News Column

Fitch Rates Utah $235MM GO Bonds 'AAA'; Outlook Stable

August 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds of the state of Utah:

--$234.54 million GO bonds, series 2014.

The bonds are expected to sell via competitive bid on Sept. 3, 2014.

In addition, Fitch affirms the 'AAA' rating on $2.8 billion of outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

General obligation, full faith and credit of the state of Utah.

KEY RATING DRIVERS

CONSERVATIVE APPROACH TO DEBT AND FINANCE: The state's conservative debt and fiscal policies have kept debt levels moderate and quickly amortizing, and have allowed for successful and timely action when addressing budgetary imbalances.

POSITIVE FINANCIAL RESULTS: The state has a history of taking action to close budgetary gaps and has prioritized building reserves.

STRONG LIABILITY POSITION: Utah's liabilities are below average for a U.S. state with rapid principal amortization, moderate debt burden despite an increase in debt for transportation needs, and below average unfunded pension liabilities.

SUCCESSFUL GROWTH MANAGEMENT: The state benefits from a growing and diversifying economy and has successfully managed associated operating and capital spending pressures, especially for education and transportation.

RATING SENSITIVITIES

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

CREDIT PROFILE

Utah's rating and outlook reflect conservative debt and fiscal policies, which have kept debt levels moderate and quickly amortizing, and have allowed for successful and timely action when addressing budgetary imbalances. Longer term prospects for the economy are for ongoing expansion and diversification and recent growth has been strong.

EXPANDING POPULATION AND ECONOMY

Utah has been characterized in recent years by rapid population growth and an expanding and diversifying economy. Utah typically is among the fastest growing states in terms of population, increasing by 23.8% from 2000 to 2010 and by 5% since 2010, more than twice the U.S. rate. The expansion reflects higher than average birth rates - Utah is the youngest state in terms of median age - as well as high family formation rates.

After several years of greater-than-average employment growth, Utah began to lose jobs in mid-2008, trailing the nation into the recession. Utah employment declined 5.1% in 2009, higher than the 4.3% national rate of job loss. These losses began to abate in early 2010 and non-farm employment began to increase in July 2010. The U.S., in comparison, did not begin to experience job growth until September 2010. Growth in non-farm employment has outpaced the U.S. in every month since July 2010, increasing 2.1% in 2011, 3.5% in 2012, and 3.2% in 2013, well higher than the U.S. rates of 1.2%, 1.7%, and 1.7% in those years. Most recently, non-farm employment increased 3.5% year-over-year, exceeding the U.S. rate of 1.9% as of June 2014.

Service sector employment has led Utah out of the recession; professional and business sector employment increased 2.3% year-over-year in June while education and health service employment was up 3.5% year-over-year. There also was 3.4% growth in manufacturing employment in June. As would be expected given the state's demographic profile, the construction sector is showing a relatively strong rebound, with employment growth of 9.2% year-over-year in June. Utah's unemployment rate remains well below the national average at 3.5% in June 2014, 57% of the national rate. The state's per capita personal income is heavily influenced by its young demographics; at 81% of the U.S. average, Utah ranks among the last of the states by this metric.

RETURN TO REVENUE GROWTH

Major revenue sources have resumed growth. Overall, combined general and education fund revenues increased 9.7% in fiscal 2013, followed by an estimated drop-off of 1.5% in fiscal 2014 that can be attributed to shifts in personal income tax collections into the prior year due to federal law changes. Reflecting that income acceleration, as well as the rebound in employment, personal income tax, which is the main revenue source for the education fund, increased 16% in fiscal 2013, followed by a 3.1% decline in 2014. Sales tax revenues deposited in the general fund are demonstrating slow but steady growth despite earmarking of a portion of the growth in sales tax revenues for transportation purposes. The state generated a small operating surplus in fiscal 2013, some of which was used to bolster reserves.

The budget for fiscal 2014, which ended June 30, was structurally balanced as enacted, and included expanded funding for education based on enrollment growth and an increase in funding per student, and anticipated higher Medicaid costs due to federal healthcare reform. The enacted budget for fiscal 2015 is structurally balanced based on a conservative estimate of modest revenue growth and did not fund any major new initiatives. As has been the case for several years, the budget funds increases in K-12 and higher education, and included small pay and benefit increases for state employees.

CONSERVATIVE DEBT POSITION

The state's approach to debt issuance is conservative, relying primarily on GO bonds. The state does not issue variable rate debt, or issue short-term or cash-flow notes. Amortization is rapid as the state has historically limited its bond maturities to seven years other than for transportation related bonds for which it permits 15 year amortization.

Debt levels have begun to decline to former lower levels with limited debt issuance and rapid amortization, after having increased earlier in the decade. Debt continues to represent a moderate burden on resources with net tax-supported debt of approximately $3.1 billion equal to 3% of 2013 personal income. Amortization of GO bonds remains rapid, with 85% of GO debt maturing in 10 years. The current offering is a refunding for debt service savings.

Pension funding remains above average, although the funded ratio has declined in recent years, reflecting both the downturn in the market as well as a revision of the actuarial return assumption from 8% to 7.75% and subsequently to 7.5%. The state consistently funds the ARC. Using Fitch's more conservative 7% discount rate assumption, funding of the state's largest pension plan would decline slightly from 85.3% to an estimated 80%. The combined ratio of debt and unfunded pension liability is below average at 4.8% of personal income, compared to the 6.1% median for U.S. states, ranking Utah 18th among the states.

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

In addition to the sources of information identified in the 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 14 Aug 2012.

--'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug 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=853054

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

Karen Krop

Senior Director

+1-212-908-0661

Fitch Ratings, Inc.

33 Whitehall Street

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, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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