CHICAGO — Minnesota will take competitive bids Wednesday on $1.1 billion of its high-grade general obligation paper to finance projects and refund debt for savings in a deal that marks the state's single largest issuance of general obligation paper.
The bond proceeds will be used to finance general, statewide infrastructure work included in the state's recent capital budgets known as "bonding bills," as well as transportation-related projects.
The sale offers five series: a $7.2 million taxable new money GO various purpose tranche; a $14.9 million GO refunding series; a $310 million new money trunk highway tranche; a $376 million GO new money various purpose; and a $386 million GO various purpose refunding piece. The state's trunk highway bonds carry a general obligation pledge and a first lien pledge on transportation-related funds including gas and motor vehicle tax revenues.
Public Resources Advisory Group is advising the state and Kutak Rock LLP is bond counsel. The state anticipates net present value savings of about $44 million on the refunding series, said a finance official.
The sale tops the state's 2014 issue that hit nearly $1 billion, but its size is driven mostly by the inclusion of refunding bonds and the state's move over the last two years to combine what had traditionally been two separate new-money sales in the summer and fall.
The state's 2010 split sales exceeded $1.7 billion and its 2013 combined borrowing hit $1.2 billion. State finance officials said they figured the market could absorb the larger single size and several buyside participants agreed that the state would fare well on the slate of nearly $8 billion coming this week, given its high ratings, variety of tranches, and limited annual issuance.
The state typically issues in the summer or early fall after its disclosure is updated with state legislative results. Gov. Mark Dayton in June signed budget bills that makeup the state's new two-year $42 billion operating budget and a $373 million capital budget after a special session. Dayton is a member of the Democrat-Farmer-Labor Party which enjoys a Senate majority while the GOP holds a House majority.
The two sides were divided over how to use the state's nearly $2 billion surplus and ended their special session leaving about $865 million unspent. Republicans wanted to pass tax cuts and use the funds for road and bridge projects. DFLer's wanted more revenue for education and a tax package to fund a multi-year transportation package.
Dayton put a positive spin on the final result this summer. "The remaining surplus, combined with the budgeted reserve and cash flow account, has left the state with a positive balance of almost $2.5 billion," he said in a statement. "It stands in welcome contrast to the financial uncertainties of recent years."
Ahead of the sale, Fitch Ratings affirmed the state's AA-plus rating and stable outlook and Moody's Investors Service affirmed its Aa1 and stable outlook. An updated review from Standard & Poor's, which rates the state AA-plus and stable, was expected late Monday or Tuesday.
The state has $6 billion of outstanding GOs and another $1 billion in appropriation backed bonds including tobacco-related borrowing and issuance for a new Minnesota Vikings stadium. Its tax supported debt after the issue will total about $8.5 billion.
Moody's said its rating reflects the state's "strong financial management that has resulted in improved revenue performance, replenishment of budget reserves, and structural budget balance" and added "revenue trends are positive, supported by the state's diverse and stable economy."
The state could see a restoration of the top credit marks it once enjoyed if it further increases and maintains reserves and its structural balance through economic cycles, Moody's said. The state lost its top credit marks in large part over its use of non-recurring solutions to erase past red ink, including tobacco bond borrowing and pushing school payments off. Some of those decisions were driven by divided political governance that prevented a sounder fix.
"The state relies on non-recurring budget-balancing measures at times of recessionary weakness; however, positive budget variances during recoveries have allowed for the replenishment of reserves and repayment of deferred school aid," Moody's said.
For a two-year period, Dayton enjoyed DFL control in both chambers allowing him to push through an income tax hike on top earners in 2013 which helped the state structurally balance its books and increase funding for education. The surplus this year marks a sharp contrast to the state's situation just a few years ago as it struggled with a $5 billion deficit.
Fitch said its rating "reflects Minnesota's moderate liability position, a broad-based economy with above-average wealth levels, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts." The state issues formal revenue projections in February and November and spending can be adjusted accordingly by the governor.
The state's unfunded pension liability is below average as a percent of personal income, and on a combined basis the burden of net tax-supported debt and adjusted unfunded pension obligations as a percentage of personal income is below the U.S. state median. In addition, the state has very limited retiree health benefits, Fitch said.