Fitch Rates Georgia's $881MM General Obligations 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following state of Georgia bonds:

--$376,815,000 general obligation (GO) refunding bonds 2016E;

--$504,210,000 GO refunding bonds 2016F.

The bonds will sell via competitive bid, on or about Oct. 19, 2016.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of the state of Georgia, secured by a pledge of the state's full faith and credit.

KEY RATING DRIVERS

Georgia's 'AAA' Issuer Default Rating (IDR) and GO rating reflect the state's conservative debt management, proven willingness and ability to support fiscal balance and a broad-based and growing economy. The state took repeated action during the recession to maintain fiscal balance through steep spending cuts and draws from its rainy-day fund (the revenue shortfall reserve [RSR]). Since then, Georgia has maintained a conservative approach to fiscal management, limiting spending growth and making progress in rebuilding the RSR balance. The state's long-term liability burden is low.

Economic Resource Base

The state's economic profile is similar to that of the nation with trade, transportation and utilities and various service sectors, including professional, business, education and health, making up the largest sector shares. Job losses during the Great Recession were particularly steep, but the state's recovery has outpaced the nation's. Georgia's demographic profile is somewhat mixed with above-average population growth and a median age below the nation's, but the state has weaker wealth indicators. Overall, these factors should support further solid economic growth. Atlanta serves as a national corporate and transportation hub, historically anchoring the state's economy. Expansion in the previously challenged manufacturing industry is among the key drivers of improvement outside the Atlanta metro area.

Revenue Framework: 'aaa' factor assessment

Georgia's revenues, primarily income and sales taxes, will continue to reflect the depth and breadth of the economy, and its solid growth potential. The state has complete control over its revenues, with an essentially unlimited legal ability to raise operating revenues as needed. A recent constitutional amendment limiting the personal income tax rate does not limit Fitch's assessment since full flexibility remains for other revenue sources.

Expenditure Framework: 'aaa' factor assessment

The state maintains ample expenditure flexibility with a low burden of carrying costs and the broad expense-cutting ability common to most U.S. states. Also as with most states, Medicaid remains a key expense driver, but one that Fitch expects to remain manageable.

Long-Term Liability Burden: 'aaa' factor assessment

Georgia's long-term liability burden is low, and overall debt management is conservative. While the state issues bonds regularly for capital needs, amortization of principal is rapid. Additionally, Georgia fully funds its actuarially determined employer contributions (ADECs, formerly ARC) for pensions, keeping the unfunded liability very low.

Operating Performance: 'aaa' factor assessment

The state is well-positioned to deal with economic downturns, with exceptionally strong gap-closing capacity due to its broad control over revenues and spending and rebuilt RSR. Georgia has a track record of restoring financial flexibility during economic expansions, which is important given the state's above average revenue volatility.

RATING SENSITIVITIES

SOLID FINANCIAL MANAGEMENT: The rating is sensitive to shifts in Georgia's fundamental credit characteristics including its history of timely action to address budgetary challenges and proactive measures to ensure fiscal flexibility.

CREDIT PROFILE

After a sharp recessionary downturn, the state's diverse economy has accelerated with employment growth outpacing national trends. Recovery in the manufacturing sector has been particularly important. In the past, low value-added manufacturing had been a primary economic driver in the areas outside Atlanta. Those industries declined in the years leading up to the recession, which exacerbated the economic losses. However, since 2011, the sector has been growing with key gains coming in the automotive industry.

The housing market downturn hit Georgia particularly hard; however, recovery has been strong, with direct implications for economic and revenue growth. Housing prices declined precipitously across the state, particularly in the Atlanta metropolitan area in 2008 and 2009. Prices rebounded with growth in the Atlanta area far outpacing most other major metropolitan areas by late 2012. By mid-2014, Atlanta's growth slowed and has moved in tandem with national trends since then.

Revenue Framework

Georgia's personal income tax (PIT) and sales and use tax together account for approximately three-fourths of the state's general fund receipts. The PIT alone makes up nearly half of total receipts. Both revenue sources are fairly economically sensitive and respond quickly to shifts in the state's economic trajectory.

Fitch anticipates revenue growth will remain slightly positive on a real basis, in line with the historical trend, given the state's solid economic growth prospects. Robust revenue growth in years of economic gains is offset by sharp declines when Georgia's economy contracts.

Georgia recently enacted a constitutional cap on its income tax rate at the current level, but no such limit exists for the sales tax or other state revenue sources. While the PIT is the state's most significant revenue stream, Fitch does not view the constitutional cap as a limiting factor in the revenue framework assessment. For all other taxes and fees Georgia has no legal limitations on its independent ability to raise revenues through base broadenings, rate increases, or the assessment of new taxes or fees.

Expenditure Framework

As in most states, education and health and human services spending are Georgia's largest operating expenses. Education is the larger line item, as the state provides significant funding for local school districts and the public university and college system. Health and human services spending is the second largest area of spending, with Medicaid being the primary driver.

Spending growth, absent policy actions, will likely be in line with, to marginally above, revenue growth driven primarily by Medicaid, requiring regular budget management to ensure ongoing balance. The fiscal challenge of Medicaid is common to all U.S. states and the nature of the program as well as federal government rules limit the states' options in managing the pace of spending growth.

