CHICAGO - Gov. Jim Doyle reshaped the Wisconsin Legislature's budget repair bill, using his veto pen to increase the number of spending cuts and lower the level of cash reserves and tobacco refunding proceeds earmarked to help eliminate a $527 million shortfall in the current $57 billion two-year budget.

Doyle used his line-item veto to increase to $270 million from $69 million the level of spending cuts in the budget repair legislation. The governor restored a $125 million school aid payment that the legislative bill had pushed off until the next fiscal biennium begins on July 1, 2009.

Doyle deleted the Legislature's move to lower the required ending cash balance to $25 million from $65 million. Through the various measures vetoed, the state's ending balance is now expected to total $100 million, said budget director David Schmiedicke. The governor left intact the use of the state's $57 million budget reserve. The state for the first time deposited funds into the reserve earlier in this fiscal year.

Doyle made some technical changes to the Legislature's retooling of the pending tobacco bond restructuring, leaving intact the change that would back the bonds with the state's appropriation credit but lowering the level of upfront savings that would be dedicated to reducing the deficit to about $150 million from $209 million. Doyle left other measures in the budget legislation, such as closing corporate tax loopholes, to fully eliminate the deficit.

The reserves and tobacco proceeds represent one-time revenue streams that will contribute to the state's structural imbalance as a new budget is crafted for the fiscal biennium that begins July 1, 2009. The Legislative Fiscal Bureau last week told lawmakers that the state's structural imbalance - where ongoing expenses exceed recurring revenues - stands at about $1.7 billion, up from $800 million when the current budget was adopted last year. The imbalance grew because of sluggish revenue growth and rising bills.

Administration officials acknowledged as much, but said the governor sought to reduce the reliance on such moves through his veto pen, citing the restoration of the school aid payment, the increase in the ending balance, and the reduction in tobacco proceeds. Credit rating agencies have cited the state's narrow ending balances and lack of significant reserve levels as one of its credit weaknesses.

"The big thing for the governor was his opposition to not paying the state's bills," Schmiedicke said. "But at the same time when you face a $650 million deficit, you can't just cut, especially in these difficult economic times. And you can't leave just a $25 million ending balance."

The state earlier this year faced a $650 million shortfall, but the governor cut it down to $527 million by rolling over repayment of a short-term borrowing to the next fiscal biennium and ordering agency cuts. The governor had wanted to enact a hospital assessment tax aimed at leveraging $450 million in additional federal Medicaid reimbursements, but House Republicans blocked that move.

While the governor made some changes to the tobacco restructuring language in the budget repair bill, the Legislature's alterations remain largely intact and they represent a significant change from the plan enacted as part of the fiscal 2008-2009 budget.

The plan now is for the state to sell up to $1.7 billion of bonds backed by the state's pledge to appropriate the funds needed for repayment, although the state would use its tobacco settlement funds to make that payment.

The new proceeds would go to retire the outstanding $1.4 billion of bonds issued in 2002 by the Badger Tobacco Asset Securitization Corp. that were secured by the state's $5.9 billion share of payments from the 1998 national settlement between 48 states and the major tobacco companies.

Doyle, who was attorney general when the settlement was struck and a harsh critic of using the state's securitization to eliminate a budget deficit, had envisioned the restructuring as a means to establish a recurring use for the proceeds. Under the restructuring included in the budget, the goal was to generate at least $50 million in annual savings to go into a health care trust to pay for health-related and anti-smoking measures. The state named a financing team last October but the deal has been on hold as interest rates on tobacco bonds rose amid a flight to quality.

Capital finance director Frank Hoadley said the state of late had been considering the use of its appropriation pledge as a means to lower interest rates on tobacco bonds so that the deal could get done. "With the fall-off in prices on tobacco bonds beginning about a year ago, we realized we couldn't achieve what we wanted to and began looking at an appropriation backing as perhaps the best use of the state's credit," he said.

As part of the budget repair bill, about $209 million in upfront savings were allocated to close the budget gap, an amount Doyle trimmed to about $150 million. The state still would achieve the annual $50 million in savings for health care programs.


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