Fitch Rates Nevada's $47 MM GO Bonds 'AA+'; Outlook Stable
Fitch Ratings has assigned a 'AA+' rating to the following state of Nevada general obligation (GO) limited tax (LT) bonds:
--$33.635 million Capital Improvement and Cultural Centers Bonds series 2016C;
--$13.605 million Natural Resources and Refunding Bonds series 2016D.
The bonds are expected to sell via competitive bid on or around Oct. 18, 2016.
In addition, Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'AA+';
--$1.4 billion in outstanding GO LT bonds at 'AA+';
--$1.3 million Nevada Real Property Corp. GO LT certificates series 2009 at 'AA+';
--$86.4 million lease revenue certificates of participation at 'AA'.
The Rating Outlook is Stable.
The bonds are a general obligation of the State of Nevada, to which its full faith and credit are pledged. Debt service is supported by a statewide property tax levy that is subject to both constitutional and statutory limitations. State law further provides that if property tax revenues are insufficient to pay GO debt service, moneys are to be borrowed from the general fund and repaid from future property tax revenues to the extent other moneys are not available.
KEY RATING DRIVERS
Nevada's 'AA+' Issuer Default Rating (IDR) and general obligation (GO) ratings reflect the state's conservative liability position, strong revenue and expenditure frameworks, and historically responsive financial practices, as well as its success in managing rapid population growth and development.
Economic Resource Base
Concentrated in the Las Vegas/Clark County area, the state economy remains largely based on gaming and entertainment, although economic development efforts are having some success in adding diversity. Growth in the state's economy is accelerating with employment growth across a broad range of sectors, positive trends in tourism and gaming, and some improvement in the housing market.
Revenue Framework: 'aaa' factor assessment
Nevada's revenues, primarily sales and gaming related taxes, have historically reflected its tourism-based economy, demonstrating some economic sensitivity. Fitch anticipates Nevada's revenues will grow on a real basis with continued economic expansion and may exhibit lower economic sensitivity following enactment of tax measures that broadened the taxing base.
Expenditure Framework: 'aa' factor assessment
The state maintains ample expenditure flexibility with a low carrying cost burden and broad expense-cutting ability common to most U.S. states. Education and Medicaid remain key expense drivers and continued budget management is expected to be necessary to keep spending within projected revenues.
Long-Term Liability Burden: 'aaa' factor assessment
Nevada's liabilities are low and below the median for states. GO debt is funded by a dedicated property tax levy and does not place a burden on the general fund. The state refunded debt through the downturn to keep debt service within this tax levy. Pension funding has stabilized after recession-related declines.
Operating Performance: 'aa' factor assessment
Nevada's conservative management of financial operations produces budgetary balance even in times of economic weakness. The state has ample resilience to manage throughout the economic cycle and has taken steps to strengthen and stabilize its financial operations through this period of expansion.
The rating is sensitive to changes in Nevada's fundamental credit characteristics, including conservative management of liabilities and maintenance of structural budget balance.
Nevada's economy remains based on gaming and entertainment, although recent economic development efforts aimed at diversification have been successful. For example, the construction of the Tesla "gigawatt" factory outside of Reno is one of several positive developments in northwestern Nevada, where growth in advanced manufacturing, and warehousing and distribution activities are expected to contribute to additional diversification and population growth. Gaming and entertainment related tourism (including casinos, hotels and resorts, eating and drinking establishments, and other attractions) have long been and continue to be the main economic activity in Nevada. Visitor trends are improving with visitor volume, occupancy rates, room tax revenues, and gaming revenues all expanding since 2011.
Nevada was initially slow to emerge from the national recession but is showing signs of a stronger expansion. Non-farm employment is now growing at a stronger pace than the nation. Although construction employment is still far below its former peak, the sector has been expanding since August 2013 and recent performance is quite strong (up 9.7% year-over-year in August 2016). The unemployment rate, while still higher than the U.S. rate, is well off of its peak of 13.5% in 2010. The housing market continues to be weak but existing home sales and prices have begun to increase and mortgage foreclosures are declining.
Visitor trends are improving with visitor volume, occupancy rates, room tax revenues, and gaming revenues all expanding since 2011.
Nevada's revenue system draws on its tourism based economy, relying most heavily on sales and gaming-related taxes. The state constitution prohibits a personal income tax and the state also does not levy a corporate income or franchise tax. However, in order to expand and stabilize revenues, the state has made adjustments to the modified business tax that it levies on payroll and enacted a commerce tax on businesses that have Nevada-based gross revenue of at least $4 million.
Historical growth, adjusted for policy changes, has kept pace with national economic growth, even given the dramatic negative impact of the recession in Nevada. The resumption of population growth and stronger economic expansion provides the basis for revenue growth prospects that continue this trend.
Nevada has an unlimited legal ability to raise revenues.
