Minnesota bringing its largest bond issue to market

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The price means big savings to state taxpayers

Sometimes, the old saying goes, it’s better to be lucky than smart.

Not that Kathy Kardell, assistant commissioner in Minnesota’s Management and Budget department, isn’t smart. But she and her team are definitely going to be lucky next Tuesday, when they bring the largest bond issue in Minnesota history to the market.

The $860 million in tax-exempt general obligation bonds will help finance an enormous range of transportation, education, infrastructure and environmental spending.

And investors appear ready to buy those securities at some of the lowest rates in history. Kardell said that when her department completed their preliminary offering documents on July 12 they estimated paying yields of 3.40-3.41 percent.

Those are historically low rates, but the market has trended even lower since then – pushing yields down by about 0.35 percent (35 basis points) over the last month.

As a result, Kardell will be saving Minnesotans millions of dollars in interest costs Kardell said that the state’s interest payments on the total issue would drop by $600,000 for each 0.01 percent (1 basis point) in rates.

That means that the 35 basis-point drop over the last month could save Minnesota taxpayers about $20 million in interest payments over the next 20 years.

In other words, the state is floating its largest debt issue in history at some of the lowest rates in history, but Kardell said she can’t take much credit for that.

“It’s in part a coincidence.  We certainly want to take advantage of pricing when it’s good, but we’re hostage” to the time it takes for departments to prepare their detailed spending proposals and to add those into securities documents, she said.

The giant scale of this issue is partly the result of the major $1.8 billion transportation spending package that the Legislature authorized back in spring 2008 – after overriding Gov. Tim Pawlenty’s veto of that measure.

“It’s taken this long to ramp up those projects” and many of them are rolled into this issues along with other bridge and road repair initiatives approved in the two years since then, Kardell said.

Investors and the weak economy played a big role, too. Investors are searching for safety in an uncertain economy, and securities backed by the tax revenues in states, cities and counties with top debt ratings are their safest havens.

Evidence of that trend can be seen in municipal bond funds, which recorded record inflows – or new net investments – during the last 18 months.

And Minnesota remains one of the preferred targets for those safety-seeking investors. The state holds AAA ratings from Fitch Ratings and Standard & Poor’s and an Aa1 – the second ratings grade – from Moody’s.  (Moody’s and Fitch confirmed those ratings for this issue; S&P hadn’t acted by Wednesday afternoon.)

The yields that highly rated states, cities and counties are paying was helped by one other market shift.  Many municipalities have utilized a new stimulus-related public finance tool, the Build America Bonds, which the federal government backs with an interest-rate subsidy.

The result is that fewer cities and counties are issuing securities in the tax-exempt general obligation market – “and that made tax-exempt paper kind of scarce, which was another reason we’re seeing these attractive prices,” Kardell said.