Wisconsin Gets Positive Outlook Ahead of GO Refunding

CHICAGO - Wisconsin could win an upgrade if recent budgetary and liquidity strides remain on course and result in a stronger balance sheet and reserves, Moody's Investors Service said in shifting the state's general obligation outlook to positive.

The review was published Thursday affirming the state's Aa2 GO rating and shifting the outlook to positive from stable on $7.7 billion of debt. It comes ahead of the state's planned advance refunding of $300 million of GOs.

The sale is on the day-to-day calendar with the finance team looking for the best opportunity to enter the market. An estimated $13 million to $14 million in savings is projected if all $300 million is sold. "Our objective is just to maximize savings," said state capital finance director Kevin Taylor.

Morgan Stanley is the senior manager with five other firms rounding out the syndicate. Foley & Lardner LLP is bond counsel and Lamont Financial Services is advising the state on the issue. The bonds mature from 2015 to 2029.

The outlook change recognizes the state's improved liquidity position, conservative management of retiree benefits that limits future budgetary pressures, and reductions in the state's long standing negative fund balance based on generally accepted accounting principles, Moody's said.

Ongoing improvements would allow the state to bolster its lean reserves, move closer to structural balance, and overall strengthen its balance sheet, Moody's said. "The state's ability to make progress toward structural budget balance and continued improvement in its fund balances will be important to future credit analysis," Moody's added.

The state's rating benefits from a fully funded pension system, ranked in some national reports as the best nationally, and limited unfunded retiree healthcare liabilities, as well as improved liquidity of $1.8 billion.

The state won praise for reversing course in the current two-year budget cycle from past practices of using one-shots like debt restructuring and interfund transfers to balance its books.

The rating also reflects the state's moderate economic growth and governance constraints as the governor lacks the executive authority to make mid-year corrections to adjust to faltering revenue collections. While improved, its negative GAAP balances remain large and the state lacks the best practices policies adhere to consensus revenue forecasting and multi-year revenue and expenditure planning.

"We're very pleased and excited by the direction of the state's credit quality," Taylor said. The state's GOs have been rated by Fitch Ratings and Moody's at the double-A level since 2010 while Standard & Poor's has rated it at that level since 2008. The state last year also received a GO rating from Kroll Bond Rating Agency, which also assigns an AA. The three give a stable outlook to the state.

Fitch affirmed the rating this week with its praise for fiscal strides tempered by the state's use of its fund balance to pay for a tax relief package. "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," Fitch wrote. The state has just limited reserves and stood to receive a good infusion of cash from an estimated $1 billion surplus until lawmakers suspended a requirement that would have sent half of the surplus revenues to the reserve which holds about $280 million.

The decision stemmed from Gov. Scott Walker's push for a tax relief package. Walker, a Republican who recently won re-election to a second term, pushed for -- and GOP lawmakers who control the Legislature approved -- a package that reduces available funds in fiscal 2014 by $328 million and $320 million in fiscal 2015.

The state's final revenue numbers for fiscal 2014 fell short of previous estimates and Fitch noted the possible "budget gap yet to be addressed." The state faces a potential $1.8 billion deficit in its next two-year budget plan that is to be unveiled next year, according to the state's Legislature Fiscal Bureau. The deficit growth is due to revenue collections that lag estimates and the impact of the tax cuts.

Kroll in affirming the state's rating said it has a history of operating with structurally imbalanced budgets, dependence on the use of one time revenues and minimal reserves but "under the current administration, significant progress has been made towards structural budget balance."

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