Fitch Rates Wisconsin’s $31MM Master Lease COPs ‘AA-‘; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned a ‘AA-‘ rating to the following Master Lease Certificates of Participation (COPs) of the State of Wisconsin:
–$31,105,000 Master Lease COPs of 2016, series A.
The COPs will be sold via negotiation on or after June 23, 2016.
In addition, Fitch affirms the following outstanding state ratings:
–Issuer Default Rating (IDR) at ‘AA’;
–$7.988 billion GO bonds at ‘AA’;
–$612.6 million GO extendible municipal commercial paper notes at ‘F1+’;
–$111 million master lease certificates of participation and $3.116 billion general fund annual appropriation bonds at ‘AA-‘.
The Rating Outlook is Stable.
Master lease COPs are secured by a proportionate interest in master lease payments required to be made by the state from any source of legally available funds, subject to legislative appropriation.
KEY RATING DRIVERS
The rating on the bonds backed by Wisconsin’s lease appropriation is one notch below the state’s IDR, reflecting the slightly higher degree of optionality associated with payment of appropriation debt. Wisconsin’s ‘AA’ IDR recognizes its considerable resources and power to control its budget, a broad and diverse economy , and the state’s low liability burden, with above average debt levels offset by fully funded pensions. State fiscal performance in recent biennia has improved, with less reliance on one-time resources and stronger liquidity allowing it to avoid annual cash flow borrowing.
Economic Resource Base
Wisconsin benefits from a diverse economy, although there is some concentration in its comparatively large manufacturing sector. A key feature of the state’s manufacturing sector is its diversity, with relatively little exposure to automotive vs. most Midwestern states. The state’s growth during much of the current expansion has been slow and uneven, although more recently gains have accelerated. Personal income is average, with the state in the middle of the pack relative to the U.S. Growth has trailed the nation’s in most years.
Revenue Framework: ‘aa’ factor assessment
Wisconsin’s sound revenue framework relies on broad based taxes that have generally reflected economic performance. Future growth is expected to be in line with historical performance. Wisconsin has an unlimited ability to independently raise revenues, providing significant legal flexibility to raise operating revenues as needed.
Expenditure Framework: ‘aaa’ factor assessment
The pace of spending growth is expected to be slightly above annual revenue growth, reflecting the primary drivers of Medicaid and education, and requiring ongoing spending control. The state benefits from low fixed carrying costs for debt and retiree benefits and has ample ability to cut spending if needed.
Long-Term Liability Burden: ‘aaa’ factor assessment
Long-term liabilities are low and below the U.S. state median. The state benefits from strong pension funding and a benefit structure that shares the risk of investment underperformance with beneficiaries. Other post-employment obligations are limited.
Operating Performance: ‘aa’ factor assessment
State fiscal performance in recent biennia has generally improved, with less reliance on one-time resources and stronger liquidity allowing it to avoid cash flow borrowing. Reserves are modest as compared to the state’s operating budget although the state maintains considerable flexibility through careful spending management
INCREASED RESILIANCE: Wisconsin’s rating is sensitive to the maintenance of structural budgetary balance while an increase in its resilience and ability to withstand a downturn in the economy would be positive credit factors.
The ‘AA-‘ rating on the master lease COPs, which are paid from annual state appropriations and are rated one notch below the state’s IDR, reflects the state’s long-term general credit characteristics and centralization of the lease issuance, budgeting, and payment processes through the Department of Administration. The department is responsible for state debt management and has a long-established history of operating the program. The cross-collateralization of all program assets under the master indenture provides further credit strength. General fund annual appropriation bonds are likewise supported by the state’s pledge of annual appropriation.
Wisconsin’s revenue structure is based on broad based taxes, including a personal income tax (approximately half of general fund revenues) and sales and use taxes (about 30% of general fund revenues). The state has taken extensive tax reduction actions over the past two biennia, although the current biennial budget included only limited policy actions.
Historical revenue growth, adjusted for the estimated impact of policy changes, was essentially flat on a real basis over the 10 years ending 2014. Year-over-year changes have been relatively modest, even during the recession. Fitch expects future organic revenue growth to be in line with historical performance.
Wisconsin has no legal limitations on its ability to raise revenues through base broadenings, rate increases, or the assessment of new taxes or fees. Under legislation enacted in 2011, the state requires a two-thirds vote of the legislature to increase certain general fund taxes, including income, sales, and franchise taxes.
As with most states, education and health and human services are Wisconsin’s largest operating expenses. State funding for local school districts and the public university and technical college system accounts for almost half of state general fund expenditures. Medicaid and other social services make up an additional one-third.
