Fitch Rates South Carolina’s $269MM GOs ‘AAA’; Outlook Stable
By Business Wire News
Fitch Ratings assigns an ‘AAA’ rating to $268.895 million of State of South Carolina general obligation (GO) bonds, consisting of:
–$19.2 million GO state institution refunding bonds (issued on behalf of South Carolina State University), series 2016A;
–$20.89 million GO state institution refunding bonds (issued on behalf of Winthrop University) series 2016B;
–$9.16 million GO state institution refunding bonds (issued on behalf of Midlands Technical College), series 2016C;
–$28.965 million GO state institution refunding bonds (issued on behalf of The Medical University of South Carolina), series 2016D;
–$10.545 million GO state institution refunding bonds (issued on behalf of Coastal Carolina University), series 2016E;
–$71.86 million GO state research university infrastructure refunding bonds, series 2016A;
–$44.635 million GO state economic development bonds, series 2016A;
–$33.29 million GO state economic development refunding bonds, series 2016B;
–$30.35 million GO state economic development refunding bonds (taxable), series 2016C.
The bonds are expected to sell competitively on Feb. 11, 2016.
In addition, Fitch affirms the following ratings:
–Approximately $1.47 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 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. The recent reorganization of fiscal oversight responsibilities following the elimination of the state’s longstanding Budget and Control Board (BCB), effective July 1, 2015, is not expected to change the state’s approach to fiscal management. The state’s careful approach to financial operations and solid revenue growth has 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 labor force gains has helped hold unemployment above the national average.
LOW DEBT AND MANAGEABLE PENSION LIABILITIES: 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.
General Obligation: The rating is sensitive to shifts in fundamental credit characteristics, including the state’s proactive financial management, commitment to reserve funding, and manageable liability position.
South Carolina’s ‘AAA’ rating rests on the state’s proven ability and willingness to support fiscal balance, aided by constitutional reserve requirements and established replenishment provisions. The state’s financial operations continue to be sound, bolstered by strong growth in the state’s economic base, as it has transitioned 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, effective on July 1, 2015, reallocated the administrative and fiscal oversight responsibilities housed with the BCB, and created a new state Fiscal Accountability Authority that assumed all of the authority and responsibilities of the BCB relating to bond authorization and issuance. The authority also assumed all outstanding debt obligations of the BCB, including the annual appropriation bonds.
The state’s debt levels are moderate from limited bond 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 despite strong job growth, as they are 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 six successive years of additions to the state’s reserves in fiscal years 2010 to 2015, following draws during the recession. Solid growth in general fund (GF) revenue and manageable growth in expenditures is forecast to result in a further addition to reserves for fiscal 2016.
The net GF revenue forecast in support of the $7 billion enacted GF budget for fiscal 2016 reflected a modest expectation of 1.9% growth from actual receipts in fiscal 2015. The forecast incorporated 2.9% growth in the personal income tax (PIT) and 4% sales tax growth, offset by modest declines in other operating revenue sources. The forecast followed strong 6.2% growth in net GF revenue in fiscal 2015, anchored by healthy 8.3% growth in the PIT, 5.6% growth in the sales tax, and 12.2% growth in corporate income tax (CIT).
In November 2015, the state’s board of economic advisors (BEA) revised the revenue forecast upward by 2.7%, to 4.7% year over year (yoy) growth from fiscal 2015, incorporating more robust growth in the PIT (to 5.1% yoy) and the sales tax (up 5.4% yoy), with very solid 20.2% growth in the CIT also forecast. The upward revision recognizes the strong economic growth trends despite a slowdown in PIT and sales tax receipts in late 2015 after the state was affected by devastating floods in October. The state expects the delay in PIT revenue to resolve following the Internal Revenue Service’s approval of filing extensions for returns due in 2015 and early 2016, to dates later in fiscal 2016 for residents in affected counties. Sales tax revenue is also expected to rebound as residents make purchases to repair their homes.
The state estimates damages from the flood event totaled $437 million. As the state received a major disaster declaration from the federal government, the federal emergency management agency (FEMA) will fund a large portion of the related costs. The state estimates its share of flood costs at $124 million and expects to fund this expense through both the fiscal 2016 and fiscal 2017 operating budgets. The state also expects to include additional funds in the fiscal 2017 budget to review the structural integrity of dams and roadways in the state.
The fiscal 2016 budget included a boost to K-12 education; approximately 4.4% yoy growth, as the state continued to incorporate 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 appropriation for health and social rehabilitation programs increased 3.3% from the enacted fiscal 2015 budget. The state expects to provide for another addition to its reserve funds at the close of fiscal 2016, boosting total reserves to $458.7 million. Fitch believes this level of reserve funding, equal to 6.6% of fiscal 2015 expenditures (per the state’s constitutional calculation), provides solid cushion for the state’s operations.
In November 2015, the BEA also provided a revenue forecast in support of the fiscal 2017 executive proposed budget. The governor has proposed a $7.4 billion GF budget for fiscal 2017 that is a 4% increase from the enacted fiscal 2016 budget. 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; and the legislature will consider the proposal in the current legislative session.
The BEA has forecast overall GF revenue growth in fiscal 2017 of 5.1% supported by net PIT growth of 6.6% and 4.7% growth in sales tax collections. The CIT is expected to decline by 13% from fiscal 2016, following a substantial boost in that year. Fitch believes the revenue forecast to be reasonable based on current economic trends.
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
Since the recession, 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 the national growth of 1.9% continued that trend. Yoy in December 2015, the state’s employment growth continued at a solid rate of 3.3% compared to the U.S. at 1.9%. The state has fully recovered jobs lost during the recession and currently stands at 153% of trough employment compared to the nation at 156%.
The sectors showing the strongest yoy growth are construction, leisure and hospitality, professional and business services, and education and health services. Despite some employment sectors showing declines, the state’s economy continues to reflect solid growth 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 2.5% yoy compared to national 1.1% growth in December. The state’s unemployment rate of 6.4% in 2014 was fairly close to the national rate of 6.2%, but has since trended downward to 5.5% in December compared to 5% for the nation.
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; 5.1% yoy growth in the third quarter of 2015 as compared to 4.6% for the nation and 4.8% for the region.
LOW DEBT AND MANAGEABLE PENSIONS
State tax-supported debt, which increased notably earlier in the last decade due to transportation infrastructure bank issuance, has since declined and now equates to a manageable 1.8% 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 89% of GO bond principal repaid in 10 years.
Under the new GASB pension standards, the state employees’ retirement system (SCRS) reported a 57% ratio of pension assets to liabilities in fiscal 2015 with a net pension liability of almost $19 billion; the smaller police officers’ retirement system (PORS) reported a ratio of 64.6% and a net pension liability of $2.2 billion. The state is responsible for state employees in both systems and for teachers in SCRS. On a combined basis, the burden of the state’s net tax-supported debt and unfunded pension (UAAL) obligations for SCRS and PORS, adjusted by Fitch to reflect a 7% return assumption, equals a manageable 5.7% of 2014 personal income, near the median for states.
The state consistently contributes to pensions at actuarially-based levels, although the reported funding levels have flattened in recent years. Reforms in recent legislative sessions have lowered discount rate and COLA benefits while increasing contributions, although the systems continue to use rolling amortization over long time horizons.
Additional information is available at ‘www.fitchratings.com‘.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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New York, NY 10004
Elizabeth Fogerty, +1 212-908-0526