NEW YORK--(BUSINESS WIRE)--
Fitch Ratings affirms the following ratings for the State of Iowa:
--The state's implied general obligation (GO) rating at 'AAA';
million outstanding Vision Iowa fund bonds at 'AA'.
The Rating Outlook is Stable.
The 'AAA' rating reflects the general credit quality of the state, as
Iowa does not issue GO debt. The Vision Iowa bonds are special, limited
obligations of the state of Iowa payable from standing appropriations of
gaming revenues, on a subordinate basis to the state's outstanding IJOBS
bonds, and to the extent those are insufficient, lottery revenues. Bond
security is enhanced by the state's reserve fund deficiency make-up
commitment, which is the basis of the rating.
KEY RATING DRIVERS
CONSERVATIVE FISCAL MANAGEMENT: The state has a careful and conservative
approach to financial operations and has consistently achieved budgetary
balance and maintained sizable reserves.
STABLE ECONOMY: Iowa maintains resilient agricultural, education,
health, and finance sectors, and growth coming out of the recession has
closely matched national averages. Recent employment growth has slowed
but the unemployment rate remains well below the national rate.
LOW DEBT AND LIABILITY LEVELS: The state's debt burden is very low,
primarily reflecting the state's pay-go funding of capital projects and
continued satisfactory funding of pension liabilities.
SOUND COVERAGE ON SPECIAL OBLIGATION BONDS: Gaming revenues continue to
provide satisfactory coverage of required appropriations for debt
service on this obligation.
RESERVE FUND REPLENISHMENT: A reserve fund deficiency make-up commitment
by the state enhances the security provided on the Vision Iowa fund
bonds, resulting in a rating two notches below the state's 'AAA' implied
The implied GO rating is sensitive to the state's continued financial
stability, stable economy, and very manageable debt position. The Vision
Iowa bond rating is sensitive to changes in Iowa's implied 'AAA' GO
rating, to which it is linked.
The state's implied 'AAA' GO rating and Stable Outlook reflect its
stable economy, conservatively managed financial operations, and low
debt and liability burden. The Vision Iowa bonds benefit from a reserve
fund holding an amount equal to maximum annual debt service. Providing
additional security and serving as the basis for the 'AA' ratings on the
bonds, if the reserve is drawn upon, the state treasurer certifies the
deficiency to the governor and the governor shall include a request in
the succeeding year's budget for an appropriation for the amount. The
state is required to certify the sufficiency of funds in the accounts
each Dec. 13th prior to the succeeding calendar year payments. Fitch
notes the strength of the state's commitment to replenish the reserve
fund as well as the state's financial strength and sufficient
notification timing to ensure appropriation, providing a direct link to
Iowa's general credit superior to the appropriation pledge of gaming
revenue for the bonds.
STABLE ECONOMY WITH AN IMPORTANT AGRICULTURAL SECTOR
the recession after most of the nation, shedding proportionally less
jobs than the nation as a whole, and has experienced steady employment
growth since 2010. The state maintained its historically lower than
national unemployment rates during this time, reaching 6.3% in 2010;
just 66% of the national rate of 9.6%. Year over year (yoy) employment
growth has recently moderated; 0.8% in December 2013 as compared to 1.7%
for the nation but this reflects the smaller rebound from a more limited
decline and unemployment rates remain well below the nation at 4.2% in
December 2013 compared to the nation at 6.7%. The strongest yoy
employment growth in December 2013 was seen in professional and business
services (up 3.8%) and trade, transportation, and utilities (up 1.6%),
offset by declines in information (down 3.7%) and other services (down
Farm income remains more important to Iowa than other states in the
region and other agricultural states; approximately 86% of the land area
in the state is in farms. In 2013, the state led the nation in the
production of pork, corn, soybeans, and eggs, and total cash receipts
for farm commodities in 2011 totaled approximately $29.9 billion, up
from $24.6 billion in 2010; the second highest in the country. Trade,
transportation, and utilities and manufacturing remain key industries in
the state and account for about 21% and 14%, respectively of nonfarm
employment. The state is a leading producer to corn-based ethanol and
biodiesel and wind generation has also become an emerging industry in
CONSERVATIVELY MANAGED FINANCIAL OPERATIONS
Fitch considers the
state's finances to be conservatively managed and sizable reserves are
maintained. The General Fund (GF) budget is supported by a mix of
revenues; personal income taxes (PIT) account for 52% of revenues; sales
and use taxes account for 34%, and corporate income taxes (CIT) account
for 7%. Following financial difficulties in fiscal 2009 precipitated by
recessionary revenue losses, the state has made successive additions to
its reserve funds, achieving its maximum statutory goals. The state
maintains two statutory reserve funds; a Cash Reserve Fund (CRF) and the
Economic Emergency Fund (EEF). The CRF is limited to 7.5% of GF
appropriable revenues and the EEF is limited to 2.5%. The CRF is filled
prior to the EEF and excess monies beyond these limits are available for
appropriation in the next fiscal year although the state has also
deposited money to other reserve funds.
Strong financial results in fiscal 2013 fueled both by abundant corn and
soybean production that increased personal incomes and the push forward
of personal income into calendar year 2012 due to uncertainty over
federal tax legislation, resulted in a 12.4% increase in personal income
tax (PIT) receipts and overall 7% growth in revenue from fiscal 2012.
