Saturday, February 3, 2018

More can-kicking. How Wisconsin refinanced debt

With the talk going around regarding what to do with a small pot of money lying around in Wisconsin, I wanted to discuss a significant source of those extra funds- the refinancing of state debt.

When this refunding/refinancing of state bonds happen, there are basically 3 steps.

1. The new bonds are auctioned off with a set interest rate, and people bid a price on the bonds to get a certain yield. For example, in this recent refinancing, a 9 1/2=year bond that pays 5% interest got a price of $1,249.59 above the $1,000 face value. This means the yield is 2.08%.

2. That money goes into an escrow account to pay off the bonds that are being refunded.

3. Those refunded bonds go "off the books" when they are paid out of the escrow account. Some are paid off immediately, but others are called at a later date, 10 years after being issued. If done right, the amount of the bonds paid off in escrow is more than the new bonds that are sent out, lowering the total amount of debt that has to be paid.

In the last half of 2017, the Walker Administration refinanced $1.17 billion in General Fund borrowing using this strategy, which reduced overall debt to the state by $95 million between now and 2035 (as the premium over the $1,000 face value for the bond sales went to pay off more debt). But what’s intriguing is how the schedule of repaying that debt changed.

Net change in maturing bond costs 2017-2027
2017-19 budget -$67.96 mil
2019-21 budget +$5.01 mil
2021-23 budget -$29.07 mil
2023-25 budget -$5.07 mil
2025-27 budget +$97.84 mil
NET CHANGE +$0.75 million

The money that was saved in this budget added to the state’s projected “surplus” that Walker is now trying to spend away. By comparison, more payments were redesignated for 8 years down the road. By the way, these numbers this doesn’t take into account new borrowing that matures in later years, which will add to the tab that is due. Nor does it include $368.6 million in refinancing for the Transportation Fund that was done in December which lowered costs over the next 8 years, but also pays more from 2026-2029.

Now, this may well be sound debt management from the state, and it looks like a pretty good move now given that the 10-year US Treasury yield has spiked from 2.40% to 2.85% since the end of 2017, which enabled more money to be escrowed last month than you would have today (this is also a big reason why the Dow Jones dropped 666 points yesterday). However, those higher debt costs in the future are going to eat up more expenses in later years, and the higher interest rates make it less worthwhile to borrow, further reducing options.

So even with a one-time better bottom line, the amount that taxpayers will have to shell out for in some years has gone up with all of this debt manipulation, and as you can see, what we push off now mostly will still have to be paid back later. And if we blow the one-time surplus that has been boosted by these debt moves, we will be even more handcuffed when we have to pay the bill in the near future.

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