News Column

Fitch Rates Washington's $1.2B GO Bonds 'AA+'; Outlook Stable

June 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following state of Washington general obligation (GO) bonds:

--$231,005,000 various purpose GO bonds, series 2015A-1 (competitive sale) and 2015A-2 (negotiated sale);

--$445,230,000 various purpose GO refunding bonds, series R-2015A;

--$437,000,000 motor vehicle fuel tax GO refunding bonds, series R-2015B;

--$85,980,000 GO bonds, series 2015T (taxable).

The bonds are expected to be sold on June 25, 2014.

In addition, Fitch has affirmed the 'AA+' rating assigned to $19 billion of outstanding state GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are GOs of the state to which its full faith, credit, and taxing power are pledged. Motor vehicle fuel tax GO bonds are first payable from state excise taxes on motor vehicle and special fuels.

KEY RATING DRIVERS

SOLID ECONOMY: Washington's economy is characterized by generally sound performance and increased diversification. The manufacturing sector remains concentrated in the cyclical aerospace industry, although this concentration is sharply reduced. Economic growth prior to the recession was primarily due to strength in construction, aerospace (Boeing), and technology (Microsoft), and these remain economic drivers.

RESPONSIVE FINANCIAL MANAGEMENT: Frequent reviews of economic and financial forecasts allow the state to react to changing conditions. As the economy and revenues repeatedly underperformed estimates in the recession, the state demonstrated its willingness and ability to take actions to maintain budget balance. The state has since experienced steady improvement in its economic and revenue results, and the budget for the current biennium continues to replenish a cushion against future underperformance.

CONCENTRATED REVENUE SYSTEM: The state, with no income tax, relies on consumption-based revenues. This makes Washington particularly vulnerable to reductions in consumer spending.

ABOVE-AVERAGE LIABILITY BURDEN: Debt ratios are in the upper moderate range and expected to remain so. This reflects funding of substantial capital needs, particularly for transportation. Although the state's unfunded pension liability is well below average, the combined burden of debt plus pensions is above the median for U.S. states.

INITIATIVES AND REFERENDA A LIMITED RISK: Washington's initiative and referendum environment creates a level of operating and financial uncertainty. However, any law approved by voters in this manner can be amended or repealed by the legislature by a two-thirds vote in the first two years after approval and by a simple majority thereafter.

RATING SENSITIVITIES

The 'AA+' rating and Stable Outlook assume the state's continued ability to maintain budget balance and an adequate reserve position in the face of funding demands presented by an education-funding court decision and transportation needs.

CREDIT PROFILE

Washington's 'AA+' GO bond rating reflects a generally solid economy and a demonstrated commitment to fiscal balance even as the state's financial position substantially weakened in the downturn. Credit strengths are offset by a concentrated revenue system that is reliant on the sales tax, with no income tax, as well as above-average debt levels. Economic and revenue growth in the recovery has allowed the state to begin to replenish its financial cushion, and the budget for the current fiscal 2013-2015 biennium continues to build reserves.

IMPROVING FISCAL POSITION

Washington's reliance on a broad-based sales tax makes it particularly vulnerable to reductions in consumer spending. State general fund revenue declines of 9.6% in fiscal 2009 and 4.1% in fiscal 2010 were followed by growth of 7.9% in fiscal 2011, reflecting in part tax increases enacted in April 2010, 1.5% in fiscal 2012, and 6.1% in fiscal 2013. The most recent forecast, from February 2014 and increased from levels assumed in the enacted budget, projects revenues up 3% in each of fiscal years 2014 and 2015.

The state reviews its general fund revenue forecast quarterly. Actual revenue performance underperformed downwardly revised estimates in the recession repeatedly and significantly. Budget balance was maintained through a combination of ongoing and one-time actions, including a drawdown of reserves. More recent performance has been in line with expectations, and aggregate forecast changes since 2012 have been comparatively modest. The revenue forecast will be updated next on June 17th; given that revenues are in line with the February estimate year-to-date and only modest revisions were made with the most recent economic forecast update, changes are expected to be minimal.

