Fitch Rates North Carolina's $250MM Limited Obligations 'AA+'
Fitch Ratings assigns an 'AA+' rating to the following limited obligation bonds of the State of North Carolina:
--$250 million limited obligation bonds, series 2013A.
The bonds are expected to be sold via competitive bid Jan. 15, 2013.
Fitch also affirms the 'AAA' rating on $4.5 billion of outstanding North Carolina general obligation (GO) debt and the 'AA+' rating on $2.4 billion in outstanding appropriation-backed debt issued by the state and its Infrastructure Finance Corp.
The Rating Outlook is Stable.
The bonds are a limited obligation of the state of North Carolina, payable solely from state appropriation. Appropriation debt is legislatively authorized and centrally managed, with approval required by the treasurer and council of state, which includes all statewide elected officials. Bondholders have no lien on or security interest in projects.
KEY RATING DRIVERS
LINK TO STATE GO RATING: The 'AA+' rating on debt backed by the State of North Carolina's appropriation commitment, one notch below the state's GO bond rating, reflects the state's strong general credit standing, as well as the sound structures and centralized oversight of appropriation debt.
LOW LIABILITIES: The state has a low-to-moderate debt burden and strong debt management practices, including an affordability planning process. Over time the state has become more reliant on appropriation debt. Pension funding is among the strongest of the states.
WELL MANAGED FINANCIAL OPERATIONS: Financial operations are conservative with a history of prompt action when necessary to maintain budget balance. The fiscal 2011-2013 biennial budget is meeting expectations including funding of reserves that were utilized during the recession.
DIVERSE ECONOMY: The economy is expected to grow and diversify in the long run, but was severely affected by the recession and recovery has been slow.
LINK TO GO RATING
The security for the limited obligation bonds will be annual payments made by the state, subject to legislative appropriation. The governor covenants to include debt service payments in the budget. Appropriation debt is legislatively authorized and approved by the council of state, comprised of all statewide elected officials, including the treasurer, who oversees debt issuance. A statutory debt affordability planning process encompasses appropriation debt, and by practice the state budgets one line item for GO and appropriation debt service. The current offering finances several capital improvements projects.
North Carolina's 'AAA' GO bond rating reflects its modest debt burden, conservative financial operations and long-term prospects for continued economic expansion and diversification.
LOW DEBT LEVELS
Tax-supported debt approximates $8.6 billion, 40% of which is appropriation-backed. The state's debt burden remains on the low end of the moderate range, at 2.5% of 2011 personal income. Amortization is above average with 70% of GO and appropriation debt due in 10 years. There is approximately $205 million in appropriation debt authorized but unissued.
Although funding of the state's major pension system has declined, it remains nearly fully funded at 94% as of Dec. 31, 2011. On a combined basis, the burden of the state's net tax-supported debt and Fitch-adjusted unfunded pension obligations as a percent of personal income is amongst the lowest of the U.S. states rated by Fitch.
CONSERVATIVE APPROACH TO FISCAL MANAGEMENT
Financial operations are conservative, with the governor empowered to unilaterally reduce spending to maintain budget balance, after making provision for debt service. North Carolina used a variety of tools to balance its budget over the course of the recession, including spending reductions, temporary tax increases, use of reserves, and federal stimulus aid.
The state faced a $2.6 billion current services gap in preparing the fiscal 2011-2013 biennial budget, including the loss of $1.6 billion in federal stimulus funds, $1.3 billion in foregone tax revenues as temporary tax increases expired, and increased operating costs of existing programs. The consensus revenue forecast upon which the budget was based assumed a slow recovery in fiscal 2012 followed by more rapid growth in fiscal 2013. The state closed the gap relying almost entirely on budget reductions and funds set aside from the prior fiscal year.
Budget performance for fiscal 2012 met expectations with tax revenue growth slightly higher than forecast. Tax revenues grew just 0.5% year-over-year in fiscal 2012 but were 2.5% higher than forecast with solid growth in individual and corporate income tax revenues offsetting lower sales tax revenues due to the rate reduction. General fund expenditures were slightly lower than budgeted but increased 5.8% after three years of reductions or no-growth. The revenue forecast for fiscal 2013 was revised slightly downward as of May 2012, projecting 4.3% growth rather than the 5.5% growth originally forecast. Tax revenues through the first five months of fiscal 2013 are tracking the forecast, up 4.1% year-over-year.
The solid budget performance allowed the state to add $307 million to its rainy day fund, which had been depleted as a budget balancing solution during the recession, bringing its balance to $419 million. Other reserves total approximately $760 million in special and trust funds as well as approximately $713 million in the Golden Leaf trust, funded from tobacco settlement and used primarily for economic development in tobacco growing regions.
TRANSITION TO SERVICE BASED ECONOMY
The transition of the economy away from manufacturing toward services continues, with manufacturing employment now half of what it was in the 1990s. Employment in manufacturing grew for the first time in more than 15 years in January 2011, and has demonstrated year-over-year gains in every month but one since, including 1.2% year-over-year growth in November 2012. Professional and business service employment is one of the faster growing sectors, increasing 1.7% on a year-over-year basis in November 2012. Measured by per capita personal income, North Carolina is below average at 88% of the U.S. level, ranking 36th among the states.
Leading into the recession, North Carolina's economy had been growing significantly in terms of both size and diversity; but its contraction over the course of the recession was severe. Employment fell 5.5% during calendar year 2009, notably worse than the national decline of 4.4%, with all sectors other than education and health services showing declines. Job losses began to abate toward the end of 2010 but employment overall fell 0.9% in 2010, again higher than the national decline of 0.7%.
Economic growth has been somewhat slow emerging from the recession but future growth is expected to be stronger as the now smaller manufacturing sector begins to recover and business and professional service sectors grow with the overall economy. Employment growth has somewhat lagged the U.S. growth rate although it matched the U.S. rate at 1.4% year-over-year growth in November 2012. The state's unemployment rate of 9.1% remains higher than the national rate of 7.7% as of November 2012, reflecting in part the need to absorb higher in-migration.
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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