In other major areas of spending such as education, Georgia is able to more easily adjust the trajectory of growth and did so during and after the recession. Next year, the state legislature will consider recommendations from a gubernatorial education reform commission that include increased state spending for K-12 education and an overhaul of the formula used to allocate state and local funding responsibilities. Fitch anticipates the state will enact changes consistent with its generally conservative expenditure management that will not materially alter the assessment of Georgia's natural pace of spending growth.

Georgia retains ample expenditure flexibility. While Medicaid costs are somewhat beyond the state's ability to materially change given federal requirements for the program, the state's carrying costs are low and unlikely to escalate significantly given carefully managed debt issuance and full actuarial pension contributions. Like most states, Georgia's operating budget goes largely towards funding of services rather than direct service delivery allowing the state to shift costs to lower levels of government in times of fiscal stress.

Long-Term Liability Burden

Most of the state's modest tax-supported debt burden is in the form of GO or guaranteed revenue bonds and amortization of principal is rapid, with approximately 70% maturing within 10 years. Other outstanding obligations include federal grant anticipation revenue (GARVEE) bonds, capital leases, multi-year leases entered into by the State Properties Commission, and a small amount of notes and loans. Including the current sale, net tax-supported debt remains low at 2.6% of 2015 state personal income.

Georgia's major pension systems covering both state employees and teachers have benefitted from consistent full funding of the ARC/ADEC. As of the June 30, 2015, valuation and under the new GASB 67 reporting standard, system-wide ratios of assets to liabilities for the state employees and teachers' plans were reported at 76.2% and 81.4%, respectively. Both ratios were consistent with prior year results under the prior GASB reporting standard. Using Fitch's more conservative 7% discount rate assumption, the state employees and teachers' plans are funded at 69% and 77.6%, respectively, as of June 30, 2015.

As reported in Fitch's October 2015 state pensions update, Georgia's net tax-supported debt and Fitch-adjusted unfunded pension liability attributable to the state totaled a low 4.9% of 2014 personal income. This is below the median of 5.8% for U.S. states

Operating Performance

Georgia's exceptionally strong gap-closing ability during cyclical downturns derives primarily from its superior budget flexibility. Conservative fiscal practices and a somewhat volatile, but still diverse and expanding, economy offer a strong platform for the state to gradually restore fiscal flexibility once utilized. Georgia typically responds to budgetary stress with spending restraint and use of budgetary reserves. During the Great Recession, the state's primary reserve fund (the RSR) went from a peak of $1.5 billion in fiscal 2007 to $104 million in 2009.

After a budget is enacted, the governor has significant statutory authority to administer the budget and scale back spending as needed, allowing the state to be responsive to changing conditions. The state made regular use of this tool during the last recession. Even several years into the recovery, the governor regularly ordered most agencies to reduce spending below enacted budget levels shortly after the start of fiscal years as a precautionary measure. The tactic contributed to regular operating surpluses and rebuilding of reserves.

As revenues recover in economic expansions, Georgia works toward re-establishing reserves, primarily in its RSR, and gradually restoring prior-year cuts. Statutory requirements to transfer all end of year surpluses to the RSR (until its statutory cap, currently 15%) led the state to build a sizable balance leading into the last recession of just more than 8% of net revenues. And after drawing down the RSR significantly during the Great Recession, the state steadily contributed to it during the expansion. At the end of fiscal 2015, the balance of $1.4 billion (net of an annual mid-year appropriation for K-12 education) was 7% of net revenues.

Georgia has been slower to restore spending cuts, which were most prominently made in education spending. It took until fiscal 2015 for annual state appropriations for education to reach the pre-recession peak, and even then enrollment growth since the recession implied continued spending pressure. More substantial increases in fiscal 2016 and in the enacted budget for fiscal 2017 make more progress towards fully restoring prior cuts. The slow restoration reflects Georgia's historically conservative fiscal practices. Fitch notes the state has consistently met its actuarial pension funding commitments and generally avoided non-recurring budget balancing measures since pulling out of the recession.

Current Developments

Georgia's revenue performance in fiscal year 2016 was strong and ahead of the enacted budget forecast reflecting both overall economic growth as well as structural and procedural changes. PIT revenues were up a robust 7.9% for the year with gains in both withholding (6.4%) and non-withholding (7%). Sales and use tax revenues to the general fund were up a modest 1.7% for the year, which partially reflects significant transportation funding changes that resulted in a portion of sales tax revenues shifting away from the general fund. Total state general fund receipts were up 8.8%. The amended fiscal year 2016 (AFY) budget relied on 6.2% growth in revenues which enabled the state to add $394 million to the RSR.

For fiscal 2017, the enacted budget continues the trend of using revenue growth to support program expansion and restoration of prior year cuts. The budget forecasts general fund revenue growth of 1.3% from fiscal 2016. Education funding is up notably with $432.5 million (4.6% from the enacted FY 2016 budget) in additional Quality Basic Education Program funding (basic aid) for K-12. Healthcare costs, including for Medicaid, also received increased funding in both the AFY 2016 and enacted fiscal 2017 budgets. Through the first quarter, state general fund receipts were up 3.6%.

Transportation funding increased substantially with adoption of House Bill 170 (HB 170) last year, which helps address the growing state's infrastructure demands. The bill altered the state's tax structure for transportation effective July 1, 2015. The state's department of revenue estimates the changes increased revenues $794 million in fiscal 2016.

Date of Relevant Rating Committee: June 2, 2016

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012966

Endorsement Policy
https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst:
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com