NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the State of Tennessee's (the state) approximately $384.7 million general obligation (GO) bonds, 2012 refunding series A.
The par amount of the refunding bonds may change prior to sale, expected on Feb. 15. Fitch also affirms the 'AAA' rating on:
--$2.07 billion outstanding state GO bonds.
The Rating Outlook is Stable.
SECURITY
Full faith and credit, payable as to principal and interest from any funds or monies of the state from whatever source derived.
KEY RATING DRIVERS
--The state's debt profile is very conservative, with low debt ratios, swift amortization, few non-general-obligation commitments, and strong security provisions. The state has fully funded its pension requirements for four decades.
--Financial operations are conservative and consistently balanced, although largely reliant on sales tax revenues. The state retains considerable operating flexibility, including sizable reserve balances.
--The state has a large manufacturing sector, which was a vulnerability in the recent downturn, although some diversification has occurred and growth is returning. Wealth levels are below average.
CREDIT PROFILE
The state's 'AAA' GO rating reflects its 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, including in its proactive approach to addressing the fiscal impact of the recent recession. Economic recovery is underway, with state sales tax revenue, the state's largest source of revenue, following suit. The state relied on one-time resources, including federal stimulus and state reserve balances, during the downturn even as it lowered base spending to maintain budgetary balance. Despite reserve draws, balances remain ample.
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 service limit that currently is only 48% used. Prior to this issuance, net tax-supported debt of $2.2 billion equals 1% of 2010 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 remained sufficient at 88.3% as of July 1, 2011.
Financial operations are conservative and consistently balanced. Dependence on sales tax collections, which make up the biggest share of state receipts, was a vulnerability in the downturn, but the state took consistent action to maintain balance while preserving flexibility in the form of reserve balances.
Fiscal performance stabilized in fiscal 2011, but not before the state made sizable cuts to recurring balance, used one-time resources including federal stimulus, and levied new revenues from a hospital assessment. Tax revenues, initially forecast to rise 1.7%, ultimately rose 5.5%, to almost $10.6 billion. The fiscal year ending balance, initially forecast at $161 million, ultimately rose to $223 million. Despite reserve draws, the combined balances in the rainy day and TennCare (the state's Medicaid program) reserves totaled $518 million at fiscal year-end.
The state has maintained a conservative fiscal posture even as revenues continue to show improvement. The fiscal 2012 adopted budget achieved balance despite the expiration of federal stimulus aid, with the state relying on widespread baseline spending cuts except to K-12 education. Total tax revenues, originally forecast to rise a modest 3.4% at budget adoption, are now forecast to rise 4.2% as of the governor's fiscal 2013 executive budget, to $11 billion. Total sales taxes would rise 4.7%. Year-to-date general fund collections through December 2011 were up 9% compared to the same period a year ago.
The governor's executive budget for fiscal 2013, released in January 2012, anticipates total tax revenues growing by 3.6%, to $11.4 billion; sales taxes would grow 4%. The budget proposes program spending increases for TennCare, education and other key areas, including salary increases, offset in part by other cuts. Total general fund spending would drop 4%. Reserve balances would remain ample, with the June 30, 2013 forecast rainy day and TennCare reserves at $585 million, including a $50 million deposit to the rainy day fund in fiscal 2013.
The state's economic strengths lie in trade and manufacturing, although cyclicality in the latter has been a vulnerability. In the recent downturn the state's job losses exceeded the U.S., with nonfarm employment in the 2007-2010 period falling 6.6%, compared to 5.7% nationally. Economic growth has returned, with December 2011 nonfarm employment rising 1.2% from December 2010, just below the 1.3% rate recorded nationally during the same period. Durable goods manufacturing and certain services are showing solid gains. Unemployment has fallen to 8.7%, from 9.4% a year earlier. The state is less wealthy than average, with 2010 per capita income ranked 37th among the states at 86% of the U.S.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
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