Pennsylvania tomorrow will competitively sell $706 million of fixed-rate general obligation bonds. The sale consists of three series, including two new-money portions and a $118 million refunding series. Public Financial Management Inc. is the financial adviser for the deal. PFM has served as the commonwealth’s financial adviser since 2003. Eckert Seamans Cherin & Mellot LLC is the bond counsel for the deal.Proceeds of the $118 million refunding will be used to current refund portions of 1997 refunding bonds. The commonwealth is up on the 10-year call period for those bonds, and it is “the last opportunity to achieve interest rate savings on those prior bonds,” according to Rick Dreher, director of the Bureau of Revenue Cash Flow and Debt in the state’s budget office.Preliminary estimates show that the Pennsylvania will save about $3.8 million from the refunding, Dreher said.The rest of the deal consists of two new-money series, including $565 million in Series A and $23 million in Series B. About $450 million of the Series A bonds will used to provide for the construction, acquisition, and major rehabilitation of capital facilities projects, according to the preliminary official statement. The Department of General Services will use $100 million for the construction and rehabilitation of public buildings for the commonwealth; the Department of Community and Economic Development will use $200 million to fund redevelopment and assistance projects; and the Department of Transportation will use $150 million to fund transportation assistance projects.Additionally, $35 million of the bond proceeds from Series A will used for Pennworks Acts grants for water and wastewater infrastructure, including water supply and sewage treatment systems. Series A bonds will also include $80 million for “Growing Greener” projects in Pennsylvania, including environmental protection, open space and farmland preservation, watershed protection, abandoned mine reclamation, and acid mine drainage remediation, according to the POS.

Series B bonds include $23 million that will be used to provide for Pennworks Acts loans. The Series B bonds are subject to extraordinary redemption at the direction of the commonwealth, the POS said. Such a redemption could be required under Section 149(f) of the Internal Revenue Code in order to maintain the tax-free status of the bonds, the POS said. The reason for the two different series is because Pennsylvania is complying with recent changes in the federal tax code that require a redemption if a certain percentage of the proceeds aren’t used within a certain period of time, Dreher said. The commonwealth has to use 30% of the proceeds of the $23 million within one year of issuance, Dreher said.Series B are segregated “because those proceeds will be used to fund non-revolving loan programs.”The final maturity of both the new-money series is 2027, while the refunding series’ final maturity is 2011, according to the POS.Whether the bonds will be insured will be the option of the winning bidder.Adam Weigold, who manages four Pennsylvania municipal bond funds as vice president and portfolio manager at Eaton Vance, said that he thinks the deal could do well without insurance.“Given the turmoil in the bond insurance base, there seems to be some increased demand for highly rated uninsured paper, which this is,” he said.Moody’s Investors Service rates the bonds Aa2 and Fitch Ratings rates them AA. While Standard & Poor’s is still reviewing Pennsylvania’s credit, it currently rates the state AA.Pennsylvania’s tax revenues collected for its general fund for this fiscal year so far — from July through October — have “basically been on budget and just slightly higher,” said Moody’s vice president Mark Tenenhaus. The commonwealth is about $44 millionin the red.“That’s good news, because you’re not seeing that in all states,” Tenenhaus said.Since fiscal 2004, the commonwealth has had surplus operations on a budgetary basis, according to Fitch director Ken Weinstein.Tenenhaus said Moody’s is still watching what happens in Pennsylvania for the rest of the fiscal year, given the economic slowdown predicted throughout the entire U.S. Additionally, the state’s budget is tight, he said, and it anticipates drawing down virtually all of the $530 million surplus from last year. “To the state’s credit, over the past few years they have adhered to making contributions to their rainy day fund,” Tenenhaus said. “And combined with other resources available to them, they do have the wherewithal to withstand any downturn in the national economy.” While Pennsylvania continues to lose manufacturing jobs each year, it is seeing strong growth in education and health care sectors, as well as the professional and business services sector, Weinstein said. “The economy has diversified,” he said.“[Pennsylvania’s] economy has been growing over the past six years,” said Standard & Poor’s associate director John Sugden. Sugden said that while Pennsylvania’s recent economic growth has been lagging slightly behind the national average, the commonwealth is still experiencing growth. Additionally, Pennsylvania’s unemployment rate has steadily decreased since 2002, dropping to about 4.7% in 2006.Pennsylvania’s demographics provide a challenge, as there is an ageing population that is slightly older than the U.S. population on a median basis. Additionally, “There’s still population growth there, but it’s slower than the national rate of growth,” Weinstein said.“The debt levels [for Pennsylvania] are in the low to moderate range, but we expect them to rise in the next couple of years, due to planned issuances,” Weinstein also noted.As of June 30, 2007, Pennsylvania has about $7.8 billion of outstanding debt, according to Dreher.Pennsylvania’s sale comes as Philadelphia also plans to refund about $218 million of GOs this week. With this week seeing the most primary market activity that the bond market has seen in the past month, how will Pennsylvania paper do tomorrow?“There is demand at the national level, if priced attractively,” Eaton Vance’s Weigold said of the Pennsylvania sale. “I think it will have to price to the national levels since I don’t think the state funds will be able to take it down.” Weigold concluded: “We always have an appetite for attractively priced paper.”

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