Thursday, August 11, 2016

A very nerdy breakdown of how Walker Admin is moving over $1 billion in debt

Yesterday, Governor Walker was back at State Fair Park to be part of the State Building Commission’s annual meeting at the Fair. And there were a ton of items on the agenda to take care of, as it was also the first meeting of the new fiscal year. This included moving ahead on a number of high-profile building projects, which the Gov was glad to talk about.
Today, the State of Wisconsin Building Commission approved several key projects across the state including, but not limited to:

•Releasing funds for the construction of Eau Claire Confluence Performing Arts Center;

•Design and construction of a Discovery Station at Old World Wisconsin;

•Several projects at University of Wisconsin facilities, such as the Music Performance Building project at UW-Madison, the Garfield Avenue Corridor Improvement project at UW-Eau Claire, the New Soccer Complex project at UW-Green Bay, and the Athletics Complex Buildings project at UW-Whitewater;
You get the idea. Sounds pretty good, right? But then I looked at the agenda, and didn’t happen to see these items listed in the Governor’s Office write-up.
1.General Obligation Refunding Authorizing Resolution -2016 State of Wisconsin Building Commission Resolution 4 authorizes the issuance and sale of General Obligations in the amount not to exceed $595,000,000, in fixed or variable rate form, to refund outstanding general obligation bonds previously issued for construction or improvement of facilities, grants, and acquisition of land for statewide purposes.

2. Debt Authorizing Resolution -2016 State of Wisconsin Building Commission Resolution 5 grants state agencies new debt authority in an amount not to exceed $202,150,000, and continuation of previously approved debt authority in an amount not to exceed $690,140,000, to allow state agencies to enter into contracts relating to various borrowing purposes which will be funded by subsequent issuances of general obligation debt.

3. General Obligation Authorizing Resolution - 2016 State of Wisconsin Building Commission Resolution 6 authorizes the issuance and sale of General Obligations in an amount not to exceed $385,595,000 in fixed or variable rate form, to fund the construction or improvements of facilities, grants, and acquisition of land for statewide purposes.
In other words, these moves authorized and allowed for the moving around of $1.2 billion in debt. So what’s going on?

As I’ve mentioned before, some of these debt moves aren’t surprising, and may well be sensible (interest rates are still very low following the Brexit vote). But I also noticed a change in a bond offering document that was bid on earlier this month, with the total amount of debt being refinanced now raised to over $600 million, and it made we want to go into this a bit more.

Digging into the document indicates that the Walker Administration is trading bonds the state gave out several years ago in favor of a different scheduled of payments in the future. In particular, some of this “refunding” takes care of some of the bonds the state of Wisconsin issued to take in money to pay the bills in those years (there was a revenue problem as a result of Bush’s Great Recession, you may remember the time).
As provided for in the Enabling Act, the 2016 Series A Bonds are being issued for the refunding of the May 1, 2018 maturities of the 2008 Series A Bonds (2008 Refunded Bonds). The aggregate principal amount of the 2008 Refunded Bonds is $363,000,000. Consistent with the expectation of the State at the time of issuance of the 2008 Series A Bonds, the 2016 Series A Bonds are being issued to provide an amortization of the principal of the 2008 Refunded Bonds. The 2016 Series B Bonds are being issued for the advance refunding of all or a portion of certain maturities of the 2009 Bonds (2009 Refunded Bonds). The principal amount of the 2009 Refunded Bonds is $172,250,000. The advance refunding of the 2009 Refunded Bonds is for debt service savings.
I’ll start with the move on the 2009 bonds first, as that is a straightforward and relatively sensible move. Those IOUs were paying between 5.0% and 6.25% interest (they were sold above the $1,000 face value at the time), and all of the bonds sold to replace them were dished out at $1,000 apeice, and will paying significantly lower interest (between 1.44% and 3.29%, depending on when they mature).

This is basically a bond call, defined by as the following.
Issuers call bonds when interest rates drop below where they were when the bond was issued. For example, if a bond is issued at a rate of 7% and the market rate for bonds of that type drops to 6% and stays there, when the bond becomes callable the issuer will likely call it in order to issue new bonds at 6%. Obviously, callability benefits issuers and hurts investors, who are faced with the prospect of reinvesting their money at lower interest rates.

Issuers entice investors to buy callable bonds by paying higher interest rates on callable bonds than on noncallable bonds. But the price of a callable bond will not rise much above its call price, no matter how low interest rates go, because dropping interest rates increase the likelihood that it will be called.

Most municipal bonds and some corporate bonds are callable. Treasury bonds and notes, with very few exceptions, are noncallable.
This is one the risks you take when you buy a bond- there may be something that says at a future time, the issuer can take it back and basically speed the maturity date if they feel it works. The downside risk to the state is that it’ll be paying bonds and interest for a few extra years (in the case of a couple of the bonds being refunded), and have to see other bonds mature in years they didn’t have before. But it’s likely the state will pay less money over the course of time, and in a less “bumpy” pattern that can disrupt the budget.

And that “disruption” is why the 2008 bonds were being refunded. As you see above, $363 million of those bonds come due on May 1, 2018, which is the next fiscal year. In addition, those bonds were replacements for a number of bonds sent out in 2003, which were intended to
provide funds for payment to the Wisconsin Retirement System (Retirement System) for all or a portion of the State’s unfunded accrued prior service (pension) liability and unfunded accrued liability for sick leave conversion credits, or to refund appropriation obligations issued for that purpose.
That’s where I’ll direct you back to the Department of Administration’s portion of the current budget, and have you look at item Number 4, and you’ll see this the source of a huge bump in costs and lapses for this year.
Provide [an additional] $383,064,900 GPR in 2016-17 to reflect the required debt service appropriation level associated with the appropriation obligation bonds issued to pay the state's Wisconsin Retirement System unfunded prior service liability as well as the accumulated sick leave conversion credit program liability. Under the legal agreements governing the appropriation bonds, the annual debt service appropriation for repayment of the bonds must equal the maximum possible payment that could be made in each succeeding year. Because there are large principal payments currently scheduled in 2017-18 and variable rate debt must be appropriated assuming the maximum allowable interest rate, the GPR appropriation in 2016-17 would be increased, although most moneys would not be expended in 2016-17 and would lapse (revert) to the general fund.
This increases lapses by nearly $371 million for this year, so no problem there, but it also meant there was another $383 million in base costs for the next budget to pay off all that debt in May 2018…without any lapses or new money to bail it out (aka a “balloon payment”). Yeah, big problem.

So that’s where this other restructuring comes in. Instead of having one huge balloon payment in 2018, these bonds mature between 2020 and 2027, with the largest amount of maturity being just over $75 million. It “smooths out” the payments, and takes care of one piece of a huge headache that would have caused further stress to the next budget (and that budget will be bad enough without complications like this).

But that doesn’t mean we should feel comfortable. What these moves have done is switched some money around, and likely raised the debt service burdens for the budgets after the next one (which will likely be the problem of the next governor). And this one “refunding” of $600 million that I described above doesn’t include the other $460 million in debt that was dished out last month, or the future moves that the Building Commission signed off on at its meeting yesterday.

Many of these moves may well be fiscally prudent, but it sure isn’t the act of an Administration whose budget is stable with adequate reserves. I fear that when we see the final revenue numbers in a couple of weeks, we’ll see that the hole continues, and no amount of debt shuffling can hide all of it.

No comments:

Post a Comment