Bonds

Wisconsin heads into the market Tuesday with a new money and refunding transportation issue against a backdrop of debate over how to spend a record $7 billion surplus, with the legislature’s Republican majority in the driver’s seat.

The size of the borrowing is in flux and dependent on market technicals Tuesday when the deal is slated to price, said Capital Finance Director Aaron Heintz. The state will raise about $143 million of new money, with the size of a refunding piece that will pay off tendered bonds still being finalized.

A decision also looms on whether to move forward with a forward delivery refunding. “That piece of the transaction is the most in flux and we may wait until the last moment to either pursue it or pull it from the transaction,” Heintz said.

The state launched a tender offer to holders of more than $700 million of outstanding par tax-exempt and taxable transportation securities Feb. 24th. It closed March 10th. The state has not yet said how many holders participated and how much they will accept.

Investors have shown a rising appetite for tenders as they provide an opportunity to reinvest cash at higher yields offered on current transactions. “This tender phenomenon that the current market allows for” paved the way for the transaction and provided “the only way for us to achieve savings,” given where taxable rates are and the inability to do advance refundings, Heintz said. “We expect healthy savings.”

The state is targeting at least 5% present value savings.

The tender is the first the state conducted in some time solely for savings, as a GO tender last year offered some savings but its primary motive was to deal with a bullet maturity.

Citi and Cabrera Capital Markets are senior managers. Public Resources Advisory Group is advising and Quarles & Brady LLP is bond counsel.

Ahead of the sale Fitch Ratings affirmed the transportation revenue bond program’s AA-plus ratings and Kroll Bond Rating Agency and S&P Global Ratings affirmed their AAA ratings. The program has $1.57 billion of outstanding debt.

“The AAA rating reflects both the stable outlook on Wisconsin, and our view of historically steady growth in pledged program revenues, supported by Wisconsin’s substantial statewide population and economic base on which the vehicle fees are levied, that are likely to provide continuing very strong debt service coverage,” said S&P analyst Thomas Zemetis.

Fiscal 2022 program income of $928.5 million provided strong 4.7 times coverage of maximum annual debt service. “The stable outlook reflects KBRA’s expectation that program income will continue to provide strong coverage” of debt service and the state “will continue its long-standing practice of monitoring and adjusting transaction fees, when necessary.”

Fee increases were implemented in several categories of registrations as well as a new surcharge on hybrid-electric vehicles. Revenues increased 17% in fiscal 2020 — despite the slower registration activity — 10% in fiscal 2021, and another 3% in fiscal 2022, Fitch said.

On the transportation front, Gov. Tony Evers’ proposed budget authorizes $375 million of cash to defease currently outstanding transportation revenue bonds.

It’s one of the measures that would tap flush surplus coffers, with the latest projections putting the surplus at more than $7 billion, but Republican House Speaker Robin Vos labeled the package as having too much “frivolous spending” and said the GOP majority would “start from scratch.”

Evers’ proposed two-year all-funds $104 billion budget provides tax relief but also eliminates some tax credits, directs an additional $2.6 billion towards public education, provides $290 million to upgrade the Milwaukee Brewers’ ballpark, and offers local governments a lifeline of additional funding by sending them 20% of state sales tax collections. It deposits $500 million in the budget stabilization fund, lifting it to a peak of $2.2 billion.

Education spending is expected to rise, as is local government revenue sharing, but the size of both is uncertain. Vos said the Brewers’ funding as crafted is likely dead but lawmakers could get behind some form of support.

The Wisconsin Policy Forum’s review of the budget proposal warned spending would exceed revenues by more than $5 billion in 2024 and $1.3 billion in 2025, given the use of the surplus. Some spending measures represent one-time costs but others would lead to recurring demands that could hurt the state’s structural balance.

The state must also tread cautiously, the forum warned, on any permanent measures. One GOP-backed proposal to move to a flat income tax could also hurt structural balance.

Evers last month unveiled a $3.8 billion capital budget that relies heavily on cash to fund projects in an effort to reduce borrowing, given the rising interest rate environment. About $1.9 billion would be cash-funding, saving $1 billion in future interest costs, according to the administration.

“Our historic surplus means we have historic opportunity and responsibility — to invest in key projects that have long been neglected while still staying well within our means, keeping borrowing low, and saving taxpayers money in the long run, and that’s exactly what our Capital Budget does,” Evers said in a statement.

The University of Wisconsin system would see an infusion of $1.8 billion for projects, health services facilities would receive $225 million, the state capital building $50 million, with deferred maintenance for state and university buildings consuming $616 million of the total package.

The Wisconsin Building Commission, which signs off on state projects, will weigh in on the plan at its meeting March 23. The GOP has rejected outright Evers’ previous proposals. Typically, the commission votes on capital recommendations and sends them to the Joint Finance Committee as part of the budget package.

Evers does enjoy veto power over the budget, with the ability to rewrite pieces based on those powers but supermajority control of the Senate is at stake in the upcoming April 4 special election. The GOP lost efforts to secure a supermajority in both chambers in the November race.

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