Fitch Rates Wisconsin's $314MM GO Bonds 'AA', Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of the State of Wisconsin:

--$257.135 million GO refunding bonds of 2014, series 3;

--$56.545 million GO refunding bonds of 2015, series 1.

The 2015 series 1 bonds are structured as a forward delivery current refunding that will be issued subject to market conditions.

The bonds will be sold via negotiation on or about Aug. 5, 2014.

In addition, Fitch has affirmed the following ratings of the state:

--$7.6 billion in GO bonds at 'AA';

--$704 million in GO extendible municipal commercial paper (EMCP) notes at 'F1+'.

The Rating Outlook on the long-term ratings is Stable. The EMCP rating does not carry an Outlook.

SECURITY

The state's full faith, credit, and taxing powers, as well as the statutory irrevocable appropriation of a first lien on all state revenues for debt service, secure the GO bonds.

KEY RATING DRIVERS

BROAD, DIVERSE ECONOMY: The Wisconsin economy is broad and diverse with considerable economic resources, albeit with an above-average manufacturing presence.

FISCAL PROGRESS UNDERWAY: The state's finances have strengthened, with structural budget solutions and solid revenue gains resulting in materially stronger liquidity. The state has not yet returned to consistent structural balance as of its fiscal 2013-2015 adopted budget although revenue performance in the first year of the biennium was strong.

LIMITED RESERVES: The state's reserves, which were depleted in the last downturn, have begun growing again but remain modest. Positive revenue performance during fiscal 2014 that would have contributed to an improved reserve position was largely offset by tax reductions enacted during fiscal 2014.

MODERATE LIABILITIES: State tax-supported debt is a moderate though above-average burden on resources. Retiree obligations are minimal, with pensions virtually fully funded and limited other post-employment obligations.

NOTES CARRY GO PLEDGE: EMCP notes are general obligations of the state; outstanding notes have never been extended. Resolutions authorizing long-term bond issuance to fund the notes have been executed.

RATING SENSITIVITIES

CONTINUED FISCAL IMPROVEMENT: A demonstrated commitment to growing reserve funding and consistently achieving structurally sound budgets in the context of moderate debt and low retiree obligations could result in a rating upgrade.

CREDIT PROFILE

Wisconsin's 'AA' long-term GO bond rating and Stable Outlook recognize its considerable resources, a diverse economy with an above-average manufacturing presence, a moderate but above-average debt burden and well-funded pensions. In Fitch's view, the state's fiscal management has improved in recent years, with extensive structural budget actions in the fiscal 2011-2013 biennium, revenue over-performance allowing sizable deposits to the budget stabilization fund (BSF), and stronger liquidity.

The adopted budget for the fiscal 2013-2015 biennium (which began on July 1, 2013) relied on substantial use of the fiscal 2013 ending balance to achieve budgetary balance in fiscal 2014 and 2015. An upward revenue revision in January 2014, which reflected strong revenue performance year-to-date and slightly higher expectations for economic growth, would have produced a surplus for the biennium without use of ending balance; however, tax policy changes enacted in March 2014 offset the revenue gains.

NARROW MARGINS FOLLOWING TAX REDUCTIONS

The state continues to adjust its tax code, offsetting revenue growth, requiring use of fund balance in the current 2013-2015 biennial budget, and limiting contributions to reserves.

The adopted budget for fiscal 2013-2015 incorporated sizable personal income tax (PIT) rate cuts taking effect in tax year 2013. PIT tax rate changes were estimated to reduce general fund revenues from baseline levels by $328 million in fiscal 2014 and $320 million in fiscal 2015. However, strong revenue performance led to a significant upward revenue revision in January 2014, following which, the governor proposed additional tax law changes that were enacted in March 2014. In addition to providing property tax relief in support of the Technical College System, the department of revenue was directed to adjust income tax withholding tables to reflect lower tax rates, which had a one-time budgetary impact due to differences in timing between the state's fiscal and tax years.

These changes significantly reduced the surplus projected in January 2014, lowering the projected fiscal 2015 ending balance from just over $1 billion to $165 million, in line with expectations at the time the budget was passed. The legislation also suspended deposits to the Budget Stabilization Fund (BSF) for the current biennium. The BSF, which had been minimally funded for much of the last decade, benefitted from general fund revenue over-performance during the 2011-2013 biennium, with a deposit of $108.9 million from fiscal 2012 and an approximately $154 million from fiscal 2013, which brought its balance to $279.3 million (about 2% of fiscal 2013 general fund tax receipts). Wisconsin statute ordinarily requires that half of revenues in excess of the adopted forecast be transferred to the BSF.

ECONOMY

Wisconsin benefits from a diverse economy, although its large manufacturing sector has been a source of vulnerability. The state's recovery from the recession has been slow and uneven. After performance in line with that of the U.S. during the downturn, 2012 employment growth was about half the U.S. pace and lagged the U.S. through much of 2013. Recent performance is stronger with 2.2% year-over-year growth in June 2014, above the U.S. rate of 1.9%. The unemployment rate, at 5.7% in June 2014, remains below the 6.1% national rate for the month. Wisconsin ranked 26th in personal income per capita in 2013, at 97% of the U.S. average. The state forecasts slow employment and personal income gains through 2015, its forecast period, which Fitch believes to be reasonable.

DEBT AND OTHER LIABILITIES

Net tax-supported measures 5.5% of 2013 personal income, a moderate but above average level. Debt grew during the recession, including $1.5 billion in general fund annual appropriation bonds issued in early 2009 to provide budget relief by purchasing tobacco settlement revenues previously sold to the Badger Tobacco Asset Securitization Corporation. A further $1.8 billion in general fund annual appropriation bonds were issued in 2003 for pension funding. More than half of tax-supported debt is GO, with the remainder consisting of various revenue and appropriation credits. The state's improving cash balances made it unnecessary to utilize cash flow borrowing during fiscal 2013, and none is expected through the fiscal 2013-2015 biennium.

The state's limited retiree obligations are a credit strength. Pensions were essentially fully funded as of Dec. 31, 2013. On a combined basis, the state's net tax-supported debt and pension obligations measure 5.6% of personal income, below the median for U.S. states. OPEB obligations are limited.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842869

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