TRUSTED ANALYSIS FROM THE
WISCONSIN TAXPAYERS ALLIANCE
F OCU S
In brief
If state government makes progress
in “getting its fiscal house in order,”
how will citizens know? State budget
documents can be misleading. Better
tools for gauging fiscal progress include the state’s “GAAP deficit” and
unrestricted net assets found on
financial statements, as well as debt
levels and independent bond ratings.
Capitol notes
n The first results of the 2010
census were delivered to the White
House on Dec. 16. For the purposes
of reapportioning U.S. House seats,
the nation’s population was 309.18
million (m); the total number of
residents was 308.75m.
n Wisconsin retains its eight U.S.
House seats. In the region, Minnesota (8) and Indiana (9) also lose
no representation. However, Illinois
(new total, 18), Iowa (4), Michigan
(14), and Missouri (8) all lose one
seat, while Ohio (16) loses two. In
sum, 10 states gave up a total of 12
House seats, and half of those losses
are in these five states.
n As of April, 2010, the Badger
State’s resident population was
5.69m, or 6.1% more than in 2000.
In the immediate region, population
growth in Minnesota (7.8%) and
Indiana (6.8%) outpaced Wisconsin.
It lagged in Illinois (3.3%) and Iowa
(4.1%), and dropped in Michigan
(-0.6%). Wisconsin’s growth rate
was 34th highest of the states.
n Overall, Wisconsin was the 20th
most populous state, compared to
18th in 2000. Illinois (5th), Michigan
(8th), Minnesota (21st), and Iowa
(30th) did not move in the rankings.
wis
tax
How to gauge state fiscal progress, II
12.29.2010 • No. 27
This is the second of a two-part series on how
citizens might gauge whether a new governor
and legislature are improving state fiscal health.
I
t has become increasingly difficult to
get an accurate “read” on Wisconsin’s
fiscal condition over the past decade. The
list of budget “balancing” tools— tobacco
bonds, debt refinancing, transfers from
segregated and even legally protected
funds, one-time federal stimulus aid, and
payment delays—keeps growing.
How are citizens to gauge whether
state government is making progress toward restoring its fiscal health?
“GAAP deficit” revisited
One place to look is Wisconsin’s
Comprehensive Annual Financial
Report (CAFR). Prepared according
to generally accepted accounting principles (GAAP), the most recent CAFR
showed the state’s general fund ended
the 2009-10 fiscal year with a deficit of
over $2.9 billion (b). Put another way, this
was 13.8% of general fund spending as
reported in the CAFR (see Focus #26).
By any measure, this is one of the
largest state GAAP deficits in the nation. One way to know whether state
finances were improving would be to see
the $2.9b GAAP deficit substantially reduced or eliminated. Ten years ago, for
example, it was about $0.8b.
A second signal: Net assets
Buried in the CAFR is another figure that can signal state fiscal health,
unrestricted net assets (UNA). The concept appears complicated but is not.
Suppose Dave and Liz have $10,000 in
the bank, a $200,000 home with a
$100,000 unpaid mortgage, and a new
$20,000 car on which they owe its full
value. The couple’s total gross assets
would be (in thousands) $10 + $200 +
$20, or $230. If they had to raise cash to
pay their unemployed daughter’s college
and law school loans, however, their
UNAs, after taking into account debt,
would be only $10 + ($200 - $100), or $110.
Unlike that of Dave and Liz, Wisconsin’s net asset position (for “governmental activities”) is negative, -$9.46b.
According to the CAFR, this means “no
funds were available for discretionary
purposes,” such as paying off creditors.
n Size in dollars. How does this
amount compare with the unrestricted net
assets of other states? In 2009 during
the recession, 28 states reported UNAs
of less than zero. However, Wisconsin’s
UNAs ($8.94b) were more negative than
those of all but seven states. California (-$86.3b) and Illinois (-$45.1b) were
in the worst shape.
n Size vs. state GDP. When relative size of state economies (GDP) is
recognized, Wisconsin’s negative UNA
position (3.7% of GDP) was exceeded
by only Connecticut (7.3%), Illinois
(7.2%), New Jersey (6.9%), California
(4.6%), and Kentucky (3.7%).
