Fitch Rates Minnesota's $904MM GOs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following State of Minnesota general obligation (GO) state bonds:

--$438,055,000 GO state various purpose bonds series 2014A;

--$288,000,000 GO state trunk highway bonds series 2014B;

--$26,150,000 GO taxable state various purpose bonds series 2014C;

--$28,250,000 GO taxable state various purpose refunding bonds series 2014D;

--$123,390,000 GO state trunk highway refunding bonds series 2014E.

The bonds are expected to sell through competitive bid the week of Aug. 11, 2014.

Fitch also affirms the 'AA+' rating on $6 billion in outstanding state GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the state of Minnesota, to which its full faith, credit, and taxing powers are pledged. In addition, per the state constitution, payment of trunk highway bonds is a first charge on money coming into the state trunk highway fund, which receives a share of taxes on motor vehicles and motor vehicle fuels.

Per the state constitution, the state auditor is required to levy an annual tax on all taxable property in an amount that, when combined with balances on hand in the debt service fund, will pay principal and interest due on GO bonds through July 1 of the second ensuing year. A state property tax has not been required for this purpose since 1966. This provision results in debt service being funded well in advance of payment dates, as the deposit to the debt service fund is made on Dec. 1 of each year.

KEY RATING DRIVERS

SOLID ECONOMIC PROFILE: Minnesota's economy is balanced and wealth indicators are positive.

BELOW-AVERAGE LIABILITY BURDEN: The state's debt levels are moderate, with rapid amortization of GO debt. On a combined basis, the burden of debt and unfunded pension liabilities is below average for a U.S. state. Other post-employment benefit obligations are minimal.

IMPROVED FINANCIAL POSITION: Minnesota's revenue structure is subject to volatility, and revenue performance in the recovery has been strong following a period of sharp declines. The state relied on non-recurring budget-balancing measures over the course of the recession. However, positive budget variances have allowed for the replenishment of reserves and repayment of deferred school aid.

RATING SENSITIVITIES

The rating is sensitive to shifts in Minnesota's fundamental credit characteristics, including a stable economic profile and manageable long-term liability burden.

CREDIT PROFILE

The 'AA+' GO rating reflects the state's moderate liability position, a broad-based economy with above-average wealth levels, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts.

FINANCES AND MANAGEMENT

Minnesota's general fund receipts are diverse, consisting of individual and corporate income, sales, and property taxes. However, the state's revenues have shown more volatility over time as capital gains have become more important to the income tax base. Budget balancing in the recession relied on a large amount of non-recurring measures, particularly school aid shifts.

Financial results in the recovery are significantly improved, with spending under budget and revenues materially above budget estimates for the biennium that closed on June 30, 2013 and in the current biennium. Pursuant to established state law and consistent with the state's practice in prior downturns, resulting balances were first applied to fund reserves to their policy targets and reverse the payment deferrals to school districts that have been a key part of budget balancing for the state. In the 2014 legislative session, an additional $1.2 billion in unbudgeted projected balance, largely resulting from increases to revenue estimates, was used for the following: revenue reductions ($483 million), including repeal of some of the new taxes that had been part of the enacted biennial budget; ongoing and one-time supplemental spending ($568 million), including for PAYGO capital; and $150 million in additional reserve funding.

The recent overperformance of income tax revenues is a notable contrast to other states that saw revenues come in under budget in fiscal 2014. With the additional allocation to the budget reserve, the state now projects ending the biennium with reserves of $1.2 billion (6% of annual spending). The state has also enhanced its approach to reserve funding and established automatic funding mechanisms.

Minnesota operates on a biennial budget basis, and following the November 2012 elections that resulted in a single party controlling the state legislature and governor's office, the budget for the current fiscal 2014 - 2015 biennium was finalized well in advance of the start of the biennium and with markedly less contention than has been the case in prior years.

Disagreements surrounding the budget for the prior fiscal 2012 -2013 biennium resulted in delayed budget adoption and a 20-day partial state government shutdown. The final budget included not only significant school aid shifts but also deficit financing in the form of a tobacco settlement securitization that was subsequently refunded with state appropriation debt.