The balance in the CRF achieved its funding goal at $466.8 million while
the balance in the EEF, $144.3 million at the end of fiscal 2013, was
just below the statutory funding limitation of $155.6 million as the
state chose to make allocations for capital projects, subsequent years'
expenditures, as well as to a recently created taxpayer trust fund. The
robust financial returns spurred the state to undertake several tax
reform measures including commercial property tax reform, earned income
tax credit increases, and through transfers from the taxpayer trust
fund, the state designated $120 million in PIT credits for tax year 2013
to eligible taxpayers. The state also chose to apply $116 million of the
surplus from fiscal 2013 to the redemption of its school infrastructure
bonds (also secured by gaming revenue) as well as other bond maturities.
The fiscal 2014 $6.5 billion enacted GF budget incorporates these reform
measures as well as allocates revenues previously received in the GF,
such as gaming and cigarette taxes, to the designated purposes of
economic development and the health care trust fund for medical and
mental health expenditures, respectively. The state currently
anticipates the year to end with balanced financial operations,
supported by 4.2% growth in sales tax revenue, despite being offset by a
1.9% decline in PIT receipts due to the increase in the earned income
tax credit, the new PIT credit, as well as a return to more normalized
PIT collections from the fiscal 2013 peak. The state's reserve funds are
expected to reach their statutory maximum amount of $649.6 million,
equal to 10% of GF appropriable revenues.
The state's revenue estimating conference (REC) forecasts fiscal 2015
tax receipts to be up 5.4% from fiscal 2014 based on receipts through
December 2013. PIT growth is forecast to be 6.7%; sales tax growth is
forecast at 4.3%; and the corporate income tax is expected to grow by
2.3%. The governor's recently proposed $7 billion fiscal 2015 budget
builds upon the revenue forecast with major proposals including an
increase of 5.7% for education and a 6.2% increase in the health and
human services budget. After transfers and other accruals, the ending
balance is forecast to be $723.2 million that would be transferred to
designated reserves, including fully funding the CRF and EEF, as well as
providing $91.9 million in revenue for PIT credits to eligible
taxpayers. The legislature will consider these proposals during the
VERY MANAGEABLE DEBT AND LIABILITY POSITION
The state's debt
management is very conservative and outstanding debt obligations are
modest. Total tax-supported debt of $1.04 billion is equivalent to a
manageable 0.8% of 2012 personal income. Funding for Iowa's pension
systems is satisfactory, with the largest system, IPERS, recording an
81% funded ratio as of Dec. 31, 2013. Using Fitch's more conservative 7%
discount rate assumption, IPERS would have a 76.8% funded ratio. On a
combined basis, the burden of the state's net tax-supported debt and
adjusted unfunded pension (UAAL) obligations equals 1.8% of 2012
personal income; well below the median of 7% for U.S. states rated by
The Vision Iowa bonds are payable from a standing appropriation of
gaming revenues, and, if necessary, lottery revenues. In the 2013
legislative session, the state modified the standing allocations from
gaming revenues, with required allocations that occur up to the Vision
Iowa allocation reduced from $80 million to $73.75 million, providing
for additional available revenue to cover the Vision Iowa obligation.
The flow of gaming revenue requires $55 million to be transferred first
to fund requirements of the senior IJOBS bond issue of the state, $3.75
million allocated to fund any debt service requirements on taxable
subsidy bonds if subsidy payments have not been received by the
treasurer and then $15 million is deposited to the Vision Iowa Fund.
Debt service on the Vision Iowa bonds was structured to be paid from the
annual $15 million allocation and up to $1 million from investment
income on funds of the program that are held by the debt service reserve
fund. To date, the state has been utilizing this investment income to
pay debt service.
Gaming revenues are primarily derived from a number of racetrack and
riverboat casinos located in 14 counties. Riverboat gaming has been
allowed since 1989 and games at racetracks since 1994. Revenues grew
steadily, reaching $280.7 million in fiscal 2008, up from $191 million
in fiscal 2001, before declining in fiscal years 2009 through 2011 as a
result of the recession. Revenues were bolstered by 5.3% in fiscal 2012
due to the opening of a new riverboat casino and then moderated by 1% to
$282 million in fiscal 2013 as operations normalized. Pledged gaming
allocations in fiscal 2013 provided 3.53 times (x) coverage for the
prior $80 million statutory appropriation discussed above. The secondary
source of security, lottery transfers, available for the Vision Iowa
bonds, provided revenues of $82.8 million in fiscal 2013 to meet the $15
million allocation requirement.
The sound coverage on the bond issue is partially offset by the
uncertainty presented by discretionary activities, the unsteady revenue
trend, the state's ability to reallocate pledged revenues, and the need
for interest income to support the Vision Iowa bonds' debt service
requirements. Positively, the requirement that referenda be held every
eight years in each county to re-authorize casino gaming was modified by
the 2011 legislative session, and re-authorization referenda is now only
required for new casino gaming operations; the existing facilities are
exempt. Also positively, lottery revenues have remained a growing source
of additional security should they need to be called upon.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from IHS Global Insight.
Applicable Criteria and Related Research:
Criteria', dated Aug. 14, 2012;
--'U.S. State Government
Tax-Supported Rating Criteria', dated Aug. 14, 2012;
Guidelines for Moral Obligations', dated April 18, 2013.
Applicable Criteria and Related Research:
State Government Tax-Supported Rating Criteria
Guidelines for Moral Obligations
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