CHICAGO – Wisconsin’s first issue of the year -- a $287 million new-money general obligation deal selling competitively Feb. 28 – will feature a non-traditional five-year call as the state adjusts its debt management practices to the federal government’s elimination of advance refundings.

Bonds with maturities from 2024 to 2032 become callable in 2023. The maturities in 2033 through 2036 are callable in 2026. Traditionally, tax-exempt bonds carried 10-year call protection for investors, but the calculus for issuers has changed now that they can't refund debt before a call date.

“We did get more aggressive on call features,” capital finance director Dave Erdman said in an interview. “First we are looking at how to structure new money bonds in light of the” new tax law that eliminated tax-exempt advance refundings, he said. “Second, we think there is some value to the shorter calls.”

Madison, Wisconsin, featuring the state capitol
Wisconsin's state capital of Madison. The state kicks off its 2018 borrowing with a deal structured to take the loss of advance refundings into account. Adobe Stock

Erdman said in conversations with market participants the state believes it faces little penalty on the shorter calls that should result in lower yields priced to the call date. With a 5% coupon the state expects sufficient interest and believes the bonds could sell at a premium. The higher price could generate more proceeds that will fund state approved “bricks and mortar” projects, Erdman said.

The state has used shorter calls in the past on deals in 2013 and 2014 but it was more limited in scope than the upcoming deal.

Erdman said it’s important for issuers, advisors, underwriters and other market participants to keep up the discussion on post-tax reform options like shorter calls so they can gain traction and market acceptance.

The state is also tinkering with how it builds floating-rate paper into its maturity structure. In the past, the state has reserved shorter maturities for floating-rate paper. Now, the capital finance team is considering using such paper on longer maturities “since our call options have changed,” Erdman said.

The state is working on a variable rate demand program that would tap the Clarity Bidrate Alternative Trading System later this year, Erdman added.

The state is currently reviewing responses from more than 40 underwriters who submitted qualifications to win a spot in the underwriting pools the state draws from for negotiated transactions. Erdman said he expects to name the pools in the next month.

In the RFQ, the state seeks input on a range of questions on the tax reform changes including call options, corporate market options, marketing, and investor outreach.

The state has not yet received fresh rating reports that incorporate its latest fiscal results and revised projections. Its fall GO sale benefited from two upgrades. Fitch Ratings and Kroll Bond Rating Agency both raised the state’s GO rating one notch to AA-plus and assigned a stable outlook.

Moody’s Investors Service rates the state’s $7.8 billion of GO debt Aa1 after an August 2016 upgrade. S&P Global Ratings rates the state at AA with a stable outlook.

The state's nonpartisan Legislative Fiscal Bureau last month released its updated general fund condition report for the current fiscal biennium that runs through June 2019. The bureau projects a balance of $385 million at the close of the biennium, about $138 million more than projected when Gov. Scott Walker signed the budget into law last summer.

The state’s comprehensive annual financial report for fiscal 2017 published last week showed an undesignated balance of $579 million, up $112 million from a previous projection. Total general fund tax collections increased 2.8% with individual income tax collections rising 3.9% and sales and use taxes rising 3.1% and corporate income taxes declined 4.4%.

The state’s retirement system was funded at 99.1%. The state’s rainy day fund ended the year with just a modest $283 million on deposit – equal to about 1.7% of fiscal 2017 revenues -- but it did represent a record amount for the state.

“In our view, the state's adequate reserve level is a limiting factor for its credit profile, despite Wisconsin's maintenance of a very well-funded pension system,” S&P said in its last report.

In other state fiscal news, Walker named Ellen Nowak to serve as secretary of the Department of Administration, which includes the state’s budget and capital finance offices, effective March 5. She replaces Scott Neitzel.

“He will be missed in our administration. Scott is an effective executive, and his leadership has served the people of our state in a very consequential way,” Walker said in a statement. Neitzel left a private sector senior management position at Madison Gas & Electric to take the job in 2015.

Nowak, who holds a law degree, comes from the Public Service Commission which she was named to in 2011 by Walker. She became chairperson in 2015. Previously, Nowak served as the chief of staff to Waukesha County Executive Dan Vrakas and as legal counsel and then chief of staff to Wisconsin State Assembly Speaker John Gard.

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