Despite continued revenue growth, budgeting for the current fiscal 2013-15 biennium was challenging. Washington took extensive spending control action in the downturn, and there was insufficient support for significant revenue increases. Adding to the challenge, a new statutory requirement mandated that the budget show projected balance over a four-year period rather than just the biennium.

The enacted budget was passed unusually close to the start of the new biennium and following preparation for a possible partial government shutdown. A key source of debate was the amount of additional money necessary to address a 2012 state Supreme Court decision that found state education funding inadequate. The court decision provided the state flexibility in terms of the timing and amount of remediation, although a goal of $3 billion-$3.5 billion in total incremental revenue by 2018, consistent with 2009 legislation, is often cited. The state calculates that $1 billion in additional funding was provided towards this goal with the current biennial budget, although that includes the continued suspension of a scheduled raise for teachers that was passed by voter initiative but has been repeatedly suspended. Significant additional education funding in future biennia is believed necessary to satisfy the court mandate, and this is likely to be a key source of pressure in the budget for the next biennium.

The ending balance and reserve total for the biennium that closed on June 30, 2013 totaled $438 million, 2.7% of fiscal 2013 revenues. This is projected to rise to $898 million, 5.4% of fiscal 2015 revenues, by the end of the current biennium. Fitch views positively the replenishment of reserves and the state's reserve funding provisions. In November 2007, voters approved a constitutional budget stabilization account that receives 1% of revenues off the top every year, capped at 10% of annual general revenues. Although there are restrictions on use, these monies were depleted during the recession. In 2011 voters approved another constitutional amendment that requires that any extraordinary growth in state revenue (defined as growth in general state revenues that exceeds by one-third the average biennial growth of the prior five biennia) shall be transferred to the budget stabilization account on top of the 1%.

Although budget balancing solutions for the current biennium did not include significant revenue-raising actions, a 2013 court decision declared unconstitutional a voter initiative-based requirement that tax increases be passed with a supermajority legislative vote. This provides some increased flexibility in this area as the state confronts funding pressures in future biennia.

SOLID ECONOMIC PROFILE

Washington State's economy, historically reliant on manufacturing supplemented by regional and international trade and tourism, has broadened. Areas of concentration (Boeing and Microsoft) offer relatively high-wage employment, and the population is well educated. In addition, population growth has far exceeded that of the U.S. as a whole. Following a vote by the machinists union earlier this year and a state incentive package passed by the legislature last year, Boeing will manufacture its new 777X jetliner in the state. This is positive news for the Washington economy, as the company had been considering production in other states.

Washington's economy entered the recession later than the nation overall following a period when it performed much more strongly than the U.S. Peak-to-trough, the state's non-farm employment decline was slightly lower than that of the nation, and the recovery has been stronger. In April 2014, Washington's year-over-year job growth of 2.1% compared to the 1.7% rate for the nation. The state's unemployment rate in April was 6.1%, 97% of the U.S. rate. Personal income per capita is above average, at 105.6% of the U.S. in 2012, and recent personal income growth has been comparatively strong.

WELL ABOVE-AVERAGE DEBT LEVELS; NEAR MEDIAN WHEN PENSIONS ADDED

Washington's debt levels are in the upper moderate range and well above average for a U.S. state, with net tax-supported debt of $19.8 billion equal to 6% of personal income. Debt is primarily GO. Capital needs are substantial, particularly for transportation, and tolling is part of the funding solution. Positively, the state has increased its focus on debt affordability. In November 2012 voters approved a constitutional amendment that tightened the constitutional debt limit.

The state administers 13 defined benefit retirement plans, three of which have hybrid defined benefit/defined contribution options. The closed public employees and teachers plans (PERS and TRS1), which have been closed since 1977, are underfunded. However, Fitch believes that the unfunded liability is manageable. On a combined basis, Washington's burden of net tax-supported debt and adjusted unfunded pension obligations, at 7.9%, is above the 6.1% of personal income median for U.S. states.

OPEB benefits are limited and funded on a pay-as-you-go basis.

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

In addition to the sources of information identified in Fitch's report '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. 14, 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated 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. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834374

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

Laura Porter

Managing Director

+1 212-908-0575

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eric Kim

Director

+1 212-908-0241

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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