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.
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
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amended or repealed by the legislature by a two-thirds vote in the first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.
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
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
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,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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Fitch Ratings, Inc.
New York, NY 10004
Relations, New York
Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings