Wisconsin may not be able to refinance $165 million in debt as planned in the municipal bond market this week or next, but that doesn't mean the state is in any kind of immediate fiscal peril.
Wisconsin has taken center stage this budget season, as Gov. Scott Walker, a Republican, has pushed to eliminate most of the collective bargaining rights for the state's 170,000 public employees through a controversial budget "repair bill." Democratic state senators have fled the state to avoid voting on the measure.
Mr. Walker's latest tactic to lure them back has been threatening to make additional cuts or more layoffs, should the state be unable to refinance $165 million in debt for short-term budget relief. Under his plan, the state would issue a 10-year bond to restructure a debt payment that otherwise would be due May 1.
The state had originally planned to do the refinancing deal either this week or next, said Frank Hoadley, the state's capital finance director.
"We are like everyone else ... waiting to see what happens," he said. "As everything stands at the moment, if the legislation is not passed, then the opportunity [to refinance the bonds] would be lost."
According to the nonpartisan Wisconsin Legislative Fiscal Bureau, issuing new bonds typically takes at least two weeks, and that process must be complete by March 16. The new financing is projected to add $42 million in interest payments over the next 10 years, said Al Runde, a fiscal analyst with the bureau.
But the notion that the state needs to refinance the debt because it's broke and can't make its debt payments is "completely wrong," said Mr. Hoadley, the state finance director.
"This is about providing relief to the budget situation by rearranging the payments," over a longer period, he said.
However, there are other ways to address Wisconsin's current fiscal year budget deficit of $137 million other than refinancing the debt, said Joshua Zeitz, municipal finance analyst for MF Global.
On Monday, state Sen. Mark Miller, one of the 14 Democrats who fled to Illinois, proposed several accounting changes in the current state budget as an alternative to the bond refinancing.
A memo from the state's Legislative Fiscal Bureau has also suggested the governor could use $79 million in surplus funds from various state accounts.
Tax-anticipation notes might be another solution, as would be delaying payments to vendors, Mr. Zeitz said.
The shortfall is about 0.5% of the state's overall budget, a fairly inconsequential amount, he said.
And since unions have already agreed to proposed givebacks on compensation and benefits, "it's becoming increasingly clear that this is a question more of politics than it is of a budget crisis," Mr. Zeitz added.
Indeed, Wisconsin is considered a very creditworthy state, with a double-A credit rating, and compared with some lower-rated states like California and Illinois, its finances are more manageable.
While Wisconsin does face a $3.6 billion deficit in its spending cycle over the next two years, that is equivalent to about 0.75% of its economic output over that time. By comparison, California's $25.4 billion one-year budget gap is equivalent to more than 1.3% of its output and Illinois' $15 billion deficit is equivalent to almost 2.4%.
When looking at the projected budget deficits as a percentage of the current year's budget amount, the comparison becomes even more stark. Wisconsin's $1.8 billion deficit for fiscal 2012 is just 12.8% of its current fiscal year budget, according to the Center on Budget and Policy Priorities. Meanwhile, California's $25.4 billion shortfall is 29.3% of its current budget, while that figure for Illinois, which faces a $15 billion budget hole, is 44.9%, the nonprofit policy group said.
"There's a good amount of political theater in what you're seeing," said Tom Kozlik, municipal credit analyst at Janney Montgomery Scott. "With any state, I'd really question whether they are going to fall off a cliff over one budget cycle."
That may explain why Wisconsin's bonds have been little changed in the secondary market despite the recent turmoil in the state's capital over the collective bargaining issue.
According to Thomson Reuters Municipal Market Data, 10-year Wisconsin debt trades around 31 basis points, or 0.31 percentage point, over a benchmark scale of top-rated state bonds.
That's compared with 10-year debt from Illinois, which trades around 200 basis points, or 2 percentage points, over the same scale.
That shows that the muni bond market "is confident that the state of Wisconsin, despite the protests and disagreements, will continue to make principal and interest payments [on debt] in a timely fashion. End of story," said Gary Pollack, head of fixed income and research at Deutsche Bank Private Wealth Management.
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