CHICAGO – Wisconsin Gov. Scott Walker has proposed a $68 billion two-year operating budget that cuts income taxes, provides nearly $1 billion in borrowing for transportation projects, and replenishes the state’s exhausted authorization to refund general obligation debt.

Though Democrats decried the Republican governor’s education plans and refusal to participate in the federal health care law’s Medicaid expansion, the response was more muted than opposition to Walker’s deep cuts proposed two years ago to eliminate a $3.6 billion deficit.

“Two years later and Wisconsin has a budget surplus and our unemployment rate is down to 6.6%,” Walker said in his budget address Wednesday evening. “This allows us to invest in our priorities — priorities I’ve talked about in every corner of our state over the past few months — creating jobs, developing the workforce, transforming education, reforming government, and investing in our infrastructure.”

The $68 billion operating budget includes spending of $33.7 billion in fiscal 2014 beginning July 1 and $34.3 billion in fiscal 2015. The fiscal 2014 budget 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 operating budget provides bonding support for transportation-related and some other projects and reauthorizes previously approved general fund supported borrowing, but the bulk of state spending on capital projects will be submitted separately in an amendment after it is reviewed by the State Building Commission in March.

The budget provides authorization to refund up to $2 billion of tax-supported general obligation debt. The state has exhausted all of its GO refunding authority leaving it at risk of losing out on potential interest-rate savings as refunding opportunities are now available, assistant capital finance David Erdman recently warned. Budget documents note that refundings over the last decade have generated about $100 million in savings.

“This authorization can only be used for refunding transactions that have debt service savings to the state,” budget documents read. The statement is a reference to the state’s reliance in its last few budgets on debt restructuring that pushed out near-term maturities for budget relief.

While Walker’s 2012-2013 budget sharply curtailed the use of one-shots, it did include $340 million in one-time savings from debt restructuring. The proposed budget ends that practice.

The budget reauthorizes $2 billion of previously approved general fund-support borrowing for projects. The figure includes $708 million for environmental and water programs and $1.3 billion for other projects.

The budget bolsters state spending on transportation by about $824 million to $6.4 billion. Borrowing will cover about $995 million of the tab, including $578 million of general fund supported bonding and $417 million of revenue bonding, Erdman said. That’s up by about $200 million from the $780 million in debt issuance for transportation projects authorized in the current budget.

Walker rejected proposals recommended by a special transportation commission to raise the state’s gasoline tax and vehicle and driver’s registration fees to fund new spending. Instead, the state will borrow more and sell off some properties.

The budget allocates the repayment of some funds siphoned from the transportation fund in the past and it shifts transit operating aid from the transportation fund to the general fund.

The proposed spending plan cuts income taxes by $343 million over the biennium through a reduction on middle-class rates and combining several business tax credits. Walker also wants to sharply cap growth in local government and school district property taxes. The budget also provides $75 million for various tax credits for economic development and establishes a $25 million venture capital fund.

The state expects to close out the current fiscal year June 30 with a balance of $484 million and $125 million in reserves. The new budget relies on projected revenue growth of 2.4%, or $328.4 million, in fiscal 2014 and 3.6% growth of $511.5 million in the second year.

The projections came from the nonpartisan Legislative Fiscal Bureau. Individual income taxes are expected to grow by 2.5 % in fiscal 2014 and then by 5.2% in fiscal 2015 while sales tax are projected to rise by 2.7% next year and then 2.4% in 2015. The budget funds an additional 700 positions.

The budget will close out both years with a positive ending balance but the state will carry a structural imbalance of about $200 million. Its books are balanced on a cash basis while it will carry a deficit based on generally accepted accounting principles of about $2.5 billion by fiscal 2015 up from $2 billion this year. The GAAP deficit occurs in part due to a mismatch in the timing of shared revenue payments to local governments.

In early reviews, Republicans praised most aspects of the budget while Democrats attacked healthcare and education spending levels and the proposed expansion of private school vouchers.

“Although the governor claims to be putting forward a fiscally responsible budget, by his administration’s own admission the structural deficit grows” to about $2.6 billion at the end of fiscal 2015, state Democratic Sen. Dave Hansen.

Republicans did express concerns over Walker’s increased borrowing proposed in the budget and planned hiring. The budget now heads to the Legislature’s Joint Finance Committee.

Last fall, all three rating agencies affirmed the mid-double-A ratings assigned to $6.8 billion of Wisconsin GO debt. 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 which improve the state’s balance sheet. It included controversial provisions stripping many public employee unions of most of their collective bargaining rights. Democrats led a recall effort, but Walker won the election last year.

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