Fitch Ratings assigns the following ratings to the State of Wisconsin’s (the state) 2009 series bonds:
–Approximately $1,028,340,000, general fund annual appropriation bonds of 2009 series A ‘A+’;
–Approximately $200 million general fund annual appropriation bond anticipation notes (BANs) of 2009, series 1 (six month note) ‘F1’;
–$295 million general fund annual appropriation BANs of 2009, series 2 (nine month note) ‘F1’.
The bonds and BANs, which are expected to be sold through negotiation the week of March 23, 2009, are being issued to purchase tobacco settlement revenues that the state previously sold to the Badger Tobacco Asset Securitization Corporation. The transaction is expected to provide immediate and ongoing budget relief; the budget for the current biennium includes $309 million in savings from the transaction.
Fitch also affirms the following ratings:
–Approximately $1.9 billion in outstanding general fund annual appropriation bonds at ‘A+’;
–Approximately $6 billion of the state’s general obligation (GO) bonds at ‘AA-‘.
The Rating Outlook is Stable.
The relative size of the bond and BAN offerings will depend on market conditions at the time of sale, with the goal of maximizing the size of the bond offering. It is the state’s intent and Fitch’s expectation that the BANs will be taken out with fixed-rate bonds as quickly as possible; the BANs will be callable after 90 days to facilitate this. The state needs no additional authority to fund or rollover the BANs.
The ‘A+’ rating on the appropriation bonds is based on the security provided from annual appropriations from the state’s general fund. Under the indenture, the department of administration, which includes the state budget office, covenants to take all appropriate action within its power to assure that sufficient appropriations are provided each fiscal year by the legislature to fund debt service on the bonds. In addition, the state legislature has recognized a moral obligation to appropriate funds for debt service and expressed its expectation and intent to do so. Payments are due to the trustee on July 1 of each year for the full fiscal year’s expected debt service, and appropriations are sized such that in the event of a late budget the continuing appropriation from the prior fiscal year will cover debt service.
Wisconsin’s ‘AA-‘ GO rating recognizes the state’s considerable resources, diverse economy, and moderate but above average debt burden. Although progress in restoring fiscal balance had been made, a weak economy and revenue underperformance in the past year have required remedial actions.
Most recently, the state lowered revenue estimates in November 2008 and again in January 2009, projecting revenue decline in both fiscal 2009 and fiscal 2010. The resulting estimated fiscal 2009 shortfall of $594 million was brought down to $417 million in February 2009 through various revenue and spending actions as well as the elimination of the statutory balance requirement of $65 million. The governor’s executive budget proposal to close the $5.8 billion total budget gap for the remainder of fiscal 2009 and the upcoming biennium includes $2.1 billion in funds from the federal stimulus package and $1.4 billion in revenue measures, including a cigarette tax increase, an income tax increase for high earners, and corporate tax changes. The proposal would result in a $216 million ending balance for fiscal 2009, rising to $269 million in fiscal 2011. These budgetary balances provide some cushion against the risk of revenue underperformance. The state carries a GAAP deficit due to the timing and treatment of local aid payments.
Fiscal 2008 results were better than forecast, with general purpose tax revenue up 3.4% over fiscal 2007 and 1.3% above estimates, although about half of this overperformance was due to improvements in tax processing procedures. Fiscal 2008 ended with a $131 million general fund balance. The January 2009 estimate projected that general fund tax revenues would fall 4.2% in fiscal 2009 and another 2.3% in fiscal 2010 before rising 4.5% in fiscal 2011.
Mirroring the nation, the state’s economy has slowed and the state has lost jobs every month since March 2008, with the pace of loss accelerating. December 2008 employment was down 2.2%, in line with the nation’s 2.1% decline, with losses in all sectors except for education and health services and government. In contrast, the state’s unemployment rate of 5.9% in December 2008 was just 82% of the U.S. rate. The state forecasts non-farm employment down 0.6% in 2008 and another 2.2% in 2009 before rising 0.8% in 2010; unemployment is projected to peak at 7.9% in 2010. Since 2002, personal income growth rates have lagged the nation. Quarterly personal income gains in 2008 have been below the U.S. but generally in line with the region. Wisconsin’s personal income per capita ranks 24th among the states at 94% of the U.S.
Net tax-supported debt totals $9.4 billion, or 4.7% of personal income, a moderate but above-average and rising debt burden. Excluding the general fund annual appropriation bonds issued for pension funding, Wisconsin’s debt burden drops to 3.9% of personal income. The current offering will increase debt ratios to 5.4% and 4.6%, respectively. Pensions are well funded.