Fitch Rates South Carolina’s $120MM GOs ‘AAA’; Outlook Stable
By Business Wire News
Fitch Ratings assigns an ‘AAA’ rating to $119.975 million of State of South Carolina general obligation (GO) bonds, consisting of:
–$61.64 million GO state institution bonds (issued on behalf of the University of South Carolina), series 2015A;
–$36.4 million GO state institution refunding bonds (issued on behalf of the University of South Carolina), series 2015B;
–$21.935 million GO state economic development bonds, series 2015A.
The bonds are expected to sell competitively on May 7, 2015.
In addition, Fitch affirms the following ratings:
–Approximately $1.45 billion in outstanding state GO bonds at ‘AAA’;
–Approximately $6.47 million in outstanding lease revenue bonds issued by the South Carolina State Budget and Control Board at ‘AA+’.
The Rating Outlook is Stable.
The bonds are GOs of the state, secured by a pledge of South Carolina’s full faith, credit, and taxing power. By statute, state institution bonds are also secured by tuition fees received by the university.
KEY RATING DRIVERS
STRONG FISCAL MANAGEMENT: South Carolina has a proven ability and willingness to support fiscal balance, and Fitch believes this commitment will be maintained through a reorganization of fiscal oversight responsibilities following the elimination of the state’s longstanding Budget and Control Board (BCB), effective July 1, 2015. The state’s careful approach to financial operations and solid revenue growth have resulted in the restoration of reserves following their depletion during the recession.
DIVERSIFYING ECONOMIC BASE WITH SIZABLE MANUFACTURING COMPONENT: The state’s economic base continues to expand into the services industry, and the largest share of employment has moved into the trade, transportation, and utilities sectors. Renewed growth in the state’s large manufacturing sector has aided in moderating unemployment rates although strong growth in the state’s labor force has pushed rates above the national average.
MANAGEABLE DEBT AND PENSION OBLIGATIONS: Debt obligations are low, reflecting infrequent borrowing and rapid amortization. Outstanding debt has declined from more elevated levels related to transportation infrastructure bank issuance. On a combined basis, debt and unfunded pension liabilities are a manageable and below-average burden on state resources.
The rating is sensitive to shifts in fundamental credit characteristics, including the state’s proactive financial management and commitment to reserve funding.
South Carolina’s ‘AAA’ rating rests on the state’s proven ability and willingness to support fiscal balance. The state’s mandate to take prompt corrective action to maintain balanced operations is expected to be maintained as it transitions to the oversight of the director of the newly established executive budget office (EBO) in the new department of administration, created by the state’s 2014 Restructuring Act.
The act, which was signed into law by the governor in January 2014 and will take effect on July 1, 2015, served to reallocate the administrative and fiscal oversight responsibilities currently housed with the BCB, and included the creation of a new state Fiscal Accountability Authority that will assume all of the authority and responsibilities of the BCB relating to bond authorization and issuance. The authority will also assume all outstanding debt obligations of the BCB, including the annual appropriation bonds. Fitch does not expect the transition to these new authorities to have any impact on the state’s conservative fiscal policies and debt management. Stability in the state’s financial operations is additionally aided by constitutional reserve requirements and established replenishment provisions.
The state’s debt levels have moderated from limited additional issuance, and amortization of GO bonds is rapid. The state’s large manufacturing sector, which quickly reflects changing economic conditions, has shown steady growth following recessionary losses, aided by strong growth in the services sector. Unemployment rates are above national averages, boosted by robust labor force growth. While wealth levels remain low, the state has been recording strong growth in personal income measures.
STRONG FISCAL MANAGEMENT AND IMPROVED FINANCIAL OPERATIONS
An improving revenue situation and strong budgeting procedures combined with constitutional and statutory changes designed to strengthen reserve funding have provided for successive additions to the state’s reserves in fiscal years 2010 to 2014, following draws during the recession. General Fund (GF) revenues grew strongly in fiscal years 2013 and 2014, by 9.1% and 7.6%, respectively, and supported steady growth in the state’s $6.3 billion GF budget, largely in K-12 education. The personal income tax (PIT) exhibited 6.8% growth in fiscal 2014 while the sales tax grew by 2.1%. A large operating surplus provided for an addition to the state’s reserve funds, boosting reserves to 4.6% of fiscal 2014 expenditures.
More modest revenue growth was forecast for fiscal 2015 in support of the almost $6.7 billion enacted GF budget of 1.6% growth from actual receipts in fiscal 2014, incorporating 3.2% growth in the PIT and 2.9% sales tax growth. In February 2015, the state’s board of economic advisors (BEA) revised the revenue forecast upward modestly, to 1.9% year over year (yoy) growth from fiscal 2014, incorporating more robust growth in the PIT (to 3.5% yoy) and the sales tax (up 4.5% yoy), offset by corporate income tax (CIT) revenue that is trailing the forecast and is now forecast as a 9.1% decline from fiscal 2014. The lower than expected CIT results reflect both a large refund to a single taxpayer as well as taxpayer shifts to making payments through the corporation license tax (CLT) rather than the CIT. The shift is incorporated in CLT receipts that are demonstrating 67% yoy growth.
