.

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