NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following master lease certificates of participation (COPs) of the State of Wisconsin:
--$37 million master lease COPs of 2014, series A (final amount to be determined). The bonds will be sold via negotiated sale on or after Feb. 13, 2014.
In addition, Fitch has affirmed the following ratings of the state:
--$3.3 billion general fund annual appropriation bonds at 'AA-';
--$72.5 million master lease COPs 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 annual legislative appropriation.
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 (GO) bonds, reflects the state's general credit standing.
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 have strengthened, with recent structural budget solutions and solid revenue gains resulting in materially stronger liquidity. The state has not yet returned to consistent structural balance as of its fiscal 2013-2015 adopted budget although year-to-date revenue performance is strong.
LIMITED RESERVES: The state's reserves, which were depleted in the last downturn, have begun growing again but remain modest. If the revised revenue performance is realized and not offset by change in tax policy, the reserve position is forecast to improve over the course of the 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.
CONTINUED FISCAL IMPROVEMENT: A demonstrated commitment to growing reserve funding and consistently achieving structurally sound budgets in the context of moderate debt and low retiree obligations could result in a rating upgrade.
The 'AA-' rating on master lease COPs, which are paid from annual state appropriations, 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 '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 Fitch's view, the state's fiscal management has improved in recent years, with extensive structural budget actions in the fiscal 2011-2013 biennium, revenue over-performance allowing sizable deposits to the budget stabilization fund (BSF), and stronger liquidity.
The adopted budget for the fiscal 2013-2015 biennium (which began on July 1, 2013) relied on substantial use of the fiscal 2013 ending balance to achieve budgetary balance in fiscal 2014 and 2015. An upward revenue revision in January 2014, which reflected strong revenue performance year-to-date and slightly higher economic growth, would produce an operating surplus for fiscal 2014 and 2015 without use of ending balance. However, the governor has proposed tax policy legislation that would offset the revenue gains.
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 adopted budget for the fiscal 2011-2013 biennium (which ended on June 30, 2013) marked a notable departure from the past, with deep structural cuts, including to employee benefits and local aid, to achieve balance. With the exception of debt refunding for budget relief in fiscal 2012, the budget avoided a reliance on nonrecurring resources and repaid longstanding budgetary obligations. Budget performance in fiscal 2013 was considerably stronger than anticipated, reflecting better than expected tax receipts.
The BSF, which had been minimally funded for much of the last decade, benefitted from general fund revenue over-performance during the biennium, with a deposit of $108.9 million from fiscal 2012 and an approximately $154 million from fiscal 2013, which brought its balance to $279.3 million (about 2% of fiscal 2013 general fund tax receipts). Wisconsin statute requires that half of revenues in excess of the adopted forecast be transferred to the BSF. If revenue continues to perform as currently anticipated, and without consideration of a tax cut proposed by the governor, the state would be required to deposit an additional $443 million to the BSF by the end of the current biennium. That deposit would be reduced to $117 million if the proposed legislation is enacted.
The adopted budget for fiscal 2013-2015 incorporated sizable personal income tax (PIT) rate cuts taking effect in tax year 2013. PIT tax rate changes were estimated to reduce general fund revenues from baseline levels by $328 million in fiscal 2014 and $320 million in fiscal 2015. The state's outlook for tax revenue collections during the fiscal 2013-2015 biennium appears reasonable, particularly given recent upward revisions in estimated fiscal 2013 performance. As of the January 2014 revised forecast, fiscal 2014 general fund tax revenues are now expected to show modest 2.2% year-over-year growth to $14.4 billion, followed by strong 4.3% growth in fiscal 2015, to $15.5 billion.
Under the adopted fiscal 2013-2015 budget, general fund net appropriations rise 3.6% in fiscal 2014, to $14.8 billion, and 3.8% in fiscal 2015, to $15.4 billion. The spending plan included changes to state Medicaid eligibility in response to federal health reform, higher school formula funding and flat aid to local governments.
With the revised revenue forecast, the ending net balance is projected to increase from $694.2 million at June 30, 2013, to $831.8 million in fiscal 2014 and $976.5 million in fiscal 2015, despite absorbing the PIT rate change and higher spending needs. The forecast ending balance is almost $900 million higher than anticipated when the budget was enacted. The governor is proposing several tax law changes, the largest of which would provide property tax relief in support of the Technical College System. The governor has also directed the department of revenue to adjust income tax withholding tables to reflect lower tax rates, which will cause a one-time loss of state revenues due to differences in timing between the state's fiscal and tax years. These changes would significantly reduce the projected surplus and deposit to the BSF. Fitch will assess the impact of any additional changes in tax policy in the context of the state's ability to achieve structural budget balance and maintain sufficient reserves.
Wisconsin benefits from a diverse economy, although its large manufacturing sector has been a source of vulnerability. 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, 2012 employment growth was about half the U.S. pace. Employment growth, which continued to lag the U.S. through much of 2013, has improved in recent months with December 2013 employment up 1.6%, matching the U.S. overall.
Unemployment, at 6.2% in December 2013, remains below the 6.7% national rate. Wisconsin ranked 26th in personal income per capita in 2012, at 95% of the U.S. average. The state forecasts slow employment and personal income gains through 2015, its forecast period, which Fitch believes to be reasonable.
DEBT AND OTHER LIABILITIES
Net tax-supported debt of approximately $13.3 billion as of Dec. 15, 2013 measures 5.5% of 2012 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. 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 made it unnecessary to utilize cash flow borrowing during fiscal 2013, and none is expected through the fiscal 2013-2015 biennium.
The state's limited retiree obligations are a credit strength. Pensions were fully funded as of Dec. 31, 2012, 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. 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 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