Strong revenue results reduced the gap to be addressed for the current fiscal 2014 - 2015 biennium to $627 million, compared to a projected gap for the fiscal 2012 - 2013 biennium that was estimated at $5 billion including full repayment of school aid payment shifts and $3.6 billion if such payments were made only as surplus funds became available. The budget was balanced through recurring measures, and the legislature enacted significant tax increases to provide funding for education and property tax relief. A new personal income tax bracket with a rate of 9.85%, up from 7.85%, was estimated to generate $1.1 billion in the bienniumIn total, tax actions in the budget, including tobacco and corporate tax changes, added $2.3 billion to the biennial revenue forecast.

Minnesota reviews its economic and revenue forecasts in February and November of each year. The forecast has been increased repeatedly and materially in the recovery. The state reported tax revenue up 9.6% in fiscal 2013 following growth of 5.4% in fiscal 2012 and 11.1% in fiscal 2011. This includes fiscal 2013 personal income tax growth of 13.1% and sales tax growth of 2.1%. Personal income tax revenues make up about half of all general fund tax revenues, and sales tax revenues another 30%.

The most recent forecast for fiscal 2014, based on the 2014 close-of-session, anticipates personal income tax growth of 5%, sales tax growth of 4.9%, and overall tax revenue growth of 7.1%. Fiscal 2015 growth is projected at 4.2%, 2.7%, and 3.2%, respectively. Actual fiscal 2014 results are now expected to be modestly above the most recent forecast; the November 2014 forecast update is expected to be released in early December. All results and projections reflect the impact of tax policy changes.

The Minnesota constitution prohibits borrowing for operating purposes beyond the end of the biennium, although borrowing for cash flow purposes within a biennium is allowed. Minnesota has not done short-term borrowing since 1985. The state actively managed its cash position in the downturn and secured a $600 million line of credit as a cushion against underperformance. However, the state did not need to draw on the line of credit, which has expired, and the state's cash position is since materially improved.

ECONOMY

Minnesota's economy is broad based and resembles that of the nation, although the manufacturing sector is somewhat more important in the state than the national average. The state experienced job losses less severe than those of the U.S. in the recent recession, with a 4.7% decline between 2007 and 2010 compared to a 5.6% drop for the nation. The state's employment recovery has been generally consistent with that of the U.S.; June 2014 year-over-year growth of 1.9% matched the national pace.

Minnesota's unemployment rate historically has been well below that of the nation. The June 2014 rate of 4.5% (seasonally adjusted) was 74% of the U.S. rate.

Wealth levels remain above average. The state's personal income per capita equaled 107% of that of the U.S. in 2013. The population is well educated, and population growth and age are generally in line with the U.S.

DEBT

Minnesota has well-established debt policies. A net tax-supported debt burden of approximately $8.6 billion after this sale equals 3.3% of personal income, on the lower end of the moderate range but above the 2.6% median for U.S. states and materially increased in recent years. Amortization remains rapid, as about 70% of GO bonds, which equal 80% of net tax-supported debt, mature within 10 years. In 2012 the state issued $656 million in appropriation-backed debt to refund for debt service savings the tobacco securitization debt that was issued in 2011 for budget relief. In addition, earlier this year the state issued appropriation-backed debt to fund its $348 million commitment to a new stadium for the Minnesota Vikings as well as the $150 million local share. The increased debt service cost to the general fund associated with the stadium bonds is expected to be offset by increased gaming revenues, among other revenues.

The state's unfunded pension liability is below average as a percent of personal income, and on a combined basis the burden of net tax-supported debt and adjusted unfunded pension obligations as a percentage of personal income is below the 6.1% median for U.S. states at 5.6%. In addition, the state has very limited retiree health benefits.

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

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843955

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1-212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Laura Porter
Managing Director
+1-212-908-0575
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661

Sharing

Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1-212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Laura Porter
Managing Director
+1-212-908-0575
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661