Wisconsin Set to Sell $800 Million of Operating Notes Today

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CHICAGO - Wisconsin will competitively sell $800 million of operating notes today to smooth out its cash-flow needs over the next fiscal year, a deal that marks the first in a series of financings set for this year that include a $180 million transportation revenue bond sale, a general obligation issue, and a long-planned tobacco bond restructuring.

The state will close on the note transaction on July 1 and repay them by their June 15, 2009, maturity. Foley & Lardner LLP is the bond counsel. Wisconsin will take electronic bids until 10 a.m. Central Daylight Time. General fund revenues not needed for repayment of GOs are pledged toward repayment.

The issue is about $200 million more than last year. More flush with cash in 2006 and 2005, the state did not need to borrow. The increased size this year illustrates the state's budgetary pressures. The Legislature this past spring passed a so-called budget repair bill to eliminate a $527 million deficit in the current two-year $57 billion budget.

The plan - reshaped somewhat by Gov. Jim Doyle using his veto pen - relied on $270 million in cuts, $57 million from the state's reserve, $150 million in upfront savings from the tobacco restructuring, and other measures such as closing corporate tax loopholes.

"The state is in a tighter financial situation and it was tougher to balance the budget," said capital finance director Frank Hoadley.

General fund tax revenues are projected to grow by 3.1% in the next fiscal year, with personal income tax collections growing by 4.6% and sales taxes by 2%. Officials expect to close out the current fiscal year with a balance of $80.5 million, although that is projected to grow to about $106 million at the close of the fiscal biennium next June. About $65 million would go into a now-depleted budget reserve.

The reserves and tobacco proceeds represent one-time revenue streams that will contribute to the state's roughly $1.7 billion structural imbalance as a new budget is crafted for the next fiscal biennium. Rating agency reports for the note sale said Wisconsin's narrow fiscal position, but the notes have strong legal provisions that help them garner top short-term ratings.

"While fiscal balance remains narrow on a budgetary basis, satisfactory protection is afforded the notes," said a report from Fitch Ratings. "The availability of interfund borrowing in an amount greater than note principal provides the cushion allowing the highest short-term rating."

The state plans a roughly $185 million new-money revenue bond issue for major transportation projects in early August. Hoadley said the 20-year bonds likely would be sold with a fixed-rate structure through negotiation, although an underwriting team has not yet been named.

Later in August, the state expects to issue new-money GOs in a competitive sale although the deal has not yet been sized. Wisconsin's current GO ratings are AA-minus by Fitch and Standard & Poor's and Aa3 with a negative outlook from Moody's Investors Service.

The state will then focus its attention on the tobacco deal. Hoadley said Wisconsin would issue sometime in August a new request for proposals for financial advisers and underwriters to refine the team for the restructuring of the $1.6 billion issue that sold in May 2002 through the Badger Tobacco Asset Securitization Corp. About $1.4 billion remains outstanding.

"The RFP really needs to be redone because the players have changed," Hoadley said of the dramatic developments in staffing at broker-dealers in the municipal industry.

Many changes stem from investment banks trying to cope with losses tied to the collapse of the subprime mortgage market and ensuing credit crunch.

The BTASC last fall named a team with Bear, Stearns & Co. as its book-runner and Citi, Goldman, Sachs & Co., Loop Capital Markets LLC, and Siebert Brandford Shank & Co. as co-senior managers, A a second tier of co-seniors includes JPMorgan, Lehman Brothers, Merrill Lynch & Co., Morgan Stanley, and UBS Securities LLC. Bear Stearns has since been acquired by JPMorgan and UBS has shuttered its municipal group. The BTASC also previously selected three financial advisers: Acacia Financial Group Inc., First Albany Capital Inc., now Depfa First Albany Securities LLC, and Public Financial Management Inc.

The state included in its current budget the restructuring plan, but the deal had been on hold last year due to increased interest rates. The bonds are repaid with Wisconsin's share of payments under the 1998 national settlement between most states and the major tobacco companies. Under a revised plan, the state will put an annual appropriation behind the restructured bonds, which will it expects will lower the interest rates on the debt and help kick-start the deal.

In addition to the $150 million in upfront savings earmarked for the budget deficit, officials also expect to generate at least $50 million in annual savings to establish an endowment to support health care and antismoking programs.

In addition, while Wisconsin has not been called upon to provide financing assistance for local governments within the 28 counties eligible for federal disaster aid due to flooding, Hoadley said the state could step up quickly to help governments in need of financing for wastewater system repairs though the state's revolving fund.

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