Wisconsin heads into the market buoyed by two upgrades
CHICAGO – With two rating upgrades in hand, Wisconsin heads into the market next week with $273 million of general obligation refunding bonds.
Jefferies is senior manager and Lamont Financial Services is advisor. Foley & Lardner LLP is bond counsel.
Ahead of the sale, Fitch Ratings and Kroll Bond Rating Agency raised the state’s rating one notch to AA-plus and assigned a stable outlook.
The upgrades bring Kroll and Fitch in line with Moody’s Investors Service, which rates the state’s more than $8 billion of GOs Aa1 with a stable outlook. S&P remains the holdout. It affirmed the state at AA with a stable outlook. The state’s $3 billion of appropriation backed bonds are rated one notch lower than the GO by all four.
“Wisconsin has consistently and accurately budgeted within its means and has prioritized a combination of tax, spending, and debt restraints that have improved the state’s reserves and liquidity,” Kroll wrote. “The state has also simultaneously pursued policies to stabilize and reduce historically high tax burdens. These factors combined with the state’s large and fully funded pension system have improved the state’s operational and financial flexibility.’
Capital finance director David Erdman is hoping the upgrades draw some new high-grade buyers and further narrow the state’s spreads which he said already have been landing at tighter levels than the Municipal Market Data’s double-A benchmark. The spread on the AA was at 20 basis points to the AAA on a 10-year bond Friday.
“We’ve seen our bond prices come in stronger than a double-A credit for the last couple years, so it’s nice the rating agencies are also now seeing Wisconsin’s strengths,” Erdman said. “Some investors might have criteria” that the upgrades meet “and more investors mean better pricing.”
The state’s annual fiscal report released Monday showed general fund revenues totaled $15.5 billion, an increase of 2.8% over the previous year and the ending balanced closed at $579 million, up from the Legislative Fiscal Bureau’s estimated in January of a $427 million. The state closed out the fiscal year with about $283 million.
The $76 billion two-year budget signed by Gov. Scott Walker more than two months after the July 1 start of the biennium projects 3.6% annual growth in general fund tax collections. The budget delay was primarily due to a dispute between Senate and Republican leaders over transportation spending.
Erdman highlighted in an investor presentation the state’s fully funded pension system. “Annual adjustments are made to contributions and annuities based on investment performance,” he said. “This plan structure which includes the ability to reduce retiree payments insulates the Wisconsin Retirement System from market volatility.”
The pension system’s stellar health plays prominently in the state’s credit profile. The upgrade reflects “the state's considerable financial flexibility derived from its broad and diverse resource base and legal authority to control its budget, as well as a unique pension structure that contributes both to a low liability burden and lower risk of a significant increase in spending requirements in the future,” Fitch wrote.
“Fiscal performance has improved in in recent biennia with reduced reliance on one-time resources and a stronger liquidity position. These leave the state well-positioned to address a moderate cyclical downturn,” Fitch added.
The state has shed its reliance on one-time maneuvers to erase red ink and 2012 was the last fiscal year that the state relied on scoop-and-toss debt restructuring for budget relief.
Multiple years of improving balances offset the state’s weak level of reserves that had cited by rating agencies as a negative. The state still has a negative balance when applying generally accepted accounting principles.
Moody’s said its rating reflects “the state's low fixed costs despite Wisconsin's slightly elevated debt levels, which outweigh the credit challenge of the state's negative unassigned fund balances.”
S&P said low fund balances and economic growth that lags the nation offset the state’s pension and budget balancing strengths. “The stable outlook reflects the state's balanced budget and manageable projected structural gap in the current biennium," said S&P analyst Christina Marin. "It also reflects recently more positive revenue growth trends.”
The state may include in the transaction a cross-over refunding of some outstanding bonds issued under the federal government’s Build America Bonds. The state used a traditional municipal call feature on its taxable BAB borrowing whereas most initial deals used a corporate-like make whole call that would cut into refunding savings.
“That position is beneficial to use now,” Erdman said. The refunding doesn’t run afoul of Internal Revenue Service rules because the BABs will remain outstanding and not be legally defeased.