Fitch Rates $90MM Wisconsin GO Bonds ‘AA’; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘AA’ rating to the following general obligation (GO) bonds of the state of Wisconsin:

–$89.96 million GO bonds of 2015, series B.

The bonds will be sold via competitive bid on June 11, 2015.

The Rating Outlook is Stable.

SECURITY

The state’s full faith, credit, and taxing powers, as well as the statutory irrevocable appropriation of a first lien on all state revenues for debt service, secure the GO bonds.

KEY RATING DRIVERS

BROAD, DIVERSE ECONOMY: The Wisconsin economy is broad and diverse with considerable economic resources, albeit with an above-average manufacturing presence.

FISCAL PROGRESS: The state’s finances strengthened during the fiscal 2011-13 biennium, with structural budget solutions and solid revenue gains resulting in materially stronger liquidity. However, the fiscal 2013-15 biennial budget did not further this progress as it relies on use of prior fund balance to achieve budgetary balance and prioritizes tax reductions over continued movement toward structural balance.

LIMITED RESERVES: Strong revenue performance in the last biennium allowed the state to add to reserves depleted in the last downturn. However, the commitment to expanding reserves remains uneven and automatic contributions based on revenue performance are suspended for the current biennium.

MODERATE LIABILITIES: State tax-supported debt is a moderate though above-average burden on resources. Retiree obligations are minimal, with pensions fully funded and limited other post-employment obligations.

RATING SENSITIVITIES

The rating is sensitive to shifts in the state’s fundamental credit characteristics, including its moderate debt, low retiree obligations, and ability to maintain budgetary balance.

CREDIT PROFILE

Wisconsin’s ‘AA’ long-term GO bond rating and Stable Outlook recognize its considerable resources, a diverse economy with an above-average manufacturing presence, a moderate but above-average debt burden and fully funded pensions.

After showing improvement during the fiscal 2011-13 biennium, with extensive structural budget actions, revenue overperformance allowing for sizable deposits to the budget stabilization fund (BSF), and stronger liquidity, the state utilized a significant portion of the fiscal 2013 ending balance to achieve budgetary balance in the current biennium. Tax policy changes enacted in March 2014 appear to be offsetting revenue gains that the growing economy would have otherwise produced in the current biennium. Fitch also notes that a current-year budget gap that resulted from revenue underperformance has reportedly been closed largely through use of fund balance, receipt of a back payment under the tribal gaming compact that was not assumed in the budget, and budgetary controls. The state expects to begin the next biennium with effectively a zero undesignated fund balance, leaving it with less flexibility than it had entering the current biennium.

NARROWED FINANCIAL MARGINS

Recent changes to the state’s tax code have offset revenue growth and limited contributions to reserves. The adopted budget for fiscal 2013-2015 incorporated sizable personal income tax (PIT) rate cuts that took effect in tax year 2013. Despite the rate reductions, strong revenue performance led to a significant upward revision to the revenue forecast in January 2014, following which, the governor proposed additional tax law changes that were enacted in March 2014. In addition to providing property tax relief in support of the Technical College System, the Department of Revenue was directed to adjust income tax withholding tables to reflect lower tax rates. This had a one-time budgetary impact due to differences in timing between the state’s fiscal and tax years.

As the state approaches the end of the fiscal 2013-15 biennium, the tax reductions, subsequent revenue underperformance, and changes in the timing of withholding had the effect of opening a significant budget gap, which the state reports it has now closed, as noted above, without drawing on the budget stabilization fund. Fiscal 2014 tax revenues were approximately $281 million (or 2%) below forecast, which the state attributes to its tax law changes as well as the impact of federal tax policy changes that saw taxpayers shift income between calendar years. Fiscal 2015 revenues are also now estimated to be significantly below the estimate used to develop the budget, continuing to reflect the tax law changes and changes in withholding, but also some economic underperformance.

The state is likely to fully deplete its starting balance as it closes out the biennium, leaving it with minimal carry-over resources to draw on as it develops the budget for fiscal 2015-17. The governor’s budget for 2015-17 is narrowly balanced as proposed, minimally increasing the fund balance by the end of the biennium. The governor’s proposal continues to focus on tax reductions in the form of state school levy tax credits to offset local property taxes, essentially flat funds for K-12 education, and reduces funding for higher education while freezing tuition rates. The budget is currently being negotiated in the legislature; Fitch will be looking to see how the enacted fiscal 2015-17 budget affects the state’s flexibility to address economic volatility and maintain balance on an ongoing basis.

The BSF, which had been minimally funded for much of the last decade, benefitted from general fund revenue overperformance during the 2011-13 biennium, with a deposit of $109 million from fiscal 2012 and approximately $154 million from fiscal 2013, which brought its balance to $279.3 million (about 2% of fiscal 2014 general fund tax receipts). Wisconsin statute ordinarily requires that half of revenues in excess of the adopted forecast be transferred to the BSF; however, the March 2014 legislation also suspended potential deposits to the BSF for the current biennium.

DIVERSE ECONOMY

Wisconsin benefits from a diverse economy, although there is some concentration in its comparatively diverse manufacturing sector. The state’s economic performance post-recession has been slow and uneven. After performance in line with that of the U.S. during the downturn, employment lagged the U.S. through much of the recovery period. Recent performance has been stronger; however, the pace of growth nationally has been accelerating (up 2.2% as of April) while Wisconsin’s employment growth rate remains slower at 1.7%. The unemployment rate, at 4.4% in April 2015, remains well below the 5.5% national rate for the month.

Wisconsin ranked 26th in personal income per capita in 2013, at 97% of the U.S. average. The state forecasts continued slow employment and personal income gains through 2017, its forecast period, which Fitch believes to be reasonable.

DEBT AND OTHER LIABILITIES

Net tax-supported debt measures 5.3% of 2013 personal income, a moderate but above-average level for a U.S. state. Debt grew during the recession, including $1.5 billion in general fund annual appropriation bonds issued in early 2009 to provide budget relief by purchasing tobacco settlement revenues previously sold to the Badger Tobacco Asset Securitization Corporation. A further $1.8 billion in general fund annual appropriation bonds were issued in 2003 for pension funding. More than half of tax-supported debt is GO, with the remainder consisting of various revenue and appropriation credits. The state’s improving cash balances have made it unnecessary to use cash flow borrowing since fiscal 2012, and none is expected through the next fiscal 2015-17 biennium.

The state’s limited retiree obligations are a credit strength and the state benefits from a particularly strong pension structure that shares investment risk with beneficiaries. Pensions were essentially fully funded as of Dec. 31, 2013. On a combined basis, the state’s net tax-supported debt and pension obligations measure 5.6% of personal income, below the 6.1% median for U.S. states. OPEB obligations are limited.

Additional information is available at ‘www.fitchratings.com‘

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986160

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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