NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following state of Nevada general obligation (GO) limited tax (LT) bonds:
--$98.815 million capital improvement and cultural affairs refunding bonds, series 2013D-1;
--$64.975 million capital improvement and cultural affairs refunding bonds, series 2013E (taxable);
--$12.11 million natural resources refunding bonds, series 2013F-1;
--$3.59 million open space, parks and cultural resources refunding bonds, series 2013G;
--$20.705 million open space, parks and natural resources refunding bonds, series 2013H-1.
The bonds are expected to sell via competitive bid on or around March 7, 2013.
In addition, Fitch affirms the following ratings:
--$2 billion in outstanding GO LT bonds at 'AA+';
--$5.9 million Nevada Real Property Corp. GO LT certificates, series 2009 at 'AA+';
--$45.7 million in outstanding lease revenue bonds at 'AA.'
The Rating Outlook is Stable.
The bonds are a general obligation of the state of Nevada, to which its full faith and credit are pledged. Debt service is supported by a statewide property tax levy that is subject to both constitutional and statutory limitations. State law further provides that if property tax revenues are insufficient to pay GO debt service, moneys are to be borrowed from the general fund and repaid from future property tax revenues to the extent other moneys are not available.
KEY RATING DRIVERS
SIGNS OF IMPROVEMENT IN WEAKENED ECONOMY: Nevada remains among the states hardest hit by the national recession. Employment declined almost as rapidly as it had been increasing leading up to the recession but has begun showing signs of improvement. Unemployment levels remain above average although the unemployment rate is down from its peak. Concentrated in the Las Vegas/Clark County area, the state economy remains narrowly based on gaming and entertainment.
CONSERVATIVE FINANCIAL MANAGEMENT: State financial operations are conservatively managed to produce budgetary balance even in light of the deep recession, which had a severe impact on state revenues. Having spent down its rainy day fund in the fiscal 2008-2009 biennium, the state adjusted revenues and reduced spending to achieve balance in the fiscal 2010-2011 biennium and passed a balanced budget for the fiscal 2012-2013 biennium. Some financial flexibility is derived from the state's practice of appropriating only 95% of expected revenues as well as an unappropriated general fund balance that remains satisfactory at almost 11% of revenues.
MANAGEABLE DEBT POSITION: Nevada's debt increased prior to the downturn in response to the demands of a growing population, but remains only a moderate burden on resources. Although the state restructured debt through the downturn, amortization is above average. Pension funding has declined but the state's overall liabilities are below average.
The rating is sensitive to limits in the state's economy, volatility in the revenue stream, and maintenance of structural budget balance.
Nevada's rating reflects the state's conservative debt position, solid financial controls, and historically responsive financial practices, as well as its success in managing rapid population growth and development prior to the downturn. Nevada's debt is only a moderate burden on resources and is supported by a separate statewide property tax levy, which, during the extended period of tax base growth that preceded the recession, produced revenues in excess of that needed for debt service.
The state accumulates any excess in a reserve that, as of June 30, 2012 equaled approximately 92% of fiscal 2013's debt service. With a significant decline in the tax base due to the recession, the tax levy no longer covers annual debt service and the state expects to gradually reduce the reserve so as to not raise the tax levy rate, with a target of maintaining 50% of the next fiscal year's debt service in reserve. If property tax revenues are insufficient, funds for debt service are borrowed from the general fund and repaid from future property tax collections to the extent other funds are not available.
SLOW EMERGENCE FROM RECESSION
Nevada has been slow to emerge from the national recession but is beginning to show signs of a return to growth. Nevada was among the states hardest hit by the recession, during which employment fell almost as rapidly as it had been previously increasing, gaming and related tourist activities declined, population declined for the first time, and the state led the nation in housing value declines and mortgage delinquencies. Nevada's economy remains based on gaming and entertainment and had been characterized by rapid growth with the population expanding at an extraordinarily rapid rate, 125% since 1990, compared with 24% for the U.S. This rapid growth had been matched by employment gains, and in particular, a surge in construction employment in the middle of the last decade. The nature of the recession, led by a housing market crash and declines in consumer spending, had a particularly severe impact on the state.
Non-farm employment in Nevada declined much further than the national average, down 9.1% in 2009 and 2.7% in 2010 versus the respective national rates of 4.4% and 0.7% during those years and an unemployment rate, which had been lower than the national average for much of the last decade, significantly higher than the U.S. rate. Nevada lost approximately 190,000 jobs in the recession, including over 90,000 construction jobs. Construction continues to decline, down 2.9% year-over-year in December 2012.
