CHICAGO - Wisconsin enters the market today with a competitive $302 million general obligation issue bolstered by a one-notch upgrade to AA from Standard & Poor's in recognition of the state's successful navigation through its latest budget crunch with just a narrow cash balance.
The proceeds from the sale will finance routine bricks-and-mortar projects across the state, said capital finance director Frank Hoadley.
Foley & Lardner LLP is the bond counsel.
Ahead of the sale, Moody's Investors Service affirmed the state's Aa3 GO rating with a negative outlook and Fitch Ratings affirmed its AA-minus. The state carries $5.8 billion of GO debt and another $1.88 billion of appropriation-backed debt on its books.
The deal marks the first time since 2001 that the state will offer GOs in a competitive sale without giving the successful bidder the option to insure the bonds in their primary market offering. The move is a result of the downgrades that have shattered the monoline insurance industry and driven up the cost of coverage from the few companies whose triple-A ratings remain intact.
The provision allowing insurance was standard language in the state's notice of sales for its GO sales after 2001 when the state suffered a round of rating downgrades. Prior to the downgrades, Hoadley said with the state's double-A credit it was clear from pricing scales that the addition of insurance did not help the bonds' prices, and premium costs would end up in the underwriting spread of the winning bidder. After the downgrades, "it became less clear that there was not value in the insurance," Hoadley said, and so the ban was lifted.
Since 2001, the winning bidder in the vast majority of the state's GO issues has opted to insure the bonds, Hoadley said. Amid the ongoing downgrades of monolines throughout the first half of the year, Lehman Brothers, the winning bidder on the state's spring GO sale, did not purchase insurance. Hoadley again doubts the value of such coverage. "We are hearing in general terms that investors are far less enamored of insurance," he added.
While the decision earlier in the decade to allow insurance was driven by the state's ratings, the Standard & Poor's upgrade did not impact the latest shift to ban it. It was driven solely by the turmoil in the bond industry and made in advance of the upgrade, Hoadley said.
Standard & Poor's analyst John Kenward attributed the upgrade to the state's success in managing through its latest budget deficit in addition to positive advances over the last two biennial budgets to bring down an ongoing structural deficit, reduce the use of one-time revenues and the first-time deposit, albeit a small one, into a reserve. The state has managed through its difficulties with narrow cash balances - a fact cited in most past rating agency reports as a negative.
"We thought long and hard about this. They have their challenges, but they've stabilized at a low but adequate budgetary fund balance," Kenward said. "We realize the state is not likely to return to the large balances it had in the past, but they have shown that they can show fiscal discipline and act quickly to make mid-budget adjustments to keep the budget balanced even with a low, but adequate, general fund balance."
Faced with a downward revision of revenues in the current two-year $57 billion budget, Gov. Jim Doyle decided to delay repayment of about $125 million of commercial paper. The Legislature then passed a so-called repair bill in the spring to eliminate the remaining $527 million deficit.
The final plan relied on $270 million in cuts, the $57 million that made up the state's reserve, $150 million in up-front savings from a proposed tobacco restructuring, and other measures such as closing corporate tax loopholes. The final package would leave the state with a general fund balance of $106.2 million at the close of the biennium next June. That figure includes $65 million that will go into the state's reserve.
The state continues to rely on nonrecurring revenues to cover ongoing expenses, but the amount has been reduced to $600 million in the current budget from $1.8 billion in the 2005 two-year budget. The state also carries a projected $1.75 billion deficit as it goes into the next biennial budget that begins July 1. While still high, the amount is down about 55% from a $3.2 billion deficit in 2002. The state's credit also benefits from fully funding its pension liabilities.
Moody's left its negative outlook on the credit, citing specifically the state's narrow operating margins and financial resources that analysts said leave the state vulnerable to the impact of a further decline in the national economy.