Minnesota Readies Big GO Sale

CHICAGO — Minnesota will take bids Tuesday on $904 million of general obligation bonds in a sale bolstered by a refunding piece and the state's decision to skip its customary second annual new money issue.

Public Resources Advisory Group is advising the state. Kutak Rock LLP is bond counsel.

The sale offers five series. They include an A series for $438 million of new money various purpose bonds, a B series for $288 million of new money GO trunk highway bonds, a C series for $26 million of taxable various purpose bonds, a D series for $28 million of taxable various purpose refunding bonds, and an E series $124 million of truck highway refunding bonds.

The bonds mature serially with final maturities in 2034, 2034, 2033, 2032 and 2025, respectively. All the bonds carry the state's full faith and credit pledge but payment of trunk highway bonds also benefits from a first charge on taxes on motor vehicles and motor vehicle fuel that flows to the state trunk highway fund.

Market participants said the state should benefit from its decision to combine its high-grade new money issuance into one sale, with investors searching for supply.

The new money proceeds will finance approved capital projects across the state. Ahead of the sale, Fitch Ratings affirmed the state's AA-plus rating, Moody's Investors Service affirmed its Aa1, and Standard & Poor's affirmed its AA-plus. All assign a stable outlook. The ratings impact $6 billion of GO debt.

"Credit factors supporting the ratings include our view of the state's deep and diverse economy, improved financial results, and moderate debt levels," said Standard & Poor's analyst Henry Henderson.

The state earlier this year raised its budget surplus projections thanks to its improving economy and higher tax collections following an income tax hike last year. A portion of the surplus was tapped for a tax cut package this spring.

"Although we don't expect to raise or lower the rating during the two-year outlook horizon, we could raise the rating later on if the state establishes a longer track record of continued structural budget alignment and its pension liabilities moderate," Henderson said. The state once enjoyed top credit marks.

Moody's said its rating reflects the state's improved revenue performance, replenishment of budget reserves, and structural budget balance after a short period of financial stress. The state benefits from sound revenue and expenditure forecasting policies and executive authority to make mid-year cuts to adjust to revenue changes.

The state's credit is challenged by debt ratios that are above median levels and a history of political gridlock that led to two government shutdowns in 2005 and 2011. The gridlock resulted in structural imbalanced budgets as the state turned to non-recurring revenues such school aid payment delays and a tobacco bond sale to break a deadlock over how to balance the budget.

Over the last two years, Gov. Mark Dayton has enjoyed a more cooperative relationship as his Democratic-Farmer-Labor Party won a majority in the Legislature and the state adopted an income tax hike on top earners last year to restore budgetary balance.

In its annual February forecast, Minnesota raised its projected budget surplus by $400 million to $1.2 billion. "The recent over performance of income tax revenues is a notable contrast to other states that saw revenues come in under budget in fiscal 2014," Fitch said.

Lawmakers used the extra funds to fund $500 million in tax cuts including a repeal of three business taxes passed a year earlier. The state now expects to close out its current biennium with $1.2 billion in reserves.

The forecast from the Minnesota Management and Budget office also reported an estimated $2.6 billion balance expected in the next biennium but that's before spending growth is counted. The latest figures provided a stark contrast to the state's fiscal position just a few years ago when the state was grappling with a $5 billion deficit.

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