Thus, another sign that state fiscal
health is improving would be a reduction
or elimination of its negative unrestricted
net assets. That is easier said than done,
however, because Wisconsin’s negative
UNAs have been growing (graph below).
Wis. Has No Assets for Discretionary Use
Gov’t. Activities, Unrestricted Net Assets ($b)
Fiscal Year End
02
03
04
05
06
07
08
09
10
$0.0
-$2.5
-3.6
-$5.0
-$7.5
-$10.0
-7.8
-8.9
-9.5
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r e p o r t yd.
requeste
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From 2009 ($-8.94b) to 2010, they deteriorated by over one-half billion dollars. As
the prior graph shows, this figure declined
from $3.6b in 2002 to almost $9.5b in 2010.
Debt is another signal
A major reason that Wisconsin’s unrestricted net assets are negative is its
increasing debt. The state’s 2010 financial
statements show debt for governmental
activities equalled $9.94b, a 6.8% increase over $9.30b in 2009. The 2010
total consisted of $4.48b in general obligation (G.O.), $3.36b in annual appropriation,
and $1.80b in revenue bonds.
Borrowing for university and environmental purposes included in a separate
category, “business-type” activities, totalled $2.12b. Adding this to the $9.94b
total for governmental activities brought
“total primary government” indebtedness
to $12.06b. Debt trends for both types
of activity, governmental and business,
are shown below.
State Debt for Gov’t Purposes Near $10b
Debt by Activity: Gov’t, Business ($b)
12.1
10.1
Gov. + Bus.
10.0
5.8
4.13
Gov'tal
6.0
9.94
8.50
5.0
4.42
2.1
'Business'
2.5
1.7
02
7.5
0.0
03
04
05
06
07
08
09
10
If borrowing by other units, most notably the state’s Housing and Economic
Development Authority and the independent UW Hospitals and Clinics, is included,
the state’s debt total rises to $15.21b.
Bond ratings: An outside view
Deficit, asset, and debt information
from the state CAFR are all useful ways
of honestly evaluating the fiscal health
of state government. Another place to
turn for an independent assessment is
ratings of state general obligation (G.O.)
bonds. States pledge their “full faith and
credit” to repay G.O. bonds.
In evaluating state bonds, analysts
take into account a broad range of factors, including items found in state financial reports (CAFRs), as well as the
overall strength and direction of a state
economy. Three major private agencies
rate state debt, Moody’s, Standard and
Poor’s (S&P), and Fitch. Although their
rating systems vary, their findings are
similar.
n History. Badger State bond ratings were stable from the mid-1980s
through the mid-1990s. Moody’s
dropped the state’s rating in 1997 and
again in 2001. Fitch’s downgrade came
in 2001, S&P’s in 2002. Wisconsin’s
ratings have not improved since (once
recent recalibration of rating systems is
recognized). In all three cases, state
expenditure trends, two recessions, and
State G.O. Bond Ratings by Three Agencies
Number of States by Rating Category, 2010
Ratings
Moody's
S&P
Fitch
Highest
Aaa 14
Aa1 19
AAA 11
AA+ 14
AAA 14
AA+ 16
33
25
30
AA 19
No. > WI
WI+others
Aa2
12
Lowest
Aa3
A1
1
1
10
AAA+
A-
1
1
1
3
No. < WI
2
4
1
1
6
Not Rated
3
0
7
50
50
50
Total
AAA+
A-
AA
questionable fiscal practices all contributed to the lack of improvement.
n State comparisons. In Moody’s
Aaa-Aa1-Aa2-Aa3-A1 bond-rating
scheme (see table above), Wisconsin receives an Aa2 rating. Of 47 states rated,
33 are rated higher, 12 are rated the
same, and 2 are rated lower. Ratings
by S&P (25-19-6) and Fitch (30-10-3)
also place Wisconsin in the lower half
of states.
In the region, Iowa (Aaa) and Minnesota (Aa1) are rated higher, Michigan
(Aa2) is rated the same, and Illinois
(Aa3) is rated lower than Wisconsin.
Whether Wisconsin’s G.O. bond rating improves after a decade of stagnation probably provides the easiest way
of all to measure state fiscal progress.
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