Fitch Rates Utah's $ 1.25B GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds of the state of Utah:

--$496 million GO Bonds, series 2010A;

--$574 million federally taxable GO bonds, series 2010B (Issuer Subsidy-Build America Bonds);

--$180 million GO refunding bonds, 2010C.

In addition, Fitch affirms the 'AAA' rating on $2.1 billion of the state's outstanding GO bonds.

The Rating Outlook is Stable.

The bonds are expected to sell via negotiation on Sept. 22, 2010.

RATING RATIONALE:

--The state's conservative debt and fiscal policies have kept debt levels moderate and quickly amortizing and have allowed for successful and timely action when addressing budgetary imbalances.

--The state has a long history of timely action to address financial imbalance and has prioritized building reserves; revenue shortfalls in fiscal years 2009 and 2010 required significant cuts to state spending.

--The state's debt profile is strong with rapid amortization, moderate debt burden, and a well funded pension system.

--Although the state benefits from a growing and diversifying economy, such expansion translates into operating and capital spending pressures, especially for education and transportation.

KEY RATING DRIVERS:

--Continued maintenance of conservative fiscal and debt management practices;

--Continued management of pressures that arise from population and economic growth.

SECURITY:

General obligation, full faith and credit of the state of Utah.

CREDIT SUMMARY:

Utah's rating and Outlook reflect conservative debt and fiscal policies, which have kept debt levels moderate and quickly amortizing, and have allowed for successful and timely action when addressing budgetary imbalances. Although the state was affected by the national recession both in terms of its own economy and the impact on state revenues, the longer term prospects for the economy are for ongoing expansion and diversification.

Utah has been characterized in recent years by rapid population growth and an expanding and diversifying economy, although the national recession weighed on economic performance over the past two years. Utah ranks third among the states in population growth, increasing by 29.6% during the 1990s and 24.7% from 2000 to 2009. The expansion reflects higher than average birth rates - Utah is the youngest state in terms of median age - as well as high family formation rates.

After several years of greater-than-average employment growth, Utah began to lose jobs in mid-2008, trailing the nation into the recession. Utah employment declined 5.1% in 2009, higher than the 4.5% national rate of job loss. These losses began to abate in early 2010 and non-farm employment began to increase in May 2010 with a year-over-year increase of 1.1% as of July 2010. In comparison, the U.S. did not begin to experience job growth until July 2010 when non-farm employment increased .1%. Service sector employment is leading Utah out of the recession: education and health service employment is up 5.3% year-over-year as of July; professional and business services has increased 2.4%; and leisure and hospitality has increased 2.4%. The construction and manufacturing sectors remain weak; however, in the longer term, housing construction is expected to rebound given the demographics of the state. Utah's unemployment rate remains well below the national average at 7.2% in July 2010 although it continues to increase while the national rate has started to abate, at 9.5% in July. The state's per capita personal income is heavily influenced by its young demographics; at 79% of the U.S. average, Utah ranks last among the states by this metric.

The weakened economy had a significant impact on the state's budget in both fiscal years (FY) 2009 and 2010. In FY 2009, revenues attributed to the general and education funds were almost $900 million, approximately 15%, less than originally budgeted, with collections of the state's two largest general revenue sources, sales and personal income taxes, coming in well below actual FY 2008 levels. Revenues declined a further 8.4% in FY 2010 and were 8.1% below the original budget estimate, with continued weakness in personal income and sales and use taxes. FY 2010 revenues in the aggregate were 23% lower than those received two years prior. In each of these budget years, the state took steps to reduce spending to meet the lower revenue targets, including two across-the-board agency cuts of 4% and 7% in FY 2009 and much deeper enacted budget reductions of 16% to 18% in FY 2010, followed by additional budget cuts in the course of the fiscal year as revenues did not meet estimates. Public and higher education were somewhat protected from these deeps cuts. The state did not tap its considerable rainy day fund during FY 2009, maintaining the balance at $414 million or approximately 9% of FY 2009 revenues; moreover, the state retained an additional $100 million set-aside, originally intended to be spent on education enrollment growth. However, as the 2010 budget year progressed, the state tapped its rainy day fund, withdrawing $86 million. Federal stimulus funds were also used to close the balance of the gap in fiscal years 2009 and 2010. The actions taken by the state are consistent with its conservative fiscal management style, with frequent spending reviews and prompt balancing actions.

Although major revenues sources are expected to stabilize in FY 2011, the state did need to close a budget gap of $482 million, which it accomplished with continued budget reductions, a small revenue enhancement ($43 million from an increase in tobacco taxes), use of reserves, and anticipated extension of the enhanced federal matching rate for Medicaid. The budget includes further use of the rainy day fund, withdrawing another $123 million as well as utilizing the $103 million that had been set aside in the student population account. The $209 million remaining in the rainy day fund represents 4.7% of expected FY 2011 revenues.

The state's approach to debt issuance is very conservative, relying primarily on GO bonds. The state does not issue variable rate debt, employ the use of interest rate swaps, or issue short-term or cash-flow notes. Amortization is rapid as the state has historically limited its bond maturities to seven years other than for transportation related bonds for which it permits fifteen-year amortization. Although debt levels are increasing, particularly with the heavy issuance in recent years of GO bonds for transportation purposes, debt continues to represent a moderate burden on resources. With the current offering, which will finance an expansion of the highway system around Salt Lake City, facilities construction at several higher education locations, and refund outstanding debt for debt service savings, net tax-supported debt of approximately $3.5 billion will equal 4.1% of 2009 personal income. Principal amortization is somewhat slower than it has historically been but remains rapid, with 69% maturing in 10 years. Pensions remain well-funded, although the funded rate has declined in recent years.

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

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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