Wisconsin's revenue prospects boost state reserves

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Wisconsin’s latest fiscal projections would bolster the state’s reserve to more than $1 billion at the end of the current fiscal biennium.

The updated projections from the non-partisan Legislative Fiscal Bureau project that state will also now close the biennium with a general fund balance of $620 million, up by $452 million from the prior projection used for the fiscal 2020-2021 $82 billion budget adopted last year.

The general fund and reserve hikes would come from more than $800 million in additional tax revenue that’s now projected through the biennium that ends June 30, 2021. About $400 million would be transferred to the state’s reserve, known as the budget stabilization fund. State law requires half go into the account until a targeted level is reached.

About $189 million would be deposited at the end of the current fiscal year putting the reserve at $845 million and another $220 million next year pushing it up to nearly $1.1 billion.

“If the assumptions hold up, it’s another significant deposit into the budget stabilization fund,” said Capital Finance Director David Erdman, who manages the state’s debt issuance and relationships with rating agencies.

In 2011, the state’s general fund balance and budget reserve held a combined $102.2 million, said the Wisconsin Policy Forum.

The reserves remain lean based on recommended practices and Republicans who control the Legislature are expected to press to use the ending balance for tax cuts. Gov. Tony Evers and his fellow legislative Democrats may push for greater spending on priorities like education if the last budget debate provides a roadmap for the next.

“After money has been set aside in the rainy day fund, the Legislature should prioritize giving that money back to Wisconsin families in the form of a property tax cut,” Senate Majority Leader Scott Fitzgerald, R-Juneau, said in a statement.

While that debate awaits, the latest projections may provide multiple benefits for the state’s credit profile.

The state’s pension system is fully funded so the state lacks the threat associated with rising liabilities that could prove a drain on reserves during an economic downturn.

“It’s a true reserve that’s there to help the state through budget stresses,” Erdman said.

A secondary benefit would be a further reduction in the state’s long-running deficit based on Generally Accepted Accounting Principles. While the state’s budget is balanced on a cash balance, the GAAP deficit is often noted as a negative factor in fiscal reviews of state finances.

Last year, the state continued to chip away at the negative GAAP balance lowering it by $480 million to a negative $773.5 million. That a more than $2 billion improvement over 2011 but Wisconsin trails most states, according to a Wisconsin Policy Forum review of the state’s latest financial results. Kentucky and Illinois are the other two states with a negative GAAP balance.

Under cash accounting, the state’s general fund ending balance and reserve had a combined $1.74 billion left over at the close of the fiscal year on June 30, 2019. The new budget incorporated some of the general fund balance.

“So far this year, state tax revenues have shown strong growth, which if sustained might help maintain the general fund balance. However, at some point growth in the economy and tax collections will falter. That could bring a return to growth in the deficit similar to 2001, when the recession that year caused the negative balance to grow after several years of improvements,” the forum wrote.

Rating agencies pay close attention to both the GAAP and reserve figures.

Moody’s Investors Service lead Wisconsin analyst Joshua Grundleger listed as factors that could lead to an upgrade from Aa1 an “established trend of recurring structural budget balance reflected in an elimination of negative unassigned GAAP fund balance” and “funding and maintenance of the budget stabilization fund to a level sufficient to provide a meaningful financial cushion in times of revenue volatility.”

The trend is positive but Moody’s doesn’t have a specific target that would trigger an upgrade. The reserve numbers also remain on the lean side compared to other states.

The state’s GOs are rated AA-plus by Kroll Bond Rating Agency and AA by S&P Global Ratings. Kroll revised its outlook to positive over the summer to reflect “the state’s continued fiscal discipline and the resulting improvement in its financial reserves.”

Terminating swaps
The state jumped into the market last week with a $623 million refunding of taxable 2008 appropriation-backed debt that’s been ready since October. The 2008 bonds refunded debt issued in 2003 to pay unfunded accrued liabilities for sick leave conversion credits and unfunded pension liabilities for the Wisconsin Retirement System to reach fully funded status.

The deal generated savings of about $8 million and achieved a 2.3% true interest cost while shedding floating-rate risk and exposure on swaps linked to Libor, an acronym for the London Interbank Offered Rate, ahead of the conversion to a new benchmark.

Proceeds also covered swap termination costs on contracts with counterparties Citibank NA, UBS AG, and JPMorgan Chase Bank NA. The amount was estimated at $140 million in the offering documents.

The current low taxable rates and high demand for the paper provided an attractive time to limit swap exit costs while cutting the overall borrowing costs. While the market had turned against the swap structure, Erdman defended the structure’s original use saying for much of the debt’s life the derivatives had worked.

“We accomplished our goals in eliminating the variable-rate risk and locking in a low rate and savings” with the refunding last week, Erdman said.

Municipal advisory firms interested in working with the state have until Friday to submit responses to the state’s request for qualifications in a routine update of its advisory pool. The state will draw from the chosen advisors for the next year with possible one-year extensions for two or more years.

Wisconsin typically updates its underwriting, advisory, and bond counsel pools every three years. A bond counsel RFQ is expected in the coming months and an underwriting RFQ is expected in the fourth quarter.

The state has three firms under current contract – Acacia Financial Group Inc., Lamont Financial Services Corp. and PFM Financial Advisors LLC. Erdman said there’s no set number of firms to be chosen under the new contract.

“New firms have entered the mix and there’s been mergers and acquisitions so it’s a good time” to update the list, Erdman said.

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State budgets State tax revenues Municipal advisors Primary bond market State of Wisconsin Wisconsin