The fiscal 2015 budget included a large boost to K-12 education of approximately 8.3% yoy growth, incorporating a revision in the K-12 funding formula that directed greater state aid to less wealthy school districts while holding other school districts harmless from cuts. The state also increased its funding for the Medicaid program funded by an increase in the state per-pack cigarette tax. The state expects to provide for another addition to its reserve funds at the close of fiscal 2015, boosting total reserves to $447.3 million. Fitch believes this level of reserve funding, equal to 4.8% of fiscal 2015 expenditures, provides solid cushion for the state’s operations.
In February 2015, the BEA also provided a revenue forecast in support of the fiscal 2016 executive proposed budget. The governor has proposed a $6.88 billion GF budget for fiscal 2016 that is a 3.3% increase from the enacted fiscal 2015 budget. The largest proposed increase is in health and social rehabilitation programs, at 5.4%, followed by 2.1% proposed growth in K-12 education. The governor has included additions to the reserve funds to the constitutionally required levels, 5% of the prior fiscal year’s revenue for the constitutional reserve fund, and 2% for the capital reserve fund; the legislature is currently considering the proposal.
The BEA has forecast overall GF revenue growth in fiscal 2016 of 4% supported by gross PIT growth of 4.3% (net growth of approximately 5%) and 3.8% growth in sales tax collections. The CIT is expected to return to positive growth of 15.4% growth from fiscal 2015. Fitch believes the revenue forecast to be reasonable based on the solid economic growth occurring in the state.
The budgetary controls in place under the BCB have been adjusted as part of the Restructuring Act. While previously the BCB was mandated to take action to avoid a deficit within seven days if quarterly revenue collections were 2% or more below projections, effective as of July 1, 2015, if the BEA reduces the revenue forecast for the fiscal year by 3% or less from projections, the director of the new EBO must reduce GF appropriations by the requisite amount to avoid a deficit. If the revenue estimate is revised downward by more than 3%, the legislature could be called into session to take action to avoid a year-end deficit. Should the legislature fail to convene or otherwise take measures to avoid a deficit within 20 days of the BEA’s revision of the forecast, the director of the EBO is required to reduce GF appropriations. Fitch believes these new measures continue to provide for strong fiscal oversight.
DIVERSIFYING ECONOMIC BASE WITH SIZABLE MANUFACTURING PRESENCE
As in prior downturns, the state’s economy performed worse than that of the nation in the most recent downturn; the state lost 7.1% of its jobs between 2008 and 2010 as compared to 5.6% for the U.S. More positively, since 2010 the state has steadily added jobs at a pace that has mirrored or exceeded that of the nation. Employment growth in 2014 of 2.5% compared to national growth of 1.9% continued that trend. Yoy in March 2015, the state’s employment growth continued at a solid rate of 2.6% compared to the U.S. at 2.3%. The state has fully recovered jobs lost during the recession and currently stands at 121% of the trough employment.
The sectors showing the strongest yoy growth are construction at 5.3% for the three-month moving average as of March 2015; leisure and hospitality at 4.4%; professional and business services at 4.2%; and trade, transportation, and utilities at 3.3%. Manufacturing employment has also continued to grow steadily, recording 2.1% yoy growth in March, and all employment sectors are demonstrating positive momentum, reflecting solid growth in the state’s economy in Fitch’s view.
Unemployment levels have historically trended above national averages although recent rates above the national average are largely due to strong growth in the state’s labor force, up 3.4% yoy compared to national 0.5% growth in March. The state’s unemployment rate of 6.4% in 2014 was fairly close to the national rate of 6.2%, but a rate of 6.7% in March 2015 was 122% of the national 5.5% rate that month, incorporating the pressures from the labor force growth.
South Carolina’s wealth levels are below average, with personal income per capita in 2014 ranking 48th among the states at 80% of the U.S. Reflecting the renewed economic growth, the state’s personal income has grown more strongly over the past four quarters than both the U.S. and the region; 5% yoy growth in the 4th quarter of 2015 as compared to 4.5% for the nation and region.
MANAGEABLE DEBT AND OTHER LIABILITIES
State tax-supported debt, which increased notably earlier in the last decade due to transportation infrastructure bank issuance, has since declined and debt now equates to a manageable 1.9% of 2014 personal income, not inclusive of the current issue. Debt of the transportation infrastructure bank, created in 1997, accounts for just over half of the state’s net tax-supported debt. Principal amortization is rapid, with 93% of GO bond principal repaid in 10 years.
Under the new GASB 67 standard for pension systems, the state employees’ retirement system (SCRS) reported a 59.9% ratio of pension assets to liabilities in fiscal 2014 with a net pension liability of $17.2 billion; the smaller police officers’ retirement system (PORS) reported a ratio of 67.5% and a net pension liability of $1.9 billion. While not directly comparable, the actuarially determined funded ratio for SCRS was 62.5% in fiscal 2014, while PORS’ ratio was 69.2%. Using Fitch’s more conservative 7% discount rate assumption, the funded ratios for the plans declines to 59.3% and 65.6%, respectively.
Although the state consistently funds pensions at actuarially-based contribution levels, the reported funding level of the systems in 2014 was a decrease from the prior fiscal year. The state’s actuary has indicated that given the declines in the funded levels, absent legislative changes or more favorable investment experience, an increase in the employer and employee contributions will be necessary to maintain a 30-year amortization schedule.
On a combined basis, the burden of the state’s net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals a manageable 5.5% of 2014 personal income, below Fitch’s calculation of the states’ median.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s 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’, Aug. 14, 2012;
–‘U.S. State Government Tax-Supported Rating Criteria’, Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Elizabeth Fogerty, New York, +1 212-908-0526
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