Fitch Rates Georgia’s $1.4 Billion General Obligations ‘AAA’; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned a ‘AAA’ rating to the following state of Georgia bonds:
–$717,290,000 general obligation (GO) bonds 2016A;
–$199,870,000 GO bonds 2016B (federally taxable);
–$382,190,000 GO refunding bonds 2016C;
–$67,985,000 GO refunding bonds 2016D (federally taxable).
The bonds will sell via competitive bid, on or about June 7, 2016.
Fitch has also affirmed Georgia’s Long-Term Issuer Default Rating (IDR) and the ratings on outstanding GO and state guaranteed revenue bonds of the state at ‘AAA’.
Fitch has upgraded the rating on the Development Authority of Clayton County revenue bonds (TUFF Archives LLC-Secretary of State of Georgia Project), series 2012 to ‘AA+’ from ‘AA’; the rating is now one notch below the state’s IDR. The upgrade reflects the application of Fitch’s revised criteria for U.S. state and local government credits released on April 18, 2016. The revised criteria include more focused consideration of risk factors in ratings for appropriation-backed debt; the bonds do not contain any of the risks that Fitch identifies for a rating more than one notch below the IDR.
The Rating Outlook is Stable.
The GO and guaranteed revenue bonds are general obligations of the state of Georgia, secured by a pledge of the state’s full faith and credit.
The authority revenue bonds are paid from rental payments of TUFF Archives LLC, which are derived from lease payments subject to annual appropriation from the state’s general fund.
KEY RATING DRIVERS
Georgia’s ‘AAA’ IDR reflects the state’s conservative debt management, proven willingness and ability to support fiscal balance and a broad-based and growing economy. The state took repeated action during the recession to maintain fiscal balance through steep spending cuts and draws from its rainy-day fund [the revenue shortfall reserve (RSR)]. Since then, Georgia has maintained a conservative approach to fiscal management, limiting spending growth and making progress in rebuilding the RSR balance. The state’s long-term liability burden is low.
Economic Resource Base
The state’s economic profile is similar to that of the nation with trade, transportation and utilities and various service sectors, including professional, business, education and health, making up the largest sector shares. Job losses during the Great Recession were particularly steep, but the state’s recovery has outpaced the nation’s. Georgia’s demographic profile is somewhat mixed with above-average population growth and a median age below the nation’s, but has weaker wealth indicators. Overall, these factors should support further solid economic growth. Atlanta serves as a national corporate and transportation hub, historically anchoring the state’s economy. Expansion in the previously challenged manufacturing industry is among the key drivers of improvement outside the Atlanta metro area.
Revenue Framework: ‘aaa’ factor assessment
Georgia’s revenues, primarily income and sales taxes, will continue to reflect the depth and breadth of the economy, and its solid growth potential. The state has complete control over its revenues, with an essentially unlimited legal ability to raise operating revenues as needed. A recent constitutional amendment limiting the personal income tax rate does not limit Fitch’s assessment since full flexibility remains for other revenue sources.
Expenditure Framework: ‘aaa’ factor assessment
The state maintains ample expenditure flexibility with a low burden of carrying costs and the broad expense-cutting ability common to most U.S. states. Also as with most states, Medicaid remains a key expense driver, but one that Fitch expects to remain manageable.
Long-Term Liability Burden: ‘aaa’ factor assessment
Georgia’s long-term liability burden is low, and overall debt management is conservative. While the state issues bonds regularly for capital needs, amortization of principal is rapid. Additionally, Georgia fully funds its actuarially determined employer contributions (ADECs, formerly ARC) for pensions, keeping the unfunded liability very manageable.
Operating Performance: ‘aaa’ factor assessment
The state is well-positioned to deal with economic downturns, with exceptionally strong gap-closing capacity due to its broad control over revenues and spending and rebuilt RSR. Georgia has a track record of restoring financial flexibility during economic expansions, which is important given the state’s above average revenue volatility.
SOLID FINANCIAL MANAGEMENT: The rating is sensitive to shifts in Georgia’s fundamental credit characteristics including its history of timely action to address budgetary challenges and proactive measures to ensure fiscal flexibility.
DEVELOPMENT AUTHORITY BONDS: The rating for the authority’s revenue bonds is sensitive to changes in the state’s ‘AAA’ IDR, to which it is linked.
After a sharp recessionary downturn, the state’s diverse economy has accelerated with employment growth outpacing national trends. Recovery in the manufacturing sector has been particularly important. In the past, low value-added manufacturing had been a primary economic driver in the areas outside Atlanta. Those industries declined in the years leading up to the recession, which exacerbated the economic losses. However, since 2011, the sector has been growing with key gains coming in the automotive industry.
The housing market downturn hit Georgia particularly hard; however, recovery has been strong, with direct implications for economic and revenue growth. Housing prices declined precipitously across the state, particularly in the Atlanta metropolitan area in 2008 and 2009. Prices rebounded with growth in the Atlanta area far outpacing most other major metropolitan areas by late 2012. By mid-2014, Atlanta’s growth slowed and has moved in tandem with national trends since then. Fitch’s Residential Mortgage-Backed Securities group characterizes the state’s 2015 home prices as sustainable given underlying economic fundamentals.
Georgia’s personal income tax (PIT) and sales and use tax together account for approximately three-fourths of the state’s general fund receipts. The PIT alone makes up nearly half of total receipts. Both revenue sources are fairly economically sensitive and respond quickly to shifts in the state’s economic trajectory.
Fitch anticipates revenue growth will remain slightly positive on a real basis, in line with the historical trend, given the state’s solid economic growth prospects. Robust revenue growth in years of economic gains is offset by sharp declines when Georgia’s economy contracts.
Georgia recently enacted a constitutional cap on its income tax rate at the current level, but no such limit exists for the sales tax or other state revenue sources. While the PIT is the state’s most significant revenue stream, Fitch does not view the constitutional cap as a limiting factor in the revenue framework assessment. For all other taxes and fees Georgia has no legal limitations on its independent ability to raise revenues through base broadenings, rate increases, or the assessment of new taxes or fees.
As in most states, education and health and human services spending are Georgia’s largest operating expenses. Education is the larger line item, as the state provides significant funding for local school districts and the public university and college system. Health and human services spending is the second largest area of spending, with Medicaid being the primary driver.
Spending growth, absent policy actions, will likely be in line with to marginally above revenue growth driven primarily by Medicaid, requiring regular budget management to ensure ongoing balance. The fiscal challenge of Medicaid is common to all U.S. states and the nature of the program as well as federal government rules limit the states’ options in managing the pace of spending growth.
In other major areas of spending such as education, Georgia is able to more easily adjust the trajectory of growth and did so during and after the recession. Next year, the state legislature will consider recommendations from a gubernatorial education reform commission that include increased state spending for K-12 education and an overhaul of the formula used to allocate state and local funding responsibilities. Fitch anticipates the state will enact changes consistent with its generally conservative expenditure management that will not materially alter the assessment of Georgia’s natural pace of spending growth.
Georgia retains ample expenditure flexibility. While Medicaid costs are somewhat beyond the state’s ability to materially change given federal requirements for the program, the state’s carrying costs are low and unlikely to escalate significantly given carefully managed debt issuance and full actuarial pension contributions. Like most states, Georgia’s operating budget (outside of Medicaid) goes largely towards funding of services rather than direct service delivery allowing the state to shift costs to lower levels of government in times of fiscal stress.
Long-Term Liability Burden
Most of the state’s modest tax-supported debt burden is in the form of GO or guaranteed revenue bonds and amortization of principal is rapid, with approximately 70% maturing within 10 years. Other outstanding obligations include federal grant anticipation revenue (GARVEE) bonds, capital leases, multi-year leases entered into by the State Properties Commission, and a small amount of notes and loans. Including the current sale, net tax-supported debt remains low at 2.6% of 2015 state personal income.
Georgia’s major pension systems covering both state employees and teachers have benefitted from consistent full funding of the ARC/ADEC. As of the June 30, 2015 valuation and under the new GASB 67 reporting standard, system-wide ratios of assets to liabilities for the state employees and teachers’ plans were reported at 76.2% and 81.4%, respectively. Both ratios were consistent with prior year results under the prior GASB reporting standard. Using Fitch Ratings’ more conservative 7% discount rate assumption, the state employees and teachers’ plans are funded at 69% and 77.6%, respectively, as of June 30, 2015.
As reported in Fitch’s October 2015 state pensions update, Georgia’s net tax-supported debt and Fitch-adjusted unfunded pension liability attributable to the state totaled a low 4.9% of 2014 personal income. This is below the median of 5.8% for U.S. states
Georgia’s exceptionally strong gap-closing ability during cyclical downturns derives primarily from its superior budget flexibility. Conservative fiscal practices and a somewhat volatile, but still diverse and expanding, economy offer a strong platform for the state to gradually restore fiscal flexibility once utilized. Georgia typically responds to budgetary stress with spending restraint and use of budgetary reserves. During the Great Recession, the state’s primary reserve fund (the RSR) went from a peak of $1.5 billion in fiscal 2007 to $103.7 million in 2009.
After a budget is enacted, the governor has significant statutory authority to administer the budget and scale back spending as needed, allowing the state to be responsive to changing conditions. The state made regular use of this tool during the last recession. Even several years into the recovery, the governor regularly ordered most agencies to reduce spending below enacted budget levels shortly after the start of fiscal years as a precautionary measure. The tactic contributed to regular operating surpluses and rebuilding of reserves.
As revenues recover in economic expansions, Georgia works toward re-establishing reserves, primarily in its RSR, and gradually restoring prior-year cuts. Statutory requirements to transfer all end of year surpluses to the RSR (until its statutory cap, currently 15%) led the state to build a sizable balance leading into the last recession of just more than 8% of net revenues. And after drawing down the RSR significantly during the Great Recession, the state steadily contributed to it during the expansion. At the end of fiscal 2015 the balance of $1.4 billion (net of an annual mid-year appropriation for K-12 education) was 7% of net revenues.
Georgia has been slower to restore spending cuts, which were most prominently made in education spending. It took until fiscal 2015 for annual state appropriations for education to reach the pre-recession peak, and even then enrollment growth since the recession implied continued spending pressure. More substantial increases in fiscal 2016 and in the enacted budget for fiscal 2017 make more progress towards fully restoring prior cuts. The slow restoration reflects Georgia’s historically conservative fiscal practices. Fitch notes the state has consistently met its actuarial pension funding commitments and generally avoided non-recurring budget balancing measures since pulling out of the recession.
Georgia’s revenue performance in fiscal year 2016 has been strong and ahead of the enacted budget forecast reflecting both overall economic growth as well as structural and procedural changes. Personal income tax revenues are up a robust 8.8% for the year through April with gains in both withholding (6.1%) and non-withholding (7.1%). Refunds are down 3.4% as well, which the state views as a slowdown in the pace attributable to increased fraud detection efforts – refund volume could pick up later in the year driving down net collections growth. Sales and use tax revenues to the general fund are up a modest 0.6% for the year, but this weakness reflects significant transportation funding changes that resulted in a substantial net increase in total state revenues. Total state general fund receipts are up 9.9% through April.
The amended fiscal year 2016 (AFY) budget relies on 6.2% growth in revenues and Fitch anticipates the state could see another sizable surplus at the end of the year given revenue trends, with an ensuing addition to the RSR. For fiscal 2017 the enacted budget continues the trend of using revenue growth to support program expansion and restoration of prior year cuts. The budget forecasts general fund revenue growth of 3.8% from AFY 2016. Education funding is up notably with $432.5 million (4.6% from the enacted FY 2016 budget) in additional Quality Basic Education Program funding (basic aid) for K-12. Healthcare costs, including for Medicaid, also received increased funding in both the AFY 2016 and enacted fiscal 2017 budgets.
Transportation funding increased substantially with adoption of House Bill 170 (HB 170) last year, which helps address the growing state’s infrastructure demands. The bill altered the state’s tax structure for transportation effective July 1, 2015 and the AFY 2016 budget reflects an additional approximately $700 million in transportation revenues from the prior year. Georgia estimates $645 million of the increase was due to HB 170’s implementation.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Elizabeth Fogerty, New York, +1 212-908-0526