Fitch Rates Wisconsin General Fund Bonds 'AA-'
Fitch Ratings assigns an 'AA-' rating to the following general fund annual appropriation bonds of the state of Wisconsin:
--$251.26 million general fund annual appropriation refunding bonds of 2012, series A.
The bonds are expected to be sold via negotiated sale the week of Oct. 29, 2012.
In addition, Fitch affirms the following ratings:
--$3.3 billion in general fund annual appropriation bonds at 'AA-';
--$68.2 million in master lease COPs at 'AA-'.
The Rating Outlook is Stable.
Secured by annual legislative appropriations from the state's general fund.
KEY RATING DRIVERS
APPROPRIATION RATING LINKED TO STATE: The 'AA-' rating on Wisconsin's appropriation-backed debt, one notch below the 'AA' rating on the state's general obligation bonds, reflects the state's general credit standing.
MODERATE DEBT: State tax-supported debt is a moderate though above-average and rising burden on resources. Pensions are fully funded.
BROAD, DIVERSE ECONOMY: The economy is broad and diverse with considerable economic resources, albeit with an above-average manufacturing presence.
PROGRESS ON STRUCTURAL IMBALANCE: Structural budget imbalance has been a persistent feature of the state's finances, with the state relying on nonrecurring items and shifting general fund expenses to other funds. The adopted budget for the fiscal 2011 - 2013 biennium made notable progress toward structural balance.
MINIMAL RESERVES: Despite reserve funding provisions, financial reserves were minimally funded in recent years and were depleted as part of budget solutions in the last downturn.
The 'AA-' rating on general fund annual appropriation bonds reflects the state's long-term general credit characteristics and the pledge of appropriations for the bonds. Under the indenture, the department of administration, which includes the state budget office and which manages state debt, covenants to take all appropriate action within its power to assure that sufficient appropriations are provided each fiscal year by the legislature to fund debt service on the bonds. In addition, the state legislature has recognized a moral obligation to appropriate funds for debt service and expressed its expectation and intent to do so. Payments are due to the trustee on July 1 of each year for the full fiscal year's expected debt service, and appropriations are sized such that in the event of a late budget the continuing appropriation from the prior fiscal year will cover debt service.
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. In past biennia the state's practice was to rely on nonrecurring items and fund shifts in times of revenue weakness to achieve budgetary balance. The budget for the fiscal 2011 - 2013 biennium (which began July 1, 2011) marked a notable departure from past practice, with deep structural cuts, including to employee benefits and local aid, to achieve forecast balance.
The adopted biennial budget anticipated fiscal years 2012 and 2013 ending with net balances of $7.8 million and $7.7 billion, respectively. Revenue growth year-over-year was expected to be 3% in fiscal 2012 and 3.6% in fiscal 2013 at the time of adoption. Appropriations included large increases to state Medicaid funding to offset expiring federal stimulus aid and spending cuts in other program areas, including local aid. The budget included significant recurring savings from changes to collective bargaining, certain aspects of which are subject to litigation. Although the budget included nonrecurring resources in the form of $339 million in debt restructuring during fiscal 2012, it also repaid longstanding obligations, including $59 million to the state of Minnesota under a terminated tax reciprocity agreement and $234 million to repay a past interfund transfer.
Fiscal 2012 actual performance was stronger than expected. General purpose revenue tax collections of $13.5 billion rose 4.7% from fiscal 2011 and were 1.6% higher than the level assumed in the adopted budget. Net appropriations, at $13.8 billion, were about 1.2% below the enacted level. The ending net balance was $342.1 million (2.5% of general purpose tax revenues) following a deposit of $108.7 million to the budget stabilization fund, well over the deposit of $45.4 million figure previously expected by the state.
The fiscal 2013 budget assumes tax revenues of nearly $13.7 billion (based on the state's May 2012 forecast); the ending net balance is forecast at $89.5 million before incorporating the solid overperformance of fiscal 2012. Fiscal 2013 first-quarter tax collections are 2.1% over the same period a year earlier, on an adjusted basis.
Wisconsin benefits from a diverse economy, although its large manufacturing sector is a source of vulnerability. The state's recovery from the recession has been slow and uneven with earlier solid job gains softening. Strong gains in manufacturing have been offset by losses in construction, government, financial activities, and professional and business services. September 2012 employment is down 0.2% year-over-year, the twelfth month of job losses after more than a year of job gains; for the U.S. overall, employment rose 1.4% in September 2012. Unemployment, at 7.3% in September 2012, is under the 7.8% U.S. rate for the same period. Wisconsin ranks 27th in personal income per capita in 2011, at 95% of the U.S. average. The state forecasts slow employment and personal income gains through 2014, its forecast period, which Fitch believes to be reasonable.
Net tax-supported debt of approximately $12.6 billion as of Dec. 15, 2011 measures 5.5% of 2011 personal income, a moderate but above-average level. Debt has grown in recent years, 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. Almost half of tax-supported debt is GO, with the remainder consisting of various revenue and appropriation credits.
The state's obligations to retirees are limited. Pensions were fully funded as of Dec. 31, 2010, the valuation date in the statewide system's most recent comprehensive annual financial report. On a combined basis, the state's net tax-supported debt and pension obligations measure 5.5% of personal income, below the median for U.S. states rated by Fitch.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 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
U.S. State Government Tax-Supported Rating Criteria
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