NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following State of Minnesota 911 revenue refunding bonds (public safety radio communications system project):
--$92,150,000 911 revenue refunding bonds series 2016.
The bonds are expected to sell through competitive bid on Oct. 18, 2016.
In addition, Fitch has affirmed the 'AA' rating on the state's outstanding 911 revenue bonds, which will be refunded with this transaction.
The Rating Outlook is Stable.
The bonds are payable solely from appropriation of proceeds from a fee assessed by the state on each customer of a telephone service provider that furnishes service capable of originating a 911 emergency telephone call, whether wireless, wire line, or voice over internet protocol (VOIP).
KEY RATING DRIVERS
RESILIENT REVENUE STREAM: Pledged revenues are well positioned to show strong financial resilience through economic downturns, reflecting both low historical sensitivity of revenues to economic decline and very strong debt service coverage levels.
STABLE PLEDGED REVENUE PERFORMANCE: Although the revenue pledge is narrow, telecommunications use is ubiquitous and the fee has been in place for almost 30 years with relatively stable performance. Fitch expects revenue growth to remain consistent with historical experience.
EXPOSURE TO CHANGING TECHNOLOGY: Emerging technologies can pose a risk to the legal and practical application of the fee. A relatively short final maturity, with full debt retirement in 2021 after the current sale, significantly mitigates this risk.
DEBT SERVICE COVERAGE: The rating is sensitive to expectations for the performance of pledged fee revenues and the maintenance of strong debt service coverage.
The 'AA' rating reflects the strong debt service coverage provided by pledged 911 fee revenues. The revenue pledge is narrow; however, receipts have been and are projected to be relatively stable, with notable fluctuations only when the fee amount is increased. Emerging technologies can potentially pose a risk to the legal and practical application of the fee, but this risk is offset by consistently solid debt service coverage of more than 3x as well as the relatively short life of the bonds (final maturity in 2021 after this sale).
The 911 revenue bonds are special, limited obligations that were issued by the state to fund portions of a six-phase Allied Radio Matrix Emergency Response (ARMER) system. The ARMER system is designed to provide a statewide digital radio network that is interoperable between state, county, and city public safety officers, as well as other government workers. Since inception in 1987 the 911 fee revenue has primarily been used to construct and operate the infrastructure necessary for the 911 emergency response system.
The 911 fee is assessed at a monthly rate (currently $0.95) to each customer in the state who uses a telephone service that is capable of originating a 911 call, whether wireless, wire-line, or VOIP. The state raised the fee to the $0.95 statutory maximum rate effective Jan. 1, 2016, later than originally expected. The 911 fee is established by the Commissioner of Public Safety with the approval of the Commissioner of Minnesota Management and Budget. The fee may be increased or decreased depending on cash flow needs.
The fee is collected by the telecommunication provider who in turn remits the fee to the state monthly (small remittances are paid quarterly). The pledged revenues are deposited to the 911 Emergency Telecommunications Service Account, a special revenue account maintained by the Commissioner of Public Safety, with appropriations for debt service made to the Commissioner of Management and Budget.
Revenue Drivers and Growth Prospects
As the fee is assessed at a flat rate, which is now set at the maximum permitted by law, the performance of annual revenues is entirely linked to fluctuations in the customer base. Fitch believes that future growth will be limited given both the nature of the tax and expectations for limited population growth in the state. Fee revenues are projected each November and February as part of state forecasting.
Resilience of Security Through Economic Declines
Fitch believes that the bond security will show exceptionally strong financial resilience through economic downturns, reflecting both the low historical sensitivity of revenues to economic decline and very strong debt service coverage levels. The state has no current authorization to issue additional new money 911 revenue bonds and none are expected, meaning that coverage is likely to remain above 3x through final maturity in 2021. This coverage cushion serves as an effective mitigant to potential cyclical decline, fee rate changes, and the technology risks inherent in the telecommunications base.
Minnesota's economy is broad based and resembles that of the nation, although the manufacturing, education and health services, and financial activities sectors are somewhat more important than the national average. The state's population of about 5.5 million is well educated and wealth levels are above average. Population growth is moderately slower than the U.S. pace. For more information, see 'Fitch Rates Minnesota's $12MM State Appropriation Bonds 'AA+'; Outlook Stable' dated Oct. 14, 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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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