News Column

Fitch Affirms Colorado Unemployment Assessment Bonds at 'AA'; Outlook Stable

June 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA' long-term rating on $374.885 millionColorado unemployment compensation fund special revenue bonds, taxable series 2012B, as issued by the Colorado Housing and Finance Authority (the authority).

The Rating Outlook is Stable.

SECURITY

Unemployment compensation fund (UCF) special revenue bonds are special, limited obligations of the authority secured by a first lien on the trust estate, primarily revenue from certain special assessments levied by the Division of Unemployment Insurance of the Colorado Department of Labor and Employment (the division) and payments from the UCF after the payment of unemployment benefits, once these have been transferred to the trustee. The division is able to charge two bond-specific special assessments, one on all contributing employers at a rate expected to generate 1x coverage of principal and another on only those employers who have relied more on state unemployment benefits at a rate expected to generate 1.5x coverage of interest requirements plus amounts necessary for administrative costs. There are no restrictions on the rates levied.

KEY RATING DRIVERS

AMPLE CASH AVAILABLE FOR PRINCIPAL PAYMENTS: The rating is based on the ample sources of cash available for principal repayment including collections of the state's regular state unemployment tax (SUTA) assessment and a special principal assessment (both of which are available for principal repayment). Funds from the regular SUTA assessment and principal assessment are pledged to bondholders once transferred to the trust estate.

INTEREST REQUIREMENTS FULLY FUNDED: Interest requirements for the bonds that were to be paid by a special interest assessment on employers have been fully funded by the state from available funds with all moneys deposited with the trustee for the benefit of bondholders.

COVERAGE OF PRINCIPAL BY BROAD UNEMPLOYMENT LEVY: The rate for the special principal assessment is set annually at a level to achieve 1x coverage of bond principal, while regular SUTA assessments intended to fund benefits are also available to bondholders as needed. Both assessments are levied on Colorado's entire broad and diverse contributing employer base. Combined special principal assessments and regular SUTA assessments provide solid coverage of principal repayment.

PRINCIPAL PAYMENT TIMED AT HIGHEST COLLECTIONS: Principal payments are scheduled on May 15, with transfers to the trustee for principal benefiting from the highest collection period for regular SUTA assessments, with over half of collections arriving between April 1 and May 15. Moreover, the state has covenanted to not repay any federal advances from the state's UCF during the six weeks prior to principal payment so that available funds will not be diluted.

RAPID REPAYMENT OF BONDS: Bonds have a short maturity; final principal payment is on May 15, 2017. The structure has an open lien but future issuance is limited by the requirement that the issuance of additional bonds will not impact the outstanding rating on these bonds.

STRONG COLLECTIONS AND ENFORCEMENT: The state's unemployment tax collection mechanisms are strong and well-established, with an historical collection rate of over 99%. All assessments are subject to the same penalties as other unemployment taxes.

STRONG STATE ECONOMY: The state has evidenced notable growth from the recession, and unemployment rates remain below national averages. Employment and income growth has surpassed that of national and regional averages.

RATING SENSITIVITIES

The rating is sensitive to the performance of the state's economy, debt service coverage on the bonds, and the legal provisions supporting repayment of the bonds.

CREDIT PROFILE

The 'AA' rating and Stable Outlook reflect the bondholder protection provided by the availability of regular SUTA assessment revenues for payment of principal, the legislatively authorized bond-specific special assessments on contributing Colorado employers for payment of debt service, the full funding of interest requirements until bond maturity, and solid coverage of principal payments to date. Legislation established the division as a state enterprise fund, allowing the division's operations to be outside of the requirements of the Colorado Taxpayer Bill of Rights (TABOR).

Proceeds of the 2012 bond issue repaid a $95 million loan by the state from the federal unemployment account and also funded a $530 million deposit to the UCF, the state's fund from which unemployment benefits are drawn, to ensure greater fund solvency. The series 2012A bonds are no longer outstanding as the one $84.79 million principal maturity on May 15, 2014 was paid in full. The balance in the UCF at the end of calendar year (CY) 2013 was $526.5 million.

SPECIAL ASSESSMENTS

There are three components of authorized special assessments related to bond repayment: an assessment restricted to principal repayment, an assessment restricted to payment of interest on the bonds, and an assessment related to principal on any bonds issued to pay interest on the state's outstanding federal unemployment account loan. The assessment related to the payment of interest is no longer required as funds have been deposited with the trustee for this payment obligation through bond maturity in 2017. The third assessment was not used as the state applied premium received with the sale of the bond issues to repay the interest owed to the federal government.

