Fitch Rates New Hampshire $90MM GO Bonds 'AA+'
Fitch Ratings has assigned an 'AA+' rating to the State of New Hampshire's general obligation (GO) capital improvement bonds consisting of:
--$90 million 2012 series B.
The bonds are expected to sell Nov. 14, 2012 via competitive sale.
Fitch also affirms the 'AA+' rating on New Hampshire's approximately $960 million outstanding GO bonds.
The Rating Outlook is Stable.
General Obligation, full faith and credit of the state of New Hampshire.
KEY RATING DRIVERS
REGIONAL LEADING ECONOMY: New Hampshire benefits from high education and wealth levels, low unemployment, and above-average job growth, offset to some extent by slow population growth and an aging demographic profile. New Hampshire's economy had been strong and resilient when compared to surrounding states coming into the economic downturn, and strong growth is expected to return as the national economy recovers.
RELIANCE ON UNUSUAL REVENUE STREAM: With no sales or income tax, the state's finances are dependent on an unusual mix of taxes - business taxes, real estate transfer taxes, cigarette and alcohol taxes, etc., which are economically sensitive and underperformed through the economic downturn. Only modest growth is expected in the current biennium.
BUDGET BALANCE: The state takes timely action to maintain budgetary balance. The enacted budget includes reductions to local governments, a significant shift in how hospitals are reimbursed for indigent care, flat funding of K-12 education and higher education cuts, as well as other program consolidations and reductions.
LOW LIABILITIES: Debt levels are low, amortization is rapid, and net tax-supported debt is entirely general obligation. Pension funding has declined dramatically over the past ten years and represents a future spending pressure.
The 'AA+' rating reflects New Hampshire's economic strength and resiliency and conservative debt position. New Hampshire's economy compared favorably to surrounding states coming into the economic downturn and seems to be emerging from the recession at a faster pace as well. These strengths are offset partly by the state's dependence on a variety of volatile taxes, which did not perform well during the recession and are expected to grow only modestly despite the state's economic recovery.
New Hampshire's debt structure is conservative with low debt levels, rapid amortization, and reliance on fixed rate GO or guaranteed debt. Net tax-supported debt represents a low 1.9% of 2011 personal income (as calculated by Fitch), reflecting the historically limited role of state government. The current offering will finance a portion of the state's annual capital improvement program. Funding of the state's pension system has declined significantly over the past decade; as of June 30, 2012 the state's pension system funded ratio was 56.1%, down from 89.9% in 2000. This already low funding level may decline with changes in actuarial assumptions, including a lowering of the investment return from 8.5% to 7.75%. Fitch expects improving the actuarial position will present a future spending pressure. The state fully funds the ARC and is responsible for approximately one-quarter of the total pension liability. Even with the low pension funding level, New Hampshire ranks among the strongest states in terms of debt and unfunded pension liabilities as a percent of personal income at 3.6%, well under the state median of 6.6%.
New Hampshire is a prosperous state that has shifted rapidly from manufacturing to services, as its economy has become more like that of the nation's. The state's population and job growth have generally outpaced New England's since 1980, benefiting from the expansion of Boston suburbs into New Hampshire and growth in the trade, transportation and utilities and other services sectors. The state did not lose jobs year-over-year during the recent recession until December 2008 and employment losses remained below the national rate through the recession, with non-farm employment down 3.4% in 2009 versus 4.4% nationwide and down 0.5% in 2010 versus a decline of 0.7% nationwide. Job growth has resumed but has been weak relative to the U.S., up 0.4% in September 2012, lower than the U.S. growth rate of 1.4%. Unemployment is consistently well below U.S. levels. The unemployment rate of 5.7% in September 2012 is below the U.S. average of 7.8% but higher on a year-over year basis. Per capita personal income is 109% of the nation's, ranking New Hampshire ninth among the states.
New Hampshire's tax structure, specifically its lack of a personal income or general sales tax, differentiates it from all other states except Alaska and is a key influence on financial operations. The state relies on business, real estate, and excise taxes, as well as a statewide property tax dedicated solely to education. This unique tax structure is volatile, especially the taxes on business profits, which are vulnerable to swings in the business cycle, and on real estate transfers, which are sensitive to housing market conditions.
The tax structure makes it difficult for the state to take advantage of the economic recovery as revenues are expected to grow only modestly despite growth in employment. The enacted budget for the fiscal 2012-13 biennium assumed growth in base revenues of just 0.8% in fiscal 2012 and 1.6% in fiscal 2013, and relies primarily on expenditure reductions, cuts or cost increases to local governments, and shifts in funding to achieve balance. Overall revenues, inclusive of net Medicaid enhancements and recoveries, were budgeted to decline 0.2% in fiscal 2012. Base revenues resumed growth in fiscal 2012 and slightly outperformed the budget, after declining in 2011. Overall revenues were in line with the budgeted 0.2% decline. Business taxes resumed growth of 5.3% but were offset by a 5.2% decline in cigarette taxes and a large fall off in payment of the Medicaid Enhancement Tax of 20%. Revenue performance through the first quarter of fiscal 2013 is just under forecast.
Net appropriations are approximately 1% less than actual expenditures in the prior biennium. The budget required a $50 million reduction in compensation and benefit expenses, which the State achieved, including a $20 million reduction in the general fund. It also assumed a $26 million savings over the biennium for the recertification of retirement contribution rates. Some of these cost savings are not expected to be achieved. Local governments also face both reduced revenues and increased expenditures, as revenue sharing is suspended for the second consecutive biennium, and a long-standing state subsidy of pension contributions was eliminated. Prior to fiscal 2010, the state paid 35% of the local government required pension contribution. The subsidy was reduced in the fiscal 2010-11 biennium and eliminated in the current biennium, saving the state $171 million over the biennium. The K-12 education funding formula was flat funded at $940 million per year but does not fund $100 million of prior legislative changes to the formula. Higher education funding is reduced over $105 million.
Additional budget gap closing measures include a significant shift in how hospitals are reimbursed for uncompensated (indigent) care, with a redirection of approximately $158 million in Medicaid enhancement tax revenue from the disproportionate share hospital program to the general fund for Medicaid provider payments. This approach is being contested through the court system by affected hospitals and, if successful, could result in an increased expense of $100 million to the general fund. Cost savings were also expected to be derived from consolidation in health and human services programs and a shift to managed care for Medicaid. There is some delay in achieving these savings that are expected to be absorbed within the respective budgets. Having depleted its rainy day fund in fiscal 2009, the state has minimal reserves, a concern given the state's revenue system, but one that is mitigated by the state's proven willingness and ability to achieve budgetary balance.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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
U.S. State Government Tax-Supported Rating Criteria
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