Most of Nevada's general fund spending (84% of the 2016 appropriation) is for education (54%) and human services, including Medicaid. Education spending is growing rapidly, in part due to a shift to more centralized funding of K-12 education, as well as rapid growth in the school-age population.
As with many states, Nevada's pace of spending growth is expected to remain in-line with, to marginally above projected revenue growth, requiring budget action to maintain balance.
Nevada's limited approach to state spending makes cyclical reductions somewhat more difficult than in states with a more expansive scope of spending, with lower but still solid flexibility in main expenditure items. During the most recent recession, the state cut spending, both across-the-board and in more targeted ways. However, to accomplish some of the required reductions, the state had to take fairly drastic action, such as furloughing employees as much as a day per month in the fiscal 2010-11 biennium.
Long-Term Liability Burden
Nevada's long-term liabilities are low at 4.8% of 2015 personal income and below the 5.8% state median (as of Fitch's October 2015 state pension update). Debt issuance has been modest, with about 21% of state GO debt supported by program revenues and considered self-supporting. The current offering will finance statewide capital improvement projects, cultural centers and historic preservation projects, environmental projects and will refund outstanding debt for debt service savings.
General obligation bonds are paid from a property tax pledge that is statutorily limited to $3.64 per $100 of assessed valuation for all overlapping units of government, with priority for taxes levied for debt service. There is a requirement to borrow from the general fund, to be repaid from future property tax revenues, if the annual collection is insufficient to pay GO debt service. The state's tax rate dedicated to debt service is $0.17, of which $.02 is exempt from the statutory limit, and state law includes a permanent appropriation for such payment.
Nevada has three defined-benefit retirement systems covering state employees, the judiciary, and the legislature. The largest is the Public Employees' Retirement System (PERS), a cost-sharing, multiple-employer plan funded by member and employer contributions and investment earnings. The system-wide ratio of assets to liabilities was reported at 73.2% as of June 30, 2015. Using a more conservative 7% investment return assumption, the funded ratio would fall to 65.9%.
Nevada is expected to retain considerable financial resilience through a moderate downturn and has very strong gap-closing capacity. The results of Fitch's Analytical Sensitivity Tool (FAST) indicates a 2.6% reduction in revenues in a moderate (1% decline in GDP) recession scenario, below the state median of 3.1% and indicative of a revenue system that is not as volatile as would be expected given the state's reliance on sales and tourism-related revenues. During the most recent recession, when Nevada experienced a dramatic reduction in revenues, the state consistently made budgetary decisions - both one-time and recurring - to produce balance. Nevada fairly quickly drew down its budget stabilization fund and then turned to budget reductions, including employee furloughs as noted above, and significant revenue enhancement measures, initially temporary, but eventually made permanent to stabilize financial operations.
Among the state's financial control tools are a constitutional requirement to balance the budget, 95% budgeting - the budget must provide for a reserve of not less than 5% of all proposed general fund operating appropriations and authorizations - and a requirement to set aside 1% of expected revenues at the start of each fiscal year in the rainy day fund. The state has repeatedly delayed implementation of the rainy day funding mechanism, which is now scheduled to take effect July 1, 2017. With positive revenue performance in fiscal 2016, the state is expected to transfer $67.3 million to the rainy day fund, required when the unrestricted fund balance exceeds 7% of general fund appropriations. In a downturn scenario, Fitch expects Nevada to utilize its rainy day fund, which it is just beginning to rebuild, and take similar budget balancing actions.
The state has taken action through this period of economic recovery to stabilize financial operations in light of the significant reduction in revenues experienced during the recession. It is of note that the state continued to need to take several one-time actions to balance the budget well into the economic recovery, but in response has also made permanent changes to its revenue system in order to reach a more structurally balanced budget.
After stronger performance initially following the recession, the state faced funding gaps during the fiscal 2014-15 biennium, even though that budget was balanced when enacted. Revenues fell short in both fiscal years of the biennium, particularly in the collection of taxes related to mining operations, and expenses related to education exceeded budget due to faster than anticipated enrollment growth. Budget balancing solutions included use of fund balance, reserve sweeps, transfer of the rainy day fund to the general fund, and budget reductions including in contributions for employee health and unemployment funds.
The enacted budget for the fiscal 2016-2017 biennium, which began July 1, 2015, made permanent many of the temporary tax increases, restructured the business license fee from a flat fee to a tiered fee based on the size of the entity, changed the way in which mining companies are taxed and raised cigarette taxes. The legislature also enacted a new commerce tax on businesses whose Nevada based gross revenue exceeds $4 million. In the aggregate, the taxes are forecast to add $1.19 billion to the current biennium to address growth pressures and allow the state to rebuild reserves. The commerce tax outperformed in its first year of collection, fiscal 2016, generating $143.5 million, $23.7 million more than expected.
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