As with most states, the natural pace of spending growth is likely to be marginally above the natural growth in the state’s revenue stream, requiring regular budget management to ensure balance. The state has, over several years, brought its expenditures to within its ongoing revenues through cost cutting measures.
Wisconsin has ample flexibility within its expenditure framework. The state has reduced spending when necessary to maintain budgetary balance, even in core spending areas, such as school aid. The state’s carrying costs for debt and pensions are below the state median and are expected to remain low given the state’s well-funded pensions and expectations for moderate debt issuance.
Long-Term Liability Burden
Wisconsin has a low burden of long-term liabilities characterized by a moderate but above-average level of bonded debt and virtually no unfunded pension liability. On a combined basis, the state’s net tax-supported debt and pension obligations as of Fitch’s 2015 pension update report measured 5.4% of personal income, below the 5.8% median for U.S. states.
Net tax-supported debt currently measures 5.3% of 2015 personal income, which while above average for a U.S. state, has declined relative to levels reached earlier in the decade. 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 to eliminate an unfunded pension liability. More than half of the approximately $13.4 billion in tax-supported debt is GO, with the remainder consisting of various revenue and appropriation obligations. The state’s solid cash balances have made it unnecessary to borrow for cash flow purposes since fiscal 2012, and no borrowing is expected through the fiscal 2015-2017 biennium.
The state’s limited retiree obligations are a credit strength. The state benefits from a uniquely strong pension structure that shares exposure to investment risk with beneficiaries. The Wisconsin Retirement System (WRS), which covers state government and most local governments in the state, is essentially 100% funded as of Dec. 31, 2014, the most recent valuation date. Under its GASB 67 valuation, the system’s fiduciary assets equal 102.7% of total pension liabilities. WRS’ high ratios of pension assets to obligations have kept its required contributions exceptionally low. OPEB obligations are limited.
Wisconsin is better positioned to address a moderate downturn scenario than it was prior to the last recession, having brought structural balance to its budget and made contributions to its budget stabilization (rainy day) fund. Wisconsin faced sizeable budget gaps during the recession, which it closed using a variety of non-recurring and ongoing measures that affected both expenditures and revenues. Revenue measures included an increase in cigarette taxes and an income tax increase for high earners. Budget reductions were enacted across several fiscal years. The budget stabilization fund was depleted and available balances in other funds were also utilized. Fitch expects that Wisconsin would take similar action to address the impact of a future downturn.
The state’s fiscal performance was historically challenged by structural imbalances and a reliance on one-time resources to cover budgetary needs. The fiscal 2011-2013 budget marked a turning point, with extensive structural budget actions and the resolution of several lingering fiscal challenges. The state used the resulting fiscal momentum to cushion the impact of extensive tax cuts it enacted in its fiscal 2013-2015 biennium. Although performance was challenged through much of the fiscal 2013-2015 biennium given the tax cuts and unexpected revenue weakness, the state responded with spending cuts and other actions.
Building up large budgetary reserves has not historically been prioritized in the state. The budget stabilization fund (BSF) benefitted from sizable deposits in the fiscal 2011-2013 biennium but currently holds a modest $280 million, equal to about 1.9% of fiscal 2015 tax revenues. As an offset, additional budgetary flexibility is considerable and has been repeatedly demonstrated; mechanisms include the secretary of administration’s power to reallocate balances, reduce agency appropriations or prorate or defer certain payments.
The budget for the 2015-17 biennium was balanced as enacted with a surplus anticipated in each fiscal year. The January 2016 revenue forecast indicated a slight reduction in anticipated revenues, down $29 million in fiscal 2016 and $129 million in fiscal 2017, primarily due to weaker than anticipated personal income tax collections. The total reduction, however, amounts to only 0.5% of expected biennial revenues. Unlike the extensive policy actions taken in the last two biennia, policy actions in the current budget are more limited.
The state has now absorbed the impact of the last biennium’s tax rate changes, but in Fitch’s view the full impact of recent changes on the state’s finances will only be clear through a full economic cycle. Only a handful of tax policy changes were included in the fiscal 2015-2017 budget, with tax revenues forecast to rise 4.6% in fiscal 2016 from final fiscal 2015 figures, and a further 3.8% in fiscal 2017, levels which Fitch believes to be reasonable. PIT collections are forecast to rise 7.3% in fiscal 2016 and 4.8% in fiscal 2017. Net appropriations are flat in fiscal 2016 compared to the final for fiscal 2015, then grow 4.9% in fiscal 2016. Although the budget restores previously suspended statutory provisions for depositing excess revenues to the BSF, reserves are expected to remain relatively flat . Fitch would view higher BSF funding as a credit positive.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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New York, NY 10004
Elizabeth Fogerty, +1 212-908-0526