Fitch Ratings assigns an 'AA' rating to the following State of Washington bonds:
--$487,950,000 various purpose general obligation (GO) series 2010E.
The bonds are expected to sell via competitive bid on Jan. 13, 2010.
Fitch also affirms the 'AA' rating assigned to approximately $15 billion of outstanding state GO bonds. The Rating Outlook is Stable.
RATING RATIONALE:
--Washington's economy is characterized by generally sound performance and increased diversification, though current performance is weak. The manufacturing sector remains concentrated in the cyclical aerospace industry, although this concentration is sharply reduced. Economic growth in recent years was primarily due to strength in construction, aerospace (Boeing), and technology (Microsoft).
--The state's revenue system is concentrated, with an income tax constitutionally forbidden.
--Frequent reviews of economic and financial forecasts allow the state to react to changing conditions.
--Debt levels are in the upper moderate range and substantial capital needs, particularly for transportation, may increase ratios further; all but a minor amount of debt is GO.
--The state's somewhat active initiative and referendum environment creates a level of operating and financial uncertainty.
KEY RATING DRIVER:
--State's success in maