Fitch Ratings has assigned an 'AA' rating to the $169.7 million Tennessee State School Bond Authority (the authority) higher educational facilities second program bonds, 2008 series B. The bonds, which are expected to sell the week of Nov. 17, 2008 through negotiation, mature May 1, 2009-2038. Fitch also affirms the 'AA' rating on the authority's $634 million outstanding higher educational facilities second program bonds. The Rating Outlook is Stable.
The 'AA' rating is based on the strength of the two payment sources (campus revenues and state appropriations) and the state's intrinsic role in the authority and its financings.
Tennessee uses authority debt to finance revenue-generating projects at public colleges and universities, such as dormitory, parking, and energy facilities. Authority bonds are payable under financing agreements with the governing bodies of the University of Tennessee (UT) system, with enrollment of more than 40,000, and Tennessee's State University and Community College system, which enrolls nearly 120,000. Under the agreements, the systems pay annual charges to the authority from campus revenues. These charges are used to pay debt service on the second-program bonds, as well as about $6 million outstanding bonds issued under the authority's first program, which has a senior lien but is no longer utilized. In the event of delinquent payments, available state appropriations would be intercepted to meet debt service requirements; no such recourse has ever been needed. A debt service reserve is sized to equal maximum semi-annual debt service at the project level.
Growth in state funding for Tennessee's colleges resumed following reductions in fiscal 2004. Formula appropriations through the Tennessee Higher Education Commission rose from $796.1 million in fiscal 2004 to $973.7 million in fiscal 2008. Total state operating funds for colleges, including monies outside this formula, rose from $1.1 billion in fiscal 2004 to $1.35 billion by fiscal 2008. Most recently, in response to state revenue underperformance, in October 2008 the governor asked the higher education systems to reduce their fiscal 2009 budgets by $42 million (about 3.4%). The systems, benefiting from tuition and enrollment increases, will meet this target without midyear tuition increases. State appropriations provide for nearly one-half of educational and general revenue available to Tennessee's public higher education systems. Future enrollment growth is expected due to demographic changes and continuation of lottery-funded scholarships.
Tennessee's general obligations are Fitch rated 'AA+' with a Stable Rating Outlook. The state's low debt level (among the lowest of any state) is a principal factor underpinning the rating. With an above-average manufacturing concentration, the state is exposed to economic cyclicality, which is currently affecting employment and sale taxes - its primary revenue source. Current revenue performance is below estimates and a revised revenue forecast is expected in mid-December.
The state has displayed an ongoing commitment to structural balance, evidenced by a permanent revenue increase and successful restructuring of TennCare, the state's Medicaid-expansion health care delivery program, earlier this decade. Financial management has been habitually conservative and has consistently fully funded its pension requirements.
For additional information on the State of Tennessee please refer to Fitch research dated Aug. 19, 2008, available on the Fitch Ratings web at site www.fitchratings.com.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.