Munis close out week firmer but still underperform Treasuries; New Jersey Turnpike deal ahead

By Sheri Kasprzak

New York, April 12 - Municipal yields rounded out the week on a firmer note but just couldn't match up to Treasuries, market insiders reported.

Yields were lower by 1 basis point to 2 bps. One trader pointed out that the municipal-to-Treasury ratio at 10 years was back around 100%.

Looking to the week ahead, new issue supply is expected to be around $8.5 billion, down slightly from the $10.5 billion level of the week just ended. New offerings will be led by a $736,105,000 offering of revenue bonds from the New Jersey Turnpike.

The offering will be conducted in four tranches: $271 million of series 2013C Sifma index bonds, $225 million of series 2013D Sifma index bonds, $150 million of series 2013E Sifma index bonds and $90,105,000 of series 2013F fixed-rate bonds.

Citigroup Global Markets Inc. is the senior manager for the deal, the proceeds of which will be used to refund the authority's series 2003C-1 revenue bonds, series 2005C revenue bonds and 2012D-E revenue bonds.

Kentucky move pressures budget

In ratings news, recent changes made by the State of Kentucky to manage its underfunded pension liability are positive, but the plan will exert additional budgetary pressure, according to Fitch Ratings.

"The plan requires the state to fully fund the actuarially calculated annual required contribution for the main state employee pension plans much faster than anticipated (by fiscal 2015), effectively suspects cost of living allowances and establishes a hybrid cash balance pension plan for new hires," wrote Eric Kim, director of Fitch's U.S. public finance department.

"To help fully fund the ARC, the legislature made several tax law changes, including reducing a personal income tax credit, which are projected to generate $100 million a year toward the accelerated ARC ramp up. In fiscal 2012, the state funded $251 million of the $482 million ARC (52%) for the state-supported portion of the Kentucky Retirement Systems plans. We believe acceleration to the full ARC will have a positive impact on the long-term trajectory of the state's pension liability."

The state's pension liability is only one of its challenges.

"In each of the past four biennial budgets, it has relied on one-time solutions to balance the budget, including depletion of reserves, debt restructuring and borrowing for operations, specifically to pay Kentucky Teachers Retirement System non-pension retirement benefits," Kim wrote.

"Although the structural gap and use of one-time items have been reduced in the current biennium, this practice continues despite economic recovery and growing revenues."

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