News Column

Fitch Rates Idaho's $475MM TANs 'F1+'

June 16, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'F1+' rating to the following State of Idaho tax anticipation notes (TANs):

--$475 million series 2014.

The notes will be sold via negotiation on or about June 24.

In addition, Fitch takes the following actions on the State of Idaho:

--Affirms at 'AA+' the state's implied general obligation (GO) rating;

--Affirms at 'AA' the rating for the state building revenue bonds of the Idaho State Building Authority (ISBA).

The Rating Outlook on the long-term ratings is Stable.

SECURITY

The TANs are valid and binding obligations secured by general tax revenue to be received in the fourth quarter of the fiscal year, the treasurer's covenant to transfer sufficient borrowables to the note repayment fund, and a pledge of the faith and credit of the state.

KEY RATING DRIVERS

SOLID COVERAGE OF NOTES: The notes benefit from solid coverage by a first claim on Idaho's general fund revenues in the fourth quarter of the fiscal year. Coverage is broadened by available borrowable resources well in excess of note borrowing.

NOTEHOLDER PROTECTIONS: The notes bear the faith and credit of the state, with holdbacks employed if necessary to ensure note payment.

CONSERVATIVE FINANCES: The state follows conservative budget practices and has demonstrated a willingness to use broad balancing actions in response to economic and revenue weakness.

REBUILDING RESERVES: The state anticipates continued progress replenishing well-funded reserve balances that were depleted during the recession.

LOW LIABILITY BURDEN: Debt levels are low and pensions are well funded.

ECONOMIC RECOVERY CONTINUES: Idaho's slow recovery from a particularly sharp recessionary downturn began in 2011. Prior to the recession, growth rates had been robust but have been relatively modest in recent years. The state forecasts a pickup, in line with its expectations for an accelerating national recovery.

RATING SENSITIVITIES

SIGNIFICANT EROSION OF COVERAGE: For the notes, a significant erosion of coverage by projected fourth-quarter revenues as well as borrowable resources could pressure the rating. Given the very high coverage currently projected, Fitch considers this very unlikely.

CHANGE IN BUDGETARY MANAGEMENT: The ratings assume a continuation of the state's prudent approach to managing its budget and maintaining solid reserve levels.

CREDIT PROFILE

The 'F1+' rating on the $475 million series 2014 notes reflects the security provided by an irrevocable pledge of taxes and other revenues received by the state in the fourth quarter of fiscal 2015, borrowable resources available for note repayment if needed, and the state's faith and credit pledge. Fourth-quarter fiscal 2015 revenues are projected to total $978.9 million, providing 2.1 times (x) coverage of note principal. Borrowable resources forecast at more than $3.1 billion in June 2015 outside of the general fund alone provide 6.6x coverage of note principal. Additionally, the state has a practice of reducing expenditures as necessary through holdbacks to ensure sufficient funds for note repayment and budget balance.

Ample Resources to Cover TANs

All state revenues and receipts are deposited into the note repayment account beginning in the fourth quarter of the fiscal year until the balance is sufficient to repay the notes. The state treasurer may make deposits to the note repayment account earlier than scheduled from excess general fund resources. Once deposits are made, they cannot be withdrawn or loaned back to the general fund. In fiscal 2014, the note repayment account for the $500 million in series 2013 notes was fully funded by April 21, 2014.

Fiscal 2015 is projected to end on June 30, 2015 with a cash balance of $68 million following note repayment, up from $36.2 million currently projected in fiscal 2014 at year-end. Borrowable balances, consisting of amounts held in multiple funds outside the general fund, are forecast to average nearly $3.4 billion through the fiscal year, higher than the $2.7 billion projected at last year's note sale. The state has an established history of annual borrowing for cash flow needs.

Annual cash flow needs grew after passage of 2007 legislation that accelerated state aid for schools to the early months of the fiscal year as part of a plan to provide property tax relief. Following a recent legislative adjustment, just over 70% of annual payments to school districts are disbursed in the first five months of the fiscal year, enlarging cash flow imbalances and the need to borrow internally and externally. The largest mid-month imbalance during fiscal 2015, forecast at $737 million in November 2014, will be covered by the notes and by internal borrowing from the state's ample internal cash resources. Note principal of $475 million is down modestly as it had been $500 million for the past five fiscal years.

Strong Overall Credit Quality

The 'AA+' implied GO rating reflects the general credit quality of the state. Although Idaho may issue GO bonds, no such bonds are outstanding and no issuance is expected. The 'AA' long-term rating on SBA building revenue bonds reflects the pledge of repayment from annual state appropriations. Idaho's credit strengths include broad powers to ensure fiscal balance, a low liability burden and a growing economy. Although the last recession was more severe in Idaho than in the nation as a whole, state economic and fiscal performance is continuing to improve, enabling the state to rebuild balances that were depleted in the downturn. Conservative budgeting practices include the use of holdbacks when necessary to reduce spending mid-year.