Special principal assessments are collected from all contributing employers in the state and the division has covenanted to levy the special principal assessment at a rate sufficient to provide 1x coverage of required principal payments. Assessments for principal payments are levied with regular SUTA assessments and collected in quarterly installments and the annual collection rate has approximated 99%.

The principal assessment rate is determined on July 1 of each year and employers are notified of their billing rate in November for the succeeding calendar year. Employers are billed on April 1 for first-quarter payroll with a significant amount of payments received in April and May. The special assessment rates are unlimited and must be set annually.

DEBT SERVICE FUNDING

Special principal assessment revenue is collected in the UCF prior to transfer to the trustee. Available revenue in the UCF for principal payments (which consist of the special principal assessments, revenue from regular SUTA assessments, and UCF fund balances) are transferred five business days prior to the principal payment date. At point of transfer, these revenues become part of the trust estate and are pledged to bondholders.

Collections from the special principal assessment approximate 56% of total principal by May 15, necessitating the use of regular SUTA assessment revenue and UCF fund balances to cover the annual May 15 principal payment. Due to the collection cycle and the fact that assessments are limited to the first receipts from an employee's taxable wages ($11,700 is the wage base for CY 2014), more than half of regular SUTA assessments are received between April 1 and May 15. To ensure sufficiency of revenue available in the UCF, the authority has covenanted that it will not pay any federal advances between April 1 and May 15 while bonds are outstanding, until the principal account is equal to payments due on the bonds on May 15 in each calendar year.

Cash flows from available revenues and fund balances provided strong coverage of principal requirements on each May 15 in CYs 2013 and 2014, although coverage was slightly lower than anticipated at the time of the bond sale. Coverage from cash flow (special principal assessments plus regular SUTA assessment revenue) was 2.3x in 2013 and the increase in coverage when considering available balances in the UCF was to 5.8x. Coverage is estimated to have remained solid at the recent May 15, 2014 principal payment; 2.3x from cash flow is estimated, increasing to 6x with all available balances applied.

STATE UNEMPLOYMENT ASSESSMENT SYSTEM

The bonds benefit from the well-established nature of the state's unemployment assessment system. Contributing Colorado employers pay several levies to the state's UCF, with components based on their benefit experience, the status of the state fund, and whether the state has federal advances outstanding. Historical collection experience is very strong, with over 99% of taxes due being collected since at least 2007. The system has been in operation for decades, with the legislature making periodic adjustments to benefits, the taxable wage base, and other factors. Most recently, the legislature made significant adjustments to the system to achieve greater long-term solvency, and a strong commitment by the state to this goal is a credit positive.

Currently, base SUTA assessment rates range from 0.81% to 10.87% reflecting each employer's experience on the first $11,700 of taxable wages in 2014. The taxable wage base adjusts annually based on the average weekly wage growth in the state. Employer contributions in 2013 totaled $684 million as compared to the $552 million that was expensed for benefit payments. All unemployment taxes are payable by contributing Colorado employers on a quarterly basis and due by the last day of the month after the end of a quarter. Approximately 66% of annual collections arrive in the period between January and May, the vast majority of which reflects workers' January - March wages and over half of the collections arrive between April 1 and May 15. The collections are deposited to the UCF and expensed for benefit payments.

STATE ECONOMY

Colorado's economy has experienced very steady growth since the recession. Employment growth has surpassed national averages and unemployment is below the nation. The state went into the recession after the nation but experienced a similar rate of employment loss in 2009 at 4.5% compared to the nation's 4.3% loss. Employment loss continued into 2010 at 1.2%, compared to 0.8% for the nation, but has since grown at a faster rate. Employment rose 1.6% in 2011, 2.4% in 2012, and 2.9% in 2013 for total growth of 6.9% compared to 4.6% national growth over those three years. April 2014 employment was up 2.9% year-over-year, compared to 1.7% for the U.S. Unemployment rates have remained below the national average since 2006 and the state's April rate of 6% was below the national average of 6.3%. The risk of potential state economic underperformance on the bonds is offset by the ability to set rates on an annual basis.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834314

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.



Fitch Ratings

Primary Analyst

Marcy Block

Senior Director

+1-212-908-0239

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eric Kim

Director

+1-212-908-0241

or

Committee Chairperson

Laura Porter

Managing Director

+1-212-908-0575

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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