Fitch Rates Wisconsin’s $183MM GO Refunding Bonds ‘AA’; Outlook Stable

NEW YORK

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

–$183.25 million GO refunding bonds of 2015, series 1.

The bonds will be sold via negotiation on or about March 16, 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 does 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. It also takes into account fiscal operations that required use of fund balance to achieve budgetary balance during the current period of economic expansion.

After showing improvement during the fiscal 2011-2013 biennium, with extensive structural budget actions, revenue over-performance allowing sizable deposits to the budget stabilization fund (BSF), and stronger liquidity, the enacted budget for the current fiscal 2013-2015 biennium (which began on July 1, 2013) relies on substantial use of the fiscal 2013 ending balance to achieve budgetary balance in fiscal 2014 and 2015. 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. In addition, lower than forecast revenues in both fiscal 2014 and fiscal 2015 have resulted in a current-year budget gap that is expected to be closed primarily with use of fund balance.

NARROWED MARGINS FOLLOWING TAX REDUCTIONS

The state continues to adjust its tax code, offsetting revenue growth, requiring use of fund balance in the current 2013-2015 biennial budget, and limiting contributions to reserves.

The adopted budget for fiscal 2013-2015 incorporated sizable personal income tax (PIT) rate cuts taking 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 2013-2015 biennium, the tax reductions, subsequent revenue underperformance, and changes in the timing of withholding have had the effect of opening a significant budget gap, which the state expects to close with budget controls and extensive use of its fund balance, although it does not expect to draw on the budget stabilization fund. Fiscal 2014 tax revenues were approximately $281 million (2%) below forecast, which the state attributes to both 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 changes in withholding, but also some economic underperformance.

Absent sizeable late improvement in revenue collections, 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 continues to focus on tax relief in the form of school levy tax credits to offset local property taxes, essentially flat funds K-12 education, and reduces funding for higher education while freezing tuition rates. Fitch will be looking to 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 over-performance during the 2011-2013 biennium, with a deposit of $108.9 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.

ECONOMY

Wisconsin benefits from a diverse economy, although there is some concentration in its comparatively diverse manufacturing sector. The state’s recovery from the 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 begun to accelerate (up 2.3% as of December) while Wisconsin’s employment growth rate remained relatively flat at 1.9%. The unemployment rate, at 5.2% in December 2014, remains well below the 5.7% 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. 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 utilize cash flow borrowing since fiscal 2012, and none is expected through the next fiscal 2015-2017 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 Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);

–‘U.S. State Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. State Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981336

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