Fitch Rates $284MM Wisconsin GO Bonds 'AA'; Outlook Stable
--$284,335,000 GO refunding bonds of 2016, series 1.
The bonds will be sold via negotiation the week of Feb. 8, 2016.
In addition, Fitch affirms the following outstanding ratings on bonds and notes of the State of Wisconsin:
--$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 on the long-term bonds 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. Economic gains have accelerated following several years of slow growth.
FISCAL PROGRESS: 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. Reserves are low relative to potential revenue volatility, although the state maintains considerable flexibility through extensive spending management mechanisms.
BALANCED OUTLOOK: The last biennium ended in balance, with the state successfully absorbing the strains from sizable tax cuts early in the biennium while effectively managing unexpected revenue weakness. The longer-term impact of recent tax cuts on state revenues through future cycles is an unknown. The fiscal 2016-2017 biennium forecasts steady operations with small net balances.
MODERATE LIABILITIES: State tax-supported debt is a moderate though above-average burden on resources. Retiree obligations are a credit strength, with strong pension funding and benefit structure that shares the risk of investment underperformance. Other post-employment benefit (OPEB) obligations are limited.
RATING SENSITIVITIES
MANAGEMENT OF ECONOMIC AND FISCAL CYCLICALITY: The rating is sensitive to shifts in the state's fundamental credit characteristics, including its management of economic and fiscal cyclicality.
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. The state's economic performance in the current expansion has been slow with gains below national averages, although the state surpassed its pre-recession jobs peak in July 2015.
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 and currently holds a modest $280 million, equal to about 1.9% of fiscal 2015 tax revenues, but the statutory deposit mechanism was suspended for the fiscal 2013-2015 biennium. 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.
FISCAL 2013-2015 BIENNIUM ENDED STRONGER
Despite revenue weakness that materialized during the second half of the 2013-2015 biennium, the state's final ending balance of $135.6 million was only slightly below the $156.3 million forecast when the budget was enacted and considerably better than the negative balance indicated as of the January 2015 forecast.
The biennium included a sizable personal income tax (PIT) rate cut enacted in the original biennium budget, followed by additional tax law changes in spring 2014; the latter package of measures included suspending the statutory transfer provisions for depositing excess revenues to the BSF.
Fiscal 2014 tax revenues were approximately $281 million (2%) below forecast, which the state attributes both to its tax law changes as well as the impact of federal tax policy changes that saw taxpayers shift income between calendar years. Weakness continued into fiscal 2015, with the legislative fiscal bureau's January 2015 forecast lowering tax revenues from earlier expectations and predicting a $283 million deficit at the biennium year-end.
The state addressed the forecast deficit through a variety of measures, including state agency spending reductions, helped by receipt of $50 million in tribal gaming revenues; the BSF balance was left untouched. Tax revenues appear to have accelerated in the last half of fiscal 2015, with final collections 0.5% above the January 2015 forecast, driven primarily by corporate income and franchise taxes; PIT receipts were slightly below the January forecast level.
FISCAL 2015-2017 BUDGET BALANCED
The budget for the 2015-2017 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 $129.2 million in fiscal 2017, primarily due to weaker than anticipated PIT 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, tax 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. Appropriations are flat in fiscal 2016 compared to the final for fiscal 2015, then grow 4.9% in fiscal 2016. The budget restores statutory provisions for depositing excess revenues to the BSF. Fitch would view higher BSF funding at this stage of the economic expansion as a credit positive.
DIVERSE ECONOMY
Wisconsin benefits from a diverse economy, although there is some concentration in its comparatively large and diverse manufacturing sector; manufacturing makes up 16.2% of employment as of December 2015, compared to 8.6% nationally. The state's growth during much of the current expansion was slow and uneven, although more recently gains have accelerated. Employment rose only 1% in 2013 and 1.3% in 2014, below the 1.7% and 1.9% pace for the U.S. during those years. As of December 2015, employment growth slowed again relative to the U.S. at 0.9% year-over-year. July 2015 marked the first month when employment exceeded the state's pre-recession peak of June 2007 and as of December 2015, employment stood at 100.4% of the pre-recession peak. Construction and most service sectors continue to experience growth, offsetting slower growth in manufacturing and trade, transportation and utilities. The unemployment rate, at 4.3% in December 2015, remains well below the 5.0% national rate for the month.
Wisconsin ranked 26th in personal income per capita in 2014, 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
Wisconsin has a manageable 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 measured 5.4% of personal income, below the 5.8% median for U.S. states.
Net tax-supported debt currently measures 5.3% of 2014 personal income, which while above average, 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 tax-supported debt is GO, with the remainder consisting of various revenue and appropriation credits. The state's solid cash balances have made it unnecessary to issue cash flow borrowing since fiscal 2012, and none 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.
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