Fitch Rates Nevada's $30MM GO Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following State of Nevada general obligation (GO) limited tax (LT) bonds:

--$30 million Colorado River Commission of Nevada, Taxable GO (Limited Tax) (Subordinate Revenue Supported) Refunding Bonds, series 2014E

The bonds are expected to sell via competitive bid on or around June 3, 2014.

In addition, Fitch affirms the following ratings:

--$1.9 billion in outstanding GO LT bonds at 'AA+';

--$4.9 million Nevada Real Property Corp. GO LT certificates, series 2009 at AA+';

--$89.7 million in outstanding lease revenue bonds at 'AA.'

The Rating Outlook is Stable.

SECURITY

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.

The bonds are expected to be paid from net pledged revenues of the Colorado River Commission derived from sales of energy output of the Hoover Dam, subordinate to outstanding bonds; however, the rating is based on the state's GO pledge.

KEY RATING DRIVERS

IMPROVEMENT IN WEAKENED ECONOMY: The state's economy is returning to growth with employment growth across a broad range of sectors, positive trends in tourism and gaming, and some improvement in the housing market. Concentrated in the Las Vegas/Clark County area, the state economy remains largely based on gaming and entertainment.

CONSERVATIVE FINANCIAL MANAGEMENT: State financial operations are conservatively managed to produce budgetary balance even in times of economic weakness. Some financial flexibility is derived from the state's practice of appropriating only 95% of expected revenues and maintenance of satisfactory reserves.

MANAGEABLE DEBT POSITION: Nevada's debt places only a moderate burden on resources. Although the state refunded debt for budgetary relief through the downturn, amortization remains above average. Pension funding has declined but the state's overall liabilities are below average.

RATING SENSITIVITIES

The rating is sensitive to limits in the state's economy, volatility in the revenue stream, and maintenance of structural budget balance.

CREDIT PROFILE

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 recession. 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, 2013 equaled approximately 88% of fiscal 2014's debt service that is paid from property taxes. 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.

GROWTH ACCELERATING

Nevada was slow to emerge from the national recession but is showing stronger 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 national rate of 4.3% 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. Although construction employment is still far below its former peak, the sector has been expanding since August 2013 and recent performance is quite strong with 10.6% year-over-year growth in March 2014.

The economy is showing signs of a stronger recovery. Non-farm employment has begun to grow again, now at a much stronger pace than the nation. After matching the U.S. growth rate at 1.7% in 2012, non-farm employment grew 2.7% in 2013, well above the U.S. rate of 1.7%. Strong growth continues into 2014 with a year-over-year increase of 4.1% in March. The unemployment rate, while still higher than the U.S. rate at 8.5% in March is well off of its peak of 13.8%. The housing market continues to be weak but existing home sales and prices have begun to increase and mortgage foreclosures are declining. The leisure and hospitality sector lost approximately 40,000 jobs during the recession but has been adding jobs since June 2010 and is up 4.0% year-over-year in March 2014. 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 since 2011.

CONSERVATIVE FINANCIAL MANAGEMENT

The economic downturn had a severe impact on the state's financial operations, with the economically sensitive revenues upon which the state relies, 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.

Revenues exceeded budget expectations in both years of the fiscal 2012-13 biennium that ended June 30, 2013. The budget included expenditure reductions and revenue enhancement, through the extension of four of the temporary taxes enacted in the prior budget, to achieve balance. 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% of payroll), a redesign of health benefits, and a continuing freeze on pay increases. Tourism related revenues improved, with the sales tax up 6.0% year-over-year in fiscal 2012 and another 5.5% in fiscal 2013. Gaming related revenues grew just 0.4% in fiscal 2012 but strengthened in fiscal 2013 with 3.5% growth.

The enacted budget for the current fiscal 2014-2015 biennium continued many of the expiring tax increases and some of the revenue diversions included in prior budgets. Funding for education is increased, both at the K-12 and higher education level. Medicaid funding is also expected to rise, reflecting implementation of the Affordable Care Act Medicaid expansion and increased caseloads. Employee furloughs are maintained at six per year but step and merit pay increases are reinstated. General fund revenues are slightly ahead of forecast through March.

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, composed of 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 offering refunds 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 billion, or 1.9% of 2013 estimated personal income. The system-wide funded ratio of Nevada PERS was 69.3% as of June 30, 2013, down from most recent peak of 77.2% in 2007. Using a more conservative 7% investment return assumption, the funded ratio would fall to 62.5%. 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 remains below the median of the U.S. states rated by Fitch.

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

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:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com