News Column

Fitch Rates Georgia's $977.83MM General Obligations 'AAA'; Outlook Stable

June 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following state of Georgia bonds:

--$649,970,000 general obligation (GO) bonds 2014A;

--$151,115,000 GO bonds 2014B (federally taxable);

--$13,750,000 GO bonds 2014C (federally taxable qualified school construction bonds - direct pay);

--$162,995,000 GO refunding bonds 2014D.

The bonds will sell via competitive bid, on or about June 17, 2014.

Fitch has also affirmed the 'AAA' ratings on $9.1 billion of outstanding GO ($8.8 billion) and guaranteed revenue bonds of the state (Georgia State Road & Tollway Authority, $348.6 million).

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the state of Georgia, secured by a pledge of the state's full faith and credit.

KEY RATING DRIVERS

LOW LIABILITY BURDEN: The state's long-term liability burden is low and overall debt management is conservative. While Georgia issues bonds regularly for capital needs, amortization of principal is rapid. Additionally, the state fully funds its annual required contributions for pensions keeping the unfunded liability very manageable.

FISCALLY CONSERVATIVE: Georgia has a long history of conservative revenue estimation and balanced operations and has consistently taken timely action to address fiscal weakness. The state has capitalized on recent revenue growth to make substantial progress in rebuilding reserves.

DIVERSIFIED ECONOMY: After a sharp recessionary downturn, the state's diverse economy is showing signs of an accelerating recovery.

RATING SENSITIVITIES

The rating is sensitive to fundamental changes in the credit characteristics of the state including an unexpected failure to respond to changes in the economy that result in budget gaps, or an unexpected change in debt profile.

CREDIT PROFILE

The longstanding 'AAA' rating and Stable Outlook on Georgia's GO bonds reflect its conservative debt management, a proven willingness and ability to support fiscal balance, and a diversified economy. The state took repeated action during the recession to maintain fiscal balance through steep spending cuts, use of federal stimulus, and draws from its rainy day fund, the revenue shortfall reserve (RSR). Since then it has maintained a conservative approach to fiscal management, curbing spending growth and making progress in rebuilding the RSR balance. The state's debt profile is conservative and its debt burden is moderate as a percentage of personal income.

Low Long-Term Liabilities

Most of the state's tax-supported debt is in the form of GO or guaranteed revenue bonds and amortization of principal is rapid, with just over 70% maturing within 10 years. Other outstanding obligations include $913.3 million in federal grant anticipation revenue (GARVEE) bonds and $188.5 million in capital leases. Including the current sale, debt remains moderate at 2.8% of 2013 state personal income.

Georgia's major pension systems covering both state employees and teachers have benefited from consistent full funding of actuarially calculated annual required contributions. As of the June 30, 2012 valuation, systemwide funded ratios for the state employees and teachers plans were reported at 73.1% and 82.3%, respectively. Using Fitch's more conservative 7% discount rate assumption, the state employees' and teachers plans would be funded at 69.3% and 78%, respectively, as of June 30, 2012. On a combined basis (and inclusive of the new issuance), the state's net tax-supported debt and Fitch-adjusted unfunded pension liability attributable to the state total 4.8% of 2013 personal income, below the median of 6.1% for U.S. states.

Funded ratios declined very modestly in the June 30, 2013 valuation, but Fitch notes positively that the state's pension systems both adopted more conservative actuarial assumptions. The reported ERS and TRS funded ratios were 71.4% and 81.1%, respectively. The boards of both retirement systems shifted to closed amortizations from open amortizations. ERS' UAAL for each year will be fully amortized within separate closed 25 year periods, while for TRS the amortization periods (using a similar methodology) will be closed 30 year periods.

Broad and Recovering Economy

While the recession was more severe in the state than the nation overall, Georgia's employment recovery has outpaced the nation recently. Like all states, Georgia remains vulnerable to significant macroeconomic risks including the uneven pace of the housing market recovery and the effects of the Federal Reserve's tapering of quantitative easing. Statewide employment began year-over-year (YOY) gains in fall 2010, shortly after the nation. While the initial growth rate was tepid and volatile, the growth trend outpaced national YOY employment gains in 2013 (2% versus 1.7%) and Georgia'sApril 2014 YOY gain of 1.9% was ahead of the nation's 1.7% rate. Unemployment remains elevated though, and the state's overall wealth levels still lag the U.S. As of April 2014, the state's unemployment rate was 7% versus the national 6.3% rate. Georgia's per capita personal income ($38,179) ranks 40th among the states at 86.4% of the U.S., and its poverty rate of 17.4% exceeds the national 14.9% rate.

Conservative Financial Management

Georgia has demonstrated its commitment to budgetary balance and maintaining flexibility in the form of RSR balances. Strong revenue performance through fiscal 2007 (year ended June 30) enabled the RSR balance to reach $1.5 billion (8.2% of net revenues) by fiscal 2007. During the recession, the state drew down the RSR to a low of $103.7 million (0.6% of net revenues) in fiscal 2009. Through spending restraint and conservative revenue estimating, Georgia has steadily rebuilt the RSR since then.

The state ended fiscal 2013 with a solid RSR balance of over $900 million, supported by strong revenue growth and expense management. After accounting for the customary 1% mid-year appropriation for education spending, the net RSR balance was $717.3 million (3.9% of fiscal 2013 net general fund revenues). Total net general fund revenues increased 5.9% from the prior year, ahead of the 4.1% amended budget estimate. As in other states, personal income tax growth (7.7% YOY) was a major driver, and Georgia attributed a portion of that growth to a one-time acceleration of income into the 2012 tax year as a result of the recent federal tax increase.

The structurally balanced fiscal 2014 original budget and amended budget assume moderate economic and revenue growth. Amended fiscal year (AFY) 2014 budget estimates are for just 3.7% growth in tax revenues (Department of Revenue reported tax collections, which exclude the insurance premium tax) from fiscal 2013. Georgia's 2014 projections prudently incorporated a significant slowdown in YOY personal income tax growth, despite last year's sharp increase of nearly 8%, to account for the effects of income acceleration. Through May, the state's tax revenues are up 4.6% YOY, versus the 3.7% AFY 2014 estimate. Stronger growth in corporate income tax revenues, and to some extent sales tax revenues, offset weaker growth in personal income tax revenues.

Georgia's fiscal 2015 adopted budget reflects overall improvement in fiscal flexibility. The state notably increased K-12 funding by over $500 million to allow school districts to restore recession-related cuts in staffing and school days. Additionally, unlike in recent years, the fiscal 2015 budget did not include broad-based expenditure reductions from current year-funding levels. Fitch views the budget as structurally balanced and in line with the state's historically conservative budgeting practices.

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

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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=834367

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

Eric Kim

Director

+1 212-908-0241

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Douglas Offerman

Senior Director

+1 212-908-0889

or

Committee Chairperson

Karen Krop

Senior Director

+1 212-908-0661

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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