As Wisconsin prepares to sell $223 million of general obligation paper Tuesday, the finance team is highlighting an improved outlook from one rating agency and a bulked-up rainy day fund to counter any frowns on the budget’s draw-down of reserves.
Kroll Bond Rating Agency revised the outlook on the state’s AA-plus rating to positive from stable. S&P Global Ratings affirmed the state’s AA and stable outlook and Moody’s Investors Service affirmed the state’s Aa1 rating and stable outlook.
The 20-year bonds being competitively offered will feature a seven-year call, a structure the state has been using on recent deals and “continues to see great interest in” as it appeals to a wider investor base, said capital finance director David Erdman. “We like the flexibility of the shorter call” especially given the federal tax law changes that killed advance refundings.
The report marks the first since the state legislature, controlled by Republicans, adopted an $82 billion two-year budget, after scaling back on many spending proposals promoted by Gov. Tony Evers, a Democrat who won election last November. Evers signed the budget July 3 after using his veto pen to put his mark on the plan with 78 items.
The budget dips deeply into the state’s ending balance leaving it at $114 million at the close of the budget cycle, down from a current level of $948 million. The state would carry a negative $651 balance heading into the next budget although that figure from the Legislative Fiscal Bureau is based on net revenues verse net appropriations and doesn’t factor in projected revenue or spending growth.
“Three things I would highlight” about the state’s fiscal condition is “a history of cautious and conservative budgeting, our strong retirement system that is fully funded, and the additional deposit happening in fiscal 2019 to our budget stabilization,” Erdman said in an interview.
The Legislative Fiscal Bureau estimates a deposit of $291 million into the rainy day fund, bringing the balance that had stood at zero for some years up to a record $617 million. The deposit was due to a strong fiscal 2019 that saw the projected balance rise to $1 billion compared to a budgeted balance of $322 million. The state used about $56 million of the unexpected balance to pay down debt.
The Wisconsin Policy Forum, a research organization, noted the differences between the governor and legislature’s final package as the legislature scaled back the governor’s proposed increases for schools, transportation, and healthcare, but the report also highlighted how similar both were drawing down general fund revenue reserves.
Both budget plans “leave the state’s general fund in a weaker position despite the best economy in nearly two decades. In one bright spot, the state’s other main source of reserves, its rainy day fund, is rising to record levels. However, the overall state reserves in the two funds combined would still decline under both budget proposals,” the forum wrote.
“The nation’s economic expansion is one of the longest on record. That fact does not mean a recession is imminent — the economy may grow for some time. Still, decisions made now will have a big impact on the state’s ability to manage a slowdown when it does arrive,” the forum wrote.
Budget
The budget authorizes $1.9 billion of new borrowing including $1.78 billion of GO debt and $142 million of transportation revenue bonds. That’s about $850 million more than the last two biennial budgets but along the lines of prior budgets. About 47% of the new authorization is for the University of Wisconsin higher education system, Erdman said.
Evers had proposed about $2.45 billion of borrowing in the operating and capital budgets. The budget-writing Joint Finance Committee scrapped his proposals and crafted its own.
Transportation bonding is down and the legislature rejected Evers proposed gasoline tax hike but it did raise the vehicle and title transfer fees — revenues streams pledged to transportation bondholders — to raise about $460 million of additional revenue over the budget cycle. “It should also help enhance and strengthen that credit,” Erdman said.
Despite the legislature’s changes, Evers took heart in the increases where he won them. “This is a down payment on the progress we must make in the next biennial budget," Evers said, adding that vetoing the package would have meant passing up new investments in special education, general school aid increase, road funding, and broadband.
The governor's veto powers are sweeping with the ability to reshape the package by shifting spending or who controls the spending and can strike references in a way that can also increase spending. Evers was able to earmark additional education funding through a veto.
Angered by the vetoes, some Republican lawmakers fired back with a proposed resolution that would rein in the veto powers by barring the use to raise spending in any area. A constitutional amendment is needed and it goes to voters only after lawmakers pass the measure in two consecutive sessions.
Rating Agencies
Kroll said strong financial operations, a broad and stable economic base, and manageable long-term liabilities underpin the state’s rating and the state has “significantly outperformed” projected ending general revenue balances in several previous biennium budgets “which speaks to the state’s conservative budgeting practices.
“The positive outlook reflects the state’s continued fiscal discipline and their resulting improved reserve levels. KBRA expects that state management will continue to act during the fiscal year to maintain budget balance as needed,” Kroll said.
S&P noted the structural imbalance but other strengths offset that factor. “As demonstrated with the enacted fiscal 2020-2021 biennial budget, the state has a history of appropriating one-time general fund balances to a level we consider out-of-sync with the mature phase of the economic recovery, which could pose some risk of downward pressure on its credit quality if economic or revenue conditions underperform the budget," S&P wrote.
But analyst Carol Spain said the state’s stellar pension funding status “offsets the state's credit weaknesses, which include a slow-growing economy, a trend of just adequate reserve levels, and a moderately high debt burden.” The credit also benefits from a demonstrated ability to make midyear budget corrections.
