CHICAGO – As Wisconsin tees up for its next general obligation sale next month, Gov. Scott Walker is facing pushback from his fellow Republicans who control the Legislature over increased borrowing proposed in his operating and capital budgets.
Walker unveiled a $1.4 billion two-year capital budget late last week that relies on $1.1 billion of borrowing. The additional debt is in on top of $1 billion of new borrowing floated in Walker’s $68 billion two-year operating budget unveiled last month.
The capital plan is higher than Walker’s biennial plan adopted two years ago but down from his predecessor’s capital program four years ago. “The capital budget invests in our priorities by funding projects to grow our economy, support higher education, and care for our most vulnerable,” Walker said in a statement.
The plan funds building projects across Wisconsin including state facilities and public universities and others aimed at promoting promote economic development and aiding social services and healthcare providers.
The largest single project allocation is $200 million for a new Department of Transportation building in Madison. About $700 million would fund University of Wisconsin system projects and $330 million would finance state building improvements. Nearly $100 million in assistance would go to non-state owned buildings including several not-for-profit organizations and a convention center.
The State Building Commission, which must sign off on borrowing for projects approved the capital budget unanimously on Thursday, despite the reservations of several Republicans over the borrowing levels and spending on some projects.
The commission also added $43 million to the plan before approving it and sending it on to the Legislature’s Joint Finance Committee which is currently reviewing the governor’s biennial operating budget proposal. The committee combines and tweaks the two spending plans and advances one package to the Legislature for a vote.
Walker chairs the building commission and six members come from the legislature, including three from each chamber. The majority party appoints two of the three and the minority party has one appointment from each chamber.
Some Republicans have called the borrowing levels in both the proposed operating and capital budgets excessive. Several Assembly Republicans on the Joint Finance Committee voiced their concerns during Department of Administration Secretary Mike Huebsch’s appearance before the committee last week.
Walker and his administration have defended the proposed borrowing as vital to improving the state’s economy and affordable given low interest rates, low construction costs, and the austere measures undertaken to cut state spending two years ago. “We were very aggressive two years ago, because of the circumstances we faced,” Walker said in published reports.
Walker floated a $967 million capital budget in 2011 while former Democratic Gov. Jim Doyle’s last capital plan approved in 2009 totaled $1.5 billion. “The governor believes now is a good time to bond based on the interest rate environment we are in,” assistant capital finance director David Erdman said of the strategy to fund the next capital cycle.
The new capital program relies on $495 million of general fund supported bonding and $653 million of non-general fund borrowing. The remaining funds come from cash, gifts, local matching and federal funds, and user fees.
The state’s next general obligation sale to cover bricks and mortar building projects is slated for the second or third week of April. “We are still finalizing structures and options such as sizing,” Erdman said. The State Building Commission last month authorized the sale of up to $500 million of GOs but the size of next month’s deal will depend on funding needs and how much the capital finance office decides to issue using its shorter-term extendible municipal commercial paper structure. The GO bonds will be competitively bid.
Ahead of a GO sale last fall, Fitch Ratings affirmed the state’s AA rating assigned to $6.8 billion of GO bonds, Moody’s Investors Service affirmed its Aa2 rating, and Standard & Poor’s affirmed its AA rating. All assign a stable outlook.
The rating is driven by moderate debt levels, fully funded pensions, and a broad and diverse economy, Fitch Ratings said. The state’s challenges remain an ongoing structural imbalance and minimally funded reserves.
Walker in 2011 pushed through a bill that increased employee pension payments and health care premiums and cut spending and local government aid to close a $3.6 billion deficit and improve the structural health of the state’s balance sheet. It included controversial provisions stripping many public employee unions of most of their collective bargaining rights.
Walker’s proposed operating budget for the next biennium cuts income taxes, provides nearly $1 billion in borrowing for transportation projects, and replenishes the state’s exhausted authorization to refund general obligation debt.
Fiscal 2014 spending marks a 3% increase over the current fiscal year and it rises by 2.1% in the second year of the proposed budget. No new or higher taxes or fees are proposed.
The nearly $1 billion in new bonding authorization includes $578 million of general fund-supported bonds and $417 million of revenue-backed borrowing. It provides $400 million for highway projects, $300 million for the Zoo Interchange project on Interstate 94 west of Milwaukee, and $260 million for bridge and rail projects. The operating budget also reauthorizes $2 billion of previously approved general fund supported borrowing for various projects.
The spending blueprint also paves the way for the refunding of up to $2 billion of tax-supported GOs. The state has exhausted all of its GO refunding authority. Citi has been selected to serve as senior manager on a refunding as candidates with substantial savings are available. “Once the authorization is in place we will take a look at the market and decide on what is the best transaction,” Erdman said.
The state expects to close out the current fiscal year June 30 with a balance of $484 million and $125 million in reserves. The budget will close out both years with a positive ending balance but the state will carry a structural imbalance of about $200 million.
Wisconsin’s longtime capital director Frank Hoadley formally retired at the end of February. The state in recent months has conducted a search to fill the position and was expected this week to announce its choice.