Fitch Rates Tennessee's $212MM GOs 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the State of Tennessee's (the state) approximately $202 million general obligation (GO) bonds, consisting of the following:

--$160 million 2009 series C;

--$52 million 2009 series D (federally taxable).

The bonds are expected to sell through negotiation the week of Nov. 30. Fitch also affirms the 'AA+' rating on the state's approximately $1.4 billion outstanding GO debt. The Rating Outlook is Stable.

The state's 'AA+' GO rating reflects the state's low debt level, among the lowest of any state, and an ongoing commitment to structural balance. Conservative fiscal management has been in evidence repeatedly in this decade and now in its proactive approach to addressing the fiscal impact of the current downturn. The national recession has reduced state employment, particularly in its large manufacturing base, while overall employment declines mirror those of the U.S. The state's revenues rely on the sales tax, collections of which were sharply lower in fiscal 2009, and which continue to underperform in fiscal 2010 year to date. The state closed the gaps arising from revenue weakness in fiscal 2009 and in the enacted fiscal 2010 budget by reliance on spending cuts, federal stimulus aid, and reserve draws, while maintaining significant reserve balances and incorporating a plan to achieve structural balance by fiscal 2012.

The state's debt places a very low burden on resources, is well-protected by security provisions, and amortizes rapidly. Several taxes, including a portion of the gas tax, are pledged to debt service, and their yield is the basis for a debt limit that currently is only about one-quarter used. Prior to this issuance, net tax-supported debt of $1.75 billion equals 0.8% of 2008 personal income. The state has met the full actuarially required employer contribution to its pension system each year since 1972 and the pension funding ratio was a high 96% as of July 1, 2007.

The state has consistently balanced its financial operations. Dependence on sales tax collections, which make up the biggest share of state receipts, is affecting its fiscal position in this downturn, but the state has taken action to maintain balance while preserving flexibility in the form of large reserves. Revenues fell in fiscal 2009, which ended on June 30, with total tax receipts down 8.9% from the prior year, to $10.17 billion, and sales tax receipts down 7.7%, to $6.34 billion. The state closed a gap of nearly $1.3 billion through use of $420 million in federal stimulus, replacing pay-go capital with bonding or delaying capital, reduced agency spending, and reserve transfers of $331 million. The state's rainy day fund closed fiscal 2009 with a balance of $587 million, about 5.8% of tax revenues; in addition, the TennCare reserve was funded at $348 million.

The enacted budget for fiscal 2010 achieves balance through measures similar to those undertaken in fiscal 2009, and includes a plan through fiscal 2014 that shows a transition to structural balance by fiscal 2012 after federal stimulus funds are fully used, with cuts in virtually all areas but K-12 education. A revenue shortfall from prior estimates of $1.1 billion is addressed through tax adjustments, use of $440 million in stimulus, base spending cuts of $808 million, and a reserve draw of $55 million. Forecast tax revenues rise 1.1%, to $10.28 billion, with sales taxes up 1.1%, to $6.41 billion. The rainy day fund is projected to end fiscal 2010 at $532 million, or 5.2% of tax revenues, in addition to $342 million remaining in the TennCare reserve.

Revenues collections in the fiscal year to date are running below forecast, with tax receipts off 4.1% and sales tax collections off 5.8%. Compared to fiscal 2009, year to date tax receipts are down 5.7%, with sales taxes down 8.8%.

The state's economy is cyclically vulnerable due to the above-average role played by manufacturing. Employment dropped from 2001-2003 by more than 1.5 times the U.S. loss for the same period. In the current downturn the state has lost jobs year-over-year in every month since June 2008. September 2009 nonfarm employment was 4.1% below that of September 2008, compared to the nation's 4.2% loss. Declines were seen in all sectors but education and health services and government, with particularly large losses in manufacturing and construction. Unemployment of 10.5% in September equaled 107% of the U.S. rate. The state's 2008 estimated per capita income ranks 36th of the states at 87% of the U.S.

Additional information is available at www.fitchratings.com.

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