NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following Tennessee State School Bond Authority (the authority) higher educational facilities second program bonds, consisting of:
--$226.9 million 2010 series A;
--$18.1 million 2010 series B
(federally taxable).
The bonds are expected to sell via competitive sale on Sept. 1, 2010. In addition, Fitch affirms the following ratings:
--$834 million in outstanding Tennessee State School Bond Authority higher educational facilities second program bonds at 'AA+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Broad coverage is provided by higher education fees and charges
through the Board of Trustees of the University of Tennessee and the
Board of Regents of the State University and Community College System of
the State of Tennessee (campus gross revenue pledge).
--A provision
exists to intercept, if necessary, state appropriations for public
higher education institutions.
--The state plays an intrinsic role
in the authority and its financings. Fitch rates Tennessee's general
obligation debt 'AAA' with a Stable Rating Outlook.
KEY RATING DRIVERS:
--Trends in state support for higher education.
--Continued strong
utilization at state higher education institutions, ensuring solid
coverage of program bond debt service.
SECURITY:
Special obligation of the authority payable primarily by annual financing charges from the Boards, as well as legislative appropriations (statutory intercept) if necessary, and other moneys via separate financing agreements between the authority and the boards (not the institutions).
CREDIT SUMMARY:
The 'AA+' rating is based on the strength of the two payment sources supporting the bonds, campus revenues and state appropriations, and the state's intrinsic role in the authority and its financings.
Tennessee uses authority debt to finance revenue-generating projects at public colleges and universities, such as dormitory, parking, and energy facilities. Authority bonds are payable under financing agreements with the governing bodies of the University of Tennessee (UT) system and the Tennessee Board of Regents (TBR) system, which oversees Tennessee's State University and Community College system. Combined full-time equivalent enrollment of the two systems totals over 178,000. Under the agreements, the systems pay annual charges to the authority from campus revenues. These charges are used to pay debt service on the second-program bonds, as well as $183,000 outstanding bonds issued under the authority's first program, which has a senior lien but is no longer utilized and will be fully repaid in 2011. Coverage of debt service by charges has remained ample over time. In the event of delinquent payments, available state appropriations would be intercepted to meet debt service requirements; no such recourse has ever been needed. A debt service reserve is sized to equal maximum semi-annual debt service at the project level. The reserve is currently funded with a mix of cash and surety bonds.
State appropriations provide a significant share of operating revenues for the UT and TBR systems, although the state's share has declined over time relative to university fees and charges, particularly as the recession prompted state spending cuts. The state reduced recurring state funding to higher education annually from fiscal 2009 through fiscal 2011, with recurring cuts of $308 million, or 19.2% of appropriations, through the period. The impact of state funding cuts was mitigated through application of $248 million in federal stimulus funding through fiscal 2010, and additional non-recurring funds have been budgeted in fiscal 2011; moreover, the extension of federal stimulus is expected to result in additional resources for community colleges. Despite funding changes, the state is undertaking broad reforms of higher education to boost graduation rates. Future enrollment growth is expected due to demographic changes and continuation of lottery-funded scholarships.
Tennessee's general obligations are Fitch rated 'AAA' with a Stable Rating Outlook. The state's low debt level (among the lowest of any state) is a principal factor underpinning the rating. With an above-average manufacturing concentration, the state is exposed to economic cyclicality. Employment and sales taxes, the state's primary source of general revenues, weakened considerably during the downturn, although both now appear to be stabilizing. Fiscal 2009 collections fell 8.6% from fiscal 2008, to $10.2 billion, with a further 1.7% decline estimated for fiscal 2010. July 2010, the first month of fiscal 2011, shows collections up 2.3%; the state's fiscal 2011 budget forecast assumes general fund taxes rising 1.7%, to $10.23 billion. Nonfarm employment dropped 5.6% in 2009, more severe than the 4.3% loss nationally, and the state's unemployment rate rose to 10.5%, from 6.7% a year earlier.
The state has displayed an ongoing commitment to structural balance, evidenced by a permanent revenue increase and successful restructuring of TennCare, the state's Medicaid-expansion health care delivery program, earlier this decade. Financial management has been habitually conservative and has consistently fully funded its pension requirements.
Additional information is available at www.fitchratings.com.
Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16,
2010.
--'U.S. State Government Tax-Supported Rating Criteria',
dated Dec. 28, 2009.
--'State Credit Enhancement Program Criteria',
Dec. 16, 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
State
Credit Enhancement Program Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=491794
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