The economy is showing signs of modest recovery. Non-farm employment has begun to grow again, up 1.6% year-over-year in December 2012, just under the U.S. growth rate of 1.7%. The unemployment rate, while still higher than the U.S. rate at 10.2% in December is well off of its peak of 14%. The housing market continues to be weak but existing home sales and prices have begun to stabilize and mortgage foreclosures are declining. The leisure and hospitality sector lost approximately 40,000 jobs but has been adding jobs since June 2010 and is up 1.9% year-over-year in December 2012. Visitor volume to Las Vegas decreased in 2008 and 2009 before beginning to rebound in 2010. Statewide gaming revenues, accordingly, also declined in 2008, 2009 and 2010, before turning around in 2011. Visitor trends are improving with visitor volume, occupancy rates, room tax revenues, and gaming revenues all expanding in 2011 and 2012.
CONSERVATIVE FINANCIAL MANAGEMENT
The economic downturn had a severe impact on the state's financial operations, with economically sensitive revenues, such as sales tax and gaming related revenues, falling dramatically. The state took action through three biennial budgets to stabilize financial operations in light of significantly reduced revenues. Following the drawdown of the rainy day fund to solve a fiscal 2008-2009 biennial budget gap, the state responded to additional financial stress in the fiscal 2010 - 2011 biennial budget with a significant but temporary increase in taxes including raising sales and business taxes, and an increase in the lodging tax and other fees. The legislature also made changes to shore up the depleted rainy day fund.
With a slow and modest economic recovery projected for the current biennium, which ends June 30, a $3 billion current services deficit was projected, reflecting the loss of $1.1 billion in revenue enhancements that were to sunset at the end of the fiscal 2010-2011 biennium, the reduction in federal stimulus aid, increased Medicaid caseloads, and increased education costs. Gap closing solutions included both expenditure reductions and revenue enhancement, through the extension of four of the temporary taxes enacted in the prior budget, to achieve balance. Education and public safety spending increased while other government functions were reduced. Employee expenses were reduced through the continuation of six furlough days, a 2.5% reduction in employee salaries, a 1% increase in the employee retirement contribution (from 11.25% to 12.25%), a redesign of health benefits, and a continuing freeze on pay increases. Revenues exceeded budget expectations in fiscal 2012. Tourism related revenues have improved, with the sales tax up 6.0% year-over-year and live entertainment tax revenues up 4.9% year-over-year. Year-to-date revenues for the current year, the second year of the biennium, remain on forecast.
The governor's recently released budget for the upcoming fiscal 2014-2015 biennium proposes a continuation of the expiring tax increases, providing an additional $649 million, and continues revenue diversions included in the prior budget. These diversions include directing the increase in the sales tax to the school fund, alleviating some pressure on the general fund. The governor proposes a modest increase in education funding, both in K-12 and higher education. Medicaid funding is also expected to rise, reflecting implementation of the Affordable Care Act and increased caseloads. Employee furloughs are reduced to three per year, which will cost the state an additional $40 million.
Among the state's financial control tools are a constitutional requirement to balance the budget, 95% budgeting - the budget must provide for a reserve of not less than 5% of all proposed general fund operating appropriations and authorizations - and a new requirement to set aside 1% of expected revenues at the start of each fiscal year in the rainy day fund. Revenues are estimated on a regular basis by the Economic Forum, comprising members appointed by the governor, the Senate majority leader, and the speaker of the Assembly. The state budget director must use the Economic Forum projection in preparing the biennial budget. The state also conducts regular, frequent debt affordability analyses to ensure its ability to pay debt service within the existing property tax rate and has a policy of maintaining a minimum reserve of six months of the following year's debt service in the Consolidated Bond Interest and Redemption Fund.
MODERATE LONG-TERM LIABILITIES
The bonds are general obligations of the state, and the state's full faith and credit are pledged, although the property tax pledge is statutorily limited to $3.64 per $100 of assessed valuation for all overlapping units of government. Statutes further provide priority for taxes levied for debt service and a requirement to borrow from the general fund, to be repaid from future property tax revenues, if the annual collection is insufficient to pay GO debt service. The state's tax rate dedicated to debt service is $0.17 and state law includes a permanent appropriation for such payment.
The current offerings refund outstanding debt for debt service savings. With about 30% of state GO debt supported by program revenues and considered self-supporting, debt ratios are moderate with net tax-supported debt of approximately $2.2 billion, or 2.0% of 2011 estimated personal income. The system-wide funded ratio of Nevada PERS was 71% as of June 30, 2012, down from the most recent peak of 77.2% in 2007. Using a more conservative 7% investment return assumption, the funded ratio would fall to 63.9%. Although pension funding has declined, the burden of the state's net tax-supported debt and Fitch-adjusted unfunded pension obligations as a percent of personal income is below the median of the U.S. states rated by Fitch.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012.
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research
U.S. State Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria