Saturday, July 30, 2016

Very quietly, state shifting another $1 billion in debt

Because I’m a nerd, I occasionally look at the Wisconsin Department of Administration’s Capital Finance page, to see if any new debt is being offered by the state, and also to see if there are any updated budget items I can latch onto. If you click on that page, now you’ll see these three items.

$598 million of General Fund Refunding Bonds
$317 million of General Obligation Refunding
$93.7 million in GO Bonds (new money)

That’s over $1 billion in debt that’s being put out by the State of Wisconsin, so I wanted to see how this was all put together, and if it was a (further) sign of bad budget times to come. I’m no expert in all of the mechanism of these bonds, but in looking through the debt offering document for the $598 million in "refunding” (basically refinancing), it looks like this influx of money goes to pay off old debt that was first sent out in 2003, 2008, and 2009 to pay the bills in those deficit-addled years. This is done to keep from waiting until those bonds mature in later years to pay out the $1,000 face value, and just like with a car or a house, refinancing in itself isn’t necessarily a bad idea (especially given how low post-Brexit interest rates have been), and it can take a lot of near-term debt payments off of the books.

And if I’m reading the preliminary bond statement document correctly, $417 million of these bonds would come due in 2018, and would hit the next budget. This refunding would seem to be a nice way to avoid some budget pressures looming for the next session. The interesting question becomes what interest rate the bonds are offered at. A look at the recently-closed sale of $93 million offered interest rates ranging from 0.80% to 5.0%, and if this new refunding pulls such a high rate that investors are willing to pay more than face value (in exchange for taking in higher interest rates in future years), the state benefits because it doesn’t need to borrow as much in the future, or it can pay off more outstanding bonds if it’s a refunding. This will likely improve the state’s budgetary bottom line for this year and the near future.

But the problem with this refunding is that it also pushes interest costs into years that we weren’t slated to pay them, given that these bonds are paid off as late as 2037, and if 4% and 5% interest costs are above what regular interest rates would be, we would pay more than we need to. It would also tie the hands of future budgets, since we’re not only paying higher interest costs, but the face value of that debt matures at some later point as well. This might be a smart gamble to make if you think inflation and/or interests costs will eat away at those concerns over the next 10-20 years, but it also makes it intriguing to see what happens to our debt service projections, and see if that crowds out spending on more pressing issues. (if you want to take a cynical view of things, the ALEC crew is fond of schemes that tie government’s hands from spending to solve problems- easier to privatize that way).

Also of interest are the statements on another $317 million of refinancing that was bid on last week, as it gives an update on the state’s overall indebtedness. You’ll see that this number is back on the rise after leveling off between 2012-2014, with last year having the largest increase in debt in 4 years ($267 million).

GO Debt, Wisconsin
July 1, 2008 $5.235 billion
July 1, 2009 $5.362 billion
July 1, 2010 $6.015 billion
July 1, 2011 $6.730 billion
July 1, 2012 $7.279 billion
July 1, 2013 $7.492 billion
July 1, 2014 $7.261 billion
July 1, 2015 $7.449 billion
July 1, 2016 $7.716 billion

This figure includes the $101 million “scoop and toss” maneuver that Gov Walker’s office pulled in May, which has added to the debt payments due in this Fiscal Year as well as the 7 years afterwards. It makes me wonder if perhaps some of this refunding is to even out the higher payments that resulted from that move and a similar “scoop and toss” in 2015.

We probably won’t get much of an idea about where the state stands on its future indebtedness until we see budget requests come back in September, and then we get to see the final FY2016 picture with the Annual Fiscal Report in October. But I find it intriguing that the state continues to try to deal away large amounts of current-year debt in exchange for the hope that it’ll be easier to take care of things in later years. Either that, or the Walker Administration is trying to pass the buck and dump the problem onto the next unlucky governor who’ll have to clean up the mess. I suppose we’ll find out in the near future which answer it is.


  1. Could there be another explanation for this stagering amount? Like, how Scott McCallum used tobacco windfall to balance his budget? Or possibly, Jim Doyle using transportation funds to do same? Or yet another..?

    1. I'm sure there's an element of these moves being made to improve the bottom line short-term. But that could actually be a legit move given how low interest rates are remaining, and it could just be a good debt management practice.

      The problem is that elected officials are geared towards short-term thinking without caring about the long-term damage that may happen in later years. I just saw that cash balances were $100 million short of expectations at the end of FY 2016 as well (even with the scoop and toss), so I'm wondering if some bad news is going to slip out here in coming months.