CHICAGO — Wisconsin will leave $108 million of low-interest commercial paper in place instead of paying off it off in the current fiscal year as originally planned, a move that will provide near-term relief to help Gov. Scott Walker close a $283 million shortfall.
The move, labeled by the non-partisan Legislative Fiscal Bureau as a debt restructuring, has put the Walker administration on the defensive. Many administrations, including Walker's, have in the past turned to debt restructuring to balance the books including the practice of "scoop and toss" in which long-term debt principal payments coming due are covered by a new debt issue.
"The proposed restructuring .would involve delaying $108 million in GPR (general purpose revenue) principal that had been previously scheduled to be retired," said a memorandum outlining the proposal by LFB in response to a request from minority Democratic lawmakers on the Joint Finance Committee.
The state's capital finance team defends the move, calling it a "debt management tool" that will allow the state avoid the more costly issuance of long-term debt to replenish its capital fund for projects.
"It will provide relief for the state's general fund but right now the rate is so favorable there is no reason to pay this off," capital finance director Kevin Taylor said Tuesday.
The cost is about five basis points, said assistant capital finance director David Erdman. "It's our lowest cost of capital," both Taylor and Erdman said. The state would pay more to tap general obligation bonding authorization on the books to cover its capital needs, they said.
The subject is a sensitive one this year given Walker's trumpeting of substantial improvement in the state budget as he weighs a Republican presidential bid. The CP maneuver is fueling Democratic arguments that the state couldn't afford to tap a budget surplus last year for a $600 million tax cut package. The state faces a $648 million deficit in its next two-year budget. Walker uses spending cuts to deal with the deficit in his proposed $68.2 billion budget.
Unlike a long-term bond restructuring, no legislative authority is required to not pay down commercial paper as planned. The program is "effectively a short term line of credit, in which the state, under the agreed terms of the line of credit, is only required to make annual interest payments on the principal borrowed on the line in credit," the LFB said.
While both provide near-term relief, Taylor sought to highlight the differences between a scoop and toss and the decision not to retire some CP, saying the state won't be "issuing additional debt to cover principal payments."
The capital finance office typically follows a principal repayment schedule for outstanding CP similar to its GO schedule, generally aiming to retire 10% to 20% annually. The decision not to retire the $108 million as planned this year will increase debt service by $545,000 in the next fiscal year and $18.7 million in the second year of the next biennial budget to cover interest and the paying down of some "deferred" principal, according to the LFB. The CP program was established in 1997.
The LFB memorandum illustrates the frequent use of restructuring maneuvers impacting $1.56 billion of debt since 2001 by both rolling over CP and issuing debt to cover upcoming principal payments on long-term bonds.
The time span covers the administrations of Walker, Democrat Jim Doyle and Republican Scott McCallum. Scoop and toss was used on $175 million of bonds in 2004, $54 million in 2009, $201 million in 2010, $25 million in 2011, and another $165 million in 2011, another $45 million in 2011 and $218 million in 2012. The remainder represented CP rolled over.
The Walker administration used debt restructuring to help close a more than $3 billion deficit in his first budget, but since then has steered clear of the practice, winning praise from rating agencies for significantly trimming the state's use of non-recurring revenues that fuel a structural imbalance.
Moody's Investors Service recently revised Wisconsin's outlook to positive.
"The state's ability to make progress toward structural budget balance and continued improvement in its fund balances will be important to future credit analysis," Moody's said.
The state's GOs are rated at the AA level by Fitch Ratings, Moody's, Standard & Poor's and the Kroll Bond Rating Agency. The three other than Moody's assign stable outlooks.
When asked how he would explain deferring the planned pay off of CP to rating agencies, Taylor said: "It's a debt management tool. We are taking advantage of historically low rates. It makes economic sense."
Democrats attacked the move. "Delaying payment on bills and incurring additional cost to taxpayers is not fiscally responsible," said a letter Monday from Democratic members of the Joint Finance Committee to Walker. "Irresponsible decisions such as this have been a recurring practice in your administration and have been used to pay for tax cuts and spending in the short term."
In other developments this week, Walker, who was re-elected in November, on Monday made a series of top level personnel changes, replacing Department of Administration Secretary Michael Huebsch with Scott Neitzel.
Huebsch was moved to serve as commissioner on the Public Service Commission of Wisconsin. Neitzel most recently served as senior vice president for Madison Gas and Electric Co. The budget officer and state capital finance office fall under the DOA.
The state has a $260 million GO refunding in the works for economic savings that is unrelated to the CP action. It also recently sold $280 million of new money.
