Wisconsin selling GOs, coronavirus disclosure says effects can't be predicted yet

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Wisconsin takes competitive bids Wednesday on $219 million of new money general obligation paper as the state continues to assess the impact of the COVID-19 pandemic on its budget picture.

The timing of the sale is driven by capital spending needs, said Capital Finance Director Dave Erdman. The deal allows for lower 4% coupons on the last two maturities in 2039 and 2040. That’s “reflective of feedback received that investors are starting to appreciate the 4% coupon and allowing the lower coupon provides more options to the firms submitting bids,” Erdman said.

Gov. Tony Evers in April warned of a $2 billion revenue loss over the next year, but formal general fund revenue projections that reflect the impact of the COVID-19 economic shutdown have not yet been published by the Wisconsin Department of Revenue or the Legislative Fiscal Bureau that reflect the impact of the COVID-19 economic shutdown.

The timing of the sale is driven by capital spending needs, said Wisconsin's capital finance director Dave Erdman.

The administration recently ordered $70 million in budget cuts and directed state agencies to reduce general fund expenditures for the 2019-20 fiscal year by 5%. Republicans, who control the legislature, say the $70 million in cuts so far are too little.

“It is likely that the full financial impact of COVID-19 on the state, the state’s economy, and the state’s financial position will change significantly as circumstances and events evolve. It is not possible at present to project with any reasonable degree of certainty the impact on State revenues, expenditures, reserves, budget, or financial position,” reads the offering statement.

The Legislative Fiscal Bureau has reported the revenue hit to general fund tax collections for April with collections down $870 million from April 2019. The report did not identify the amount of revenues that might be delayed until July due to the extension of the income tax filing from April or the amount of revenues lost as a result of the COVID-19 pandemic, according to the upcoming sale’s offering statement.

Individual income tax collections for April were down $676 million from last year. That is likely due to the filing extension, the report said. Sales tax collections for April, which reflect March sales, were down by $48 million. Corporate income/franchise tax collections came in $177 million lower than a year ago.

“An expected transfer of $189 million to the budget stabilization fund from the general fund for the 2019-20 fiscal year … is now unlikely” as “the COVID-19 pandemic” takes its toll on revenues that earlier this year were tracking at rates better than budgeted.

Before the pandemic, the updated projections from the non-partisan Legislative Fiscal Bureau projected the state would close the biennium with a general fund balance of $620 million, up by $452 million from the prior projection used for the $82 billion fiscal 2020-2021 budget adopted last year.

The general fund and reserve hikes would come from more than $800 million in additional tax revenue that’s now projected through the biennium ending June 30, 2021. About $400 million would be transferred to the state’s reserve, known as the budget stabilization fund. State law requires half of any revenue surplus to go into the account until a targeted level is reached.

Based on those projections from early this year, about $189 million would be deposited at the end of the current fiscal year, putting the reserve at $845 million and another $220 million would be added next year, pushing it up to nearly $1.1 billion.

The state is receiving $2.3 billion of federal funds for its COVID-19 related costs and those of local governments under the Coronavirus Aid, Relief and Economic Security Act, signed March 27.

Evers issued a Safer At Home order in March and declared a public health emergency that closed non-essential businesses and schools and banned gatherings of more than 10 people. The economy reopened last month as the state legislature successfully mounted a legal challenge of the closures and ban on public gatherings, since they were implemented without prior legislative approval.

Some local governments then instituted their own stay-at-home orders following the Wisconsin Supreme Court order, although some have since lifted those rules as the legality is unclear.

“We do not see any material immediate credit risks for Wisconsin. However, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis,” Moody’s Investors Service wrote in its report ahead of the sale, affirming the state’s Aa1 rating and stable outlook.

“We expect that the state will continue its prudent budget management practices, enabling the state to weather the current econonic downturn without significant impact on its credit profile,” Moody’s added.

The state’s GOs are rated AA-plus by Kroll Bond Rating Agency with a positive outlook and AA and a stable outlook by S&P Global Ratings.

Wisconsin recently wrapped up a request for qualifications to update its municipal advisory list. Erdman said the state entered into contracts this week with PFM Financial Advisors LLC, Public Resources Advisory Group Inc., and Baker Tilly Municipal Advisors LLC. The state is accepting responses from law firms until Monday to provide bond counsel or other counsel services for future sales.

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