Fitch Rates Wisconsin $297MM GO Bonds 'AA', Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of the State of Wisconsin:

--$296.985 million GO refunding bonds of 2014, series 4.

The bonds will be sold via negotiation as early as the week of Nov. 17, 2014.

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 have strengthened, with structural budget solutions during the fiscal 2011-2013 biennium and solid revenue gains resulting in materially stronger liquidity. However, the fiscal 2013-2015 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 benefit (OPEB) obligations.

RATING SENSITIVITIES

CONTINUED FISCAL IMPROVEMENT: The rating is sensitive to shifts in the state's fundamental credit characteristics, including its moderate debt and low retiree obligations.

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. In Fitch's view, the state's fiscal position showed 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 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. 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. Fitch also notes that revenue performance in fiscal 2014 that was short of state expectations may result in a current-year budget gap yet to be addressed.

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. 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. 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, which had a one-time budgetary impact due to differences in timing between the state's fiscal and tax years.

These changes significantly reduced the surplus projected in January 2014, lowering the projected fiscal 2015 ending balance from just over $1 billion to $165 million, in line with expectations at the time the budget was passed. However, this forecast does not take into account the revenue underperformance in fiscal 2014 that lowered the starting balance for the current fiscal year. 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. Fitch notes that the lower starting point will likely result in a larger budget gap to be addressed in the current fiscal year as well as in the forecast for the upcoming fiscal 2015-2017 biennium. Through September fiscal 2015 tax revenues are $23.9 million below estimate and have decreased $161.1 million on a year-over-year basis.

The March 2014 legislation also suspended potential deposits to the BSF for the current biennium. 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.

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. Job growth was stronger than the U.S. through the summer but the growth rate dropped to 1.5% in September, below the U.S. rate of 2%. The unemployment rate, at 5.5% in September 2014, remains below the 5.8% 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 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 measures 5.4% 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 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 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 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

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=925455

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1 212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1 212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com