Fitch Ratings assigns an 'AAA' rating to $400 million State of North Carolina's general obligation (GO) refunding bonds, series 2009A. The bonds are expected to be sold via competition on Oct. 6. Fitch also assigns a long-term rating of 'AAA' to bank bonds corresponding to outstanding GO variable-rate bonds as follows:
--GO public improvement bonds series 2002C;
--GO public improvement bonds series 2002D;
--GO public improvement bonds series 2002E.
Fitch also affirms the 'AAA' rating on $5.2 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.
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, including $500 million in outstanding federal grant anticipation revenue bonds. 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. There is approximately $1.9 billion in authorized but unissued debt, of which $487 million is expected to be issued as GO debt. The state's major pension system is funded at an exceptionally high level, at 106% as of June 30, 2008.
Financial operations are conservative, with the governor's powers including the ability 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 15.4% from fiscal 2008 levels, with individual income tax down 16.8% and sales tax down 13%. 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 $8.4 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.
Leading into the current recession, North Carolina's economy had been growing significantly in terms of both size and diversity; it is now severely contracting along with the national economy. Employment fell 5.1% year-over-year in August, notably worse than the national decline of 4.4%, with all sectors other than education and health services showing declines. The state's unemployment rate in August was 10.8%; the national rate was 9.7%. The transition of the economy away from manufacturing toward services continues with losses accelerating in manufacturing subsectors (textiles, furniture, apparel).
Manufacturing employment declined 14.1% year-over-year in August. The residential housing slowdown appears to be less acute in North Carolina than in many other states. Nonetheless, construction employment declined 16.8% with financial activities off 6.2% 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.
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Fitch Ratings, New York
Karen Krop, 212-908-0661
Laura Porter,
212-908-0575
or
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Cindy Stoller,
212-908-0526
Email: cindy.stoller@fitchratings.com
