Mar. 18, 2010 (Business Wire) -- Fitch Ratings assigns an 'AAA' rating to the State of North Carolina's general obligation (GO) bonds, as follows:
--$487.7 million GO public improvement bonds, series 2010A.
The bonds are expected to be sold via competitive bid March 31. Fitch also affirms the 'AAA' rating on $5.3 billion of outstanding North Carolina GO debt and the 'AA+' rating on $1.7 billion in outstanding State of North Carolina appropriation-backed debt. The Rating Outlook is Stable.
RATING RATIONALE:
--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 lease appropriation debt.
--Pension funding is among the strongest of the states.
--Financial operations are conservative, with the governor serving as the director of budget, allowing prompt action when necessary to maintain balance.
--Previously strong reserve levels have been reduced to address fiscal year 2009 revenue shortfalls.
--The economy is expected to grow and diversify in the long run but has been severely affected by the recession.
KEY RATING DRIVER:
--Continued maintenance of conservative fiscal and debt management policies.
SECURITY:
General obligation, full faith and credit of the state of North Carolina.
CREDIT SUMMARY:
North Carolina's 'AAA' GO bond rating reflects its moderate debt burden, conservative financial operations and long-term prospects for continued economic expansion and diversification. Tax-supported debt approximates $7.5 billion, 23% of which is appropriation-backed. The state's debt burden remains on the low end of moderate, at 2.3% of 2008 personal income. Amortization is above average with 65% of GO and appropriation debt due in 10 years. Following the issuance of these GO bonds, there will remain approximately $1.4 billion in appropriations debt authorized but unissued. Although funding of the state's major pension system has declined, it is still funded at an exceptionally high level, at 99.3% as of Dec. 31, 2008.
Financial operations are conservative, with the governor empowered to unilaterally reduce spending to maintain budget balance, after making provision for debt service. North Carolina faced a $3.2 billion budget gap during fiscal 2009, which it closed using a combination of spending cuts, federal stimulus funds and reduction in various reserves. Overall, tax revenues declined 10.9% from FY 2008 levels, with individual income tax down 13% and sales tax down 6%. Although the state had hoped to avoid spending down its rainy day fund during fiscal 2009, it was ultimately reduced from $787 million to $150 million by fiscal year end.
The state took significant action to close a projected $8.5 billion budget gap over the 2009-2011 biennium. Revenue projections appear conservative with growth not returning until fiscal 2011 and then at a rate of growth much lower than the historical average. The enacted budget included program reductions of $4.6 billion, more than 10% below the initial current services requirements. The state also implemented a temporary increase to the state sales tax, temporary surcharges on personal and corporate income taxes and a number of smaller tax and fee increases. In total, revenues are projected to increase $2.3 billion over the biennium due to these adjustments. Federal stimulus funding will provide another $2.4 billion to close the remaining gap. Revenues have performed reasonably well year-to-date, with total tax revenues just $35 million short of expectations. While personal income tax revenues are slightly below forecast, a one-time receipt of corporate taxes following a targeted settlement initiative came in well above expectations.
Leading into the current recession, North Carolina's economy had been growing significantly in terms of both size and diversity, but its contraction over the course of the past year was severe. Employment fell 5.3% during calendar year 2009, notably worse than the national decline of 4.3%, with all sectors other than education and health services showing declines. Job losses appear to be abating with a 2.8% year-over-year decline in non-farm employment in January 2010, now lower than the national rate of 3%. The state's unemployment rate of 10.6% was also higher than the national rate of 9.3% in 2009 and remains higher as of January 2010, at 11.1% while the national rate is 9.7%. The transition of the economy away from manufacturing toward services continues with losses in manufacturing subsectors (textiles, furniture, apparel) accelerating. Manufacturing employment declined 10.3% year-over-year in January. The residential housing slowdown appears to have been less acute in North Carolina than in many other states. Nonetheless, construction employment declined 17.6% in January with financial activities off 3.1% from last year. Measured by per capita personal income, North Carolina is below average at 87% of the U.S. level, ranking 40th among the states.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
--'Tax-Supported Rating Criteria', dated Dec.21, 2009;
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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