Wisconsin Readies $365M for Savings, Restructuring

CHICAGO – Wisconsin enters the market as soon as Wednesday with about $365 million of general obligation refunding bonds designed to capture both traditional interest-rate savings and to accomplish a debt restructuring for budgetary relief.

Barclays Capital is the senior manager with Ramirez & Co. serving as co-senior manager. Public Financial Management Inc. is advising on the transaction and Foley & Lardner LLP is bond counsel. About $214 million will restructure debt service coming due this spring to ease demands on the state’s general fund with the remainder current and advance refunding existing debt for roughly 10% present-value savings.

The structural refunding piece “is part of the governor’s budget which takes Wisconsin’s structural deficit down to nearly zero,” said capital finance director Frank Hoadley. About $337 million of debt restructuring in fiscal 2012 was one of the few one-time revenues used by Gov. Scott Walker to help eliminate a $3 billion shortfall in the state’s $66 billion two-year budget adopted last year.

While rating agencies praise the state’s advances towards matching its recurring revenues with its ongoing expenses, they were critical of the debt restructuring. The budget puts Wisconsin on course to reduce its $2.5 billion structural imbalance to $250 million.

The state expects to follow up the sale as soon as next month with a $300 million to $400 million new-money and refunding transportation revenue bond issue. Morgan Stanley is the senior manager and Siebert Brandford Shank & Co. is co-senior, Hoadley said.

Ahead of the GO issue, all three rating agencies affirmed the credit attached to $6.8 billion of debt. Fitch Ratings affirmed its AA and stable outlook. Standard & Poor’s assigns the same rating. Moody’s Investors Service affirmed its Aa2 rating and stable outlook.

Wisconsin’s ratings recognize “its considerable resources, a diverse economy with an above-average manufacturing presence, and a moderate but above-average and rising debt burden,” Fitch wrote. “Economic and revenue trends are generally improving, with manufacturing and services growing, albeit unevenly, after deep recessionary weakness late in the last decade.”

The state’s former governors had for years relied on non-recurring revenues to help balance the state’s budgets, leaving it with a deep structural deficit. “The budget for the fiscal 2011-2013 biennium … made notable progress toward structural balance through steep recurring cuts, including for local aid and employee benefits,” Fitch said, citing the “sizeable” debt restructuring as an offsetting factor.

When the budget was adopted last year it anticipated ending each fiscal year with small balances. The Legislative Fiscal Bureau recently revised its estimates and now projects negative balances of $53.2 million and $208.2 million, respectively. The state has not yet announced a plan to address the red ink.

Moody’s said the state’s rating reflects its improved liquidity position and fully-funded pension system while also taking into consideration its continued reliance on non-recurring revenues.

While Walker’s approach in his first budget plan to almost exclusively rely on spending cuts have put the state on a more solid financial footing, it’s come at the expense of local governments, school districts and public employees, who face higher pension contributions and health care premiums. Walker, a Republican who benefits from GOP control of the Legislature, also pushed through measures that sharply curtailed the employees’ collective bargaining rights.

Democrats and union leaders led a petition drive against Walker and last month submitted more than one million signatures, twice the number needed to force a recall election. Officials are still reviewing the signatures.

Walker has defended his decisions. “When I spoke here last January, Wisconsin faced a $3.6 billion deficit,” Walker said in his state of the state address last month. “We balanced the state budget. We balanced it without raising taxes, without massive layoffs, and without budget tricks. We balanced … the budget deficit with long-term, structural reforms.”

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