Fitch Rates New Hampshire's $150MM GO Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the State of New Hampshire's general obligation (GO) capital improvement bonds consisting of:

--$90 million 2010 series B;

--$60 million 2010 series C.

The bonds are expected to sell Aug. 25 via competitive sale.

Fitch also affirms the 'AA+' rating on New Hampshire's approximately $823 million outstanding GO bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--New Hampshire's economy had been strong and resilient when compared to surrounding states coming into the economic downturn, and strong growth is expected to return as the national economy recovers.

--With no sales or income tax, the state's finances are dependent on an unusual mix of taxes - business taxes, real estate transfer taxes, cigarette and alcohol taxes, etc., which are economically sensitive and have underperformed through the economic downturn.

--The state takes timely action to maintain budgetary balance. State actions to balance the budget include various revenue increases, expenditure reductions, federal stimulus, fund transfers and bond issuance in lieu of paygo school building aid.

--Debt levels are low, amortization is rapid, and net tax-supported debt is entirely general obligation. Pension funding has declined dramatically over the past 10 years, and may represent a future spending pressure.

KEY RATING DRIVER:

The state's continued ability to meet funding needs and maintain balanced financial operations within a limited revenue system that is susceptible to business cycles.

SECURITY:

General Obligation, full faith and credit of the state of New Hampshire.

CREDIT SUMMARY:

The 'AA+' reflects New Hampshire's economic strength and resiliency and conservative debt position. New Hampshire's economy compared favorably to surrounding states coming into the economic downturn and seems to be emerging from the recession at a faster pace as well. These strengths are offset partly by the state's dependence on a variety of volatile taxes, which have not performed well in the current economic environment.

New Hampshire's debt levels are low and debt amortizes quickly. All state debt is either GO or guaranteed, except for turnpike revenue bonds. Net tax-supported debt represents a low 1.7% of 2009 personal income, reflecting somewhat the historically limited role of state government. The current offering consists of $90 million for school building aid, being issued in place of the more usual pay-as-you-go financing as a budget closing measure, and $60 million to finance the state's annual capital improvement program. The bonds will be used in part to retire $50 million in outstanding commercial paper. Funding of the state's pension system has declined significantly over the past decade. As of June 30, 2009 the state's pension system funded ratio was 58.3%, down from 89.9% in 2000. Improving its actuarial position will present a future spending pressure.

New Hampshire is a prosperous state that has shifted rapidly from manufacturing to services, as its economy has become more like the nation's. The state's population and job growth have generally outpaced New England's since 1980, benefiting from the expansion of Boston suburbs into New Hampshire and growth in the trade, transportation and utilities and other services sectors. The state did not lose jobs year-over-year in the current downturn until December 2008 and employment losses remained below the national rate through the recession, with non-farm employment down 3.4% in 2009 versus 4.3% nationwide. Job growth has resumed, up 1.5% in June 2010 while the U.S. continues to show some losses at .1%. Although unemployment levels have increased significantly, the unemployment rate remains well below the national average at 5.9% in June 2010 versus 9.5% for the U.S. and has begun to decline. Per capita personal income is 108% of the nation's, ranking New Hampshire ninth among the states.

New Hampshire's tax structure, specifically its lack of a personal income or general sales tax, differentiates it from all other states except Alaska and is a key influence on its economy and financial operations. The state relies on business, real estate, and excise taxes, as well as a statewide property tax dedicated solely to education. This unique tax structure is volatile, especially the taxes on business profits, which are vulnerable to swings in the business cycle, and on real estate transfers, which are sensitive to housing market conditions.

The enacted budget for the fiscal 2010-2011 biennium assumed minimal growth in base revenues, and used a combination of revenue enhancements, expenditure reductions, reserves and one-shots to achieve balance. Expense reductions included lay-offs, health benefit restructuring, and the closing of state facilities, including a prison and courts. The budget increased education spending by $120 million to address State Supreme Court decisions regarding primary and secondary education funding. In 1997 the court placed the responsibility for adequate education on the state. The state responded with the statewide property tax, increases in various taxes, including cigarette and real estate, and a new car rental tax, among other revenue enhancements.

Revenue enhancements in the fiscal 2010 - 2011 enacted plan included a 45 cent increase in the tobacco tax, a 1% increase in the meals and room tax and its expansion to campsites (an expansion since repealed), a 10% tax on gambling winnings, and the expansion of the interest and dividends tax (an expansion also since repealed). Revenue sharing with local governments was reduced, saving the state $25 million per year. The budget assumed a $22.5 million transfer in each year from the surplus in the medical malpractice fund, which will not take place due to a successful legal challenge. The operating expenses of the liquor commission were moved from the general fund to a separate enterprise fund and some assets of the liquor commission are to be sold.

Despite all of these adjustments, a budget gap opened up during the fiscal 2010-2011 biennial budget, which was largely solved through legislative action in June 2010, although some uncertainty remains on both the spending and revenue side of the budget. The shortfall, originally estimated to be $295 million, now somewhat lower due to stronger end of fiscal year 2010 revenues, is due largely to revenues falling short of expectations, but also reflects the $45 million that cannot be transferred from the medical malpractice fund, as well as increased caseloads associated with the economic downturn. In response, the legislature enacted a deficit reduction plan that includes $82 million in spending reductions, additional lapses and fund transfers, debt restructuring, a $25 payment from the university system and other smaller revenue and spending items. The university system will also receive $25 million in additional bonding capacity.

Some uncertainty remains in the budget with $60 million in as yet unidentified asset sales; however, the recent passage of additional federal stimulus funding is expected to help stabilize the budget with approximately $30 million in enhanced Medicaid matching funds (FMAP) and $41 million in fiscal stabilization funds for education anticipated. Further, the enacted budget solutions assumed lower fiscal 2010 revenues than ultimately were realized as there was some pick-up in revenues at the end of the fiscal year. Unaudited revenues for fiscal 2010 were 2.4% ahead of fiscal 2009, but down approximately $43 million, or 1.8%, below plan. Business taxes, which had been down all year, trended up at the end of the fiscal year and increased 2.7% over fiscal 2009, essentially on target. Meals and rooms tax revenue increased 10.5% year-over-year, reflecting the increase in the rate, but was 7.7% below plan. Tobacco taxes, which also were increased in the budget, increased 30% and were 12.3% above plan.

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

Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 2010

--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28 2009

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048

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