Focus on Restoring Reserves

The state also has a history of building sizable reserve balances, including in its budget stabilization fund, economic recovery reserve, public education stabilization fund and higher education stabilization fund. Total balances in these funds rose to nearly $319 million as of fiscal 2008, equal to 10.9% of general fund revenues, and then fell to $11.3 million by fiscal 2011 as the state responded to recessionary fiscal weakness.

The state has prioritized rebuilding balances since then, both with direct appropriations at budget adoption and through the deposit of excess balances following budgetary overperformance. Total reserve balances, which reached $185.2 million as of fiscal year 2013 (6.6% of general fund revenues and ahead of the $99.8 million estimated at last year's TANs sale), are forecast at $237.6 million at fiscal 2014 year-end (a solid 8.5% of general fund revenues), following the expected deposit of a legislatively specified portion of excess balances. In Fitch's view, the state's focus on rebuilding and maintaining reserves is a key credit strength.

Positive Budgetary Results

Actual performance during fiscal 2014 has been well ahead of the enacted budget, and largely in line with the January 2014 forecast. Tax revenues were forecast to rise 4.7% at the time of budget adoption from estimated fiscal 2013, to $2.8 billion. With the January upward forecast adjustments, the updated outlook assumes 5.9% growth from estimated fiscal 2013 and is up 2.3% from actual 2013. General fund revenue collections year to date through May are in line with the current year forecast, rising 2% from the prior year. As of the fiscal 2015 adopted budget, the general fund is expected to end fiscal 2014 with a cash balance of $36.2 million, $10 million of which is obligated for encumbrances and reappropriations.

The fiscal 2015 adopted budget assumes continued steady economic and revenue gains. On a cash basis, general fund tax revenues rise a robust 6.3%, to $2.9 billion; the forecast reflects relatively minor tax adjustments by the legislature and a projection of accelerating economic growth. General fund appropriations rise 2.8%, to $2.9 billion. Appropriations for K-12 schools, which represent nearly 47% of spending, rise 6.6%. The fiscal year is expected to end with a cash balance of $68 million.

Low Liability Levels

The state has a conservative approach to long-term borrowing, with a low burden overall. Tax-supported debt totals approximately $854.9 million, a low burden at 1.5% of 2013 personal income. Tax-supported debt consists largely of outstanding GARVEEs (77% of total net tax-supported debt) and SBA bonds; the latter are the state's primary means of borrowing for facility financing. SBA bonds are supported by a pledge of annual appropriation. Leases renew automatically absent action by the state at least 10 months prior to scheduled expiration and payments are made within 30 days of the beginning of the fiscal year. A debt service reserve is set aside for each project.

The state's major pension system, covering state and local retirees, has generally been conservatively managed. Assets are not smoothed, and statute requires amortization of the unfunded liability within 25 years. The system's funded ratio is above-average, at 85.4% in fiscal 2013 on a reported basis; using Fitch's more conservative 7% discount rate (versus the 7.5% rate used by the system), the funded ratio declines to a still above-average 80.9%. After several years during which the pension system's board held annual funding slightly below actuarially calculated levels, the state's fiscal 2015 budget increases contributions to the system. On a combined basis, the burden of net tax-supported debt and adjusted unfunded pension obligations that are attributable to the state equals 3% of 2013 personal income, well below the 6.1% median for U.S. states and among the lowest of the states.

Modest Economic Recovery

Idaho's economy has grown slowly after taking a steep decline during the recession. Following higher-than-national employment declines in 2009 and 2010, state non-farm payrolls growth accelerated in 2012 and 2013 by 1.9% and 2.6%, respectively. These rates exceeded national growth rates of 1.7% in both years. This year's pace in Idaho has been considerably slower, though still positive, with three-month moving average yoy growth of 0.8% through April versus 1.6% for the nation. Growth in construction due to a rebounding housing sector has been strong enough to offset weakness in professional and business services, and in financial activities.

As of April, the state's monthly payrolls had returned to 97.9% of their pre-recession peak, while the nation had essentially fully recovered. Positively, Idaho'sApril 2014 unemployment rate of 5% was just 79% of the U.S. rate of 6.3%, down from 6.4% and 85% of the national rate one year prior.

Acceleration Anticipated

The state projects improvement over the rest of 2014 and into the next three years, with nonfarm payrolls forecast to expand 2.7% on an average annual basis. Idaho anticipates construction will be a major economic driver, supported by a rebounding housing market. Housing starts rose 27.6% in 2013, and construction employment increased 7.8%. The state's economic outlook forecast continued growth, though at somewhat moderated rates.

Idaho's revenue forecasts incorporate these baseline assumptions of accelerating economic growth, though the state's financial management and flexibility mitigate budgetary risks. The state demonstrated a commitment to timely budgetary adjustments through the recession and has quickly restored reserve balances.

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:

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

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834870

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Fitch Ratings

Primary Analyst

Eric Kim

Director

+1-212-908-0241

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Douglas Offerman

Senior Director

+1-212-908-0889

or

Committee Chairperson

Laura Porter

Managing Director

+1-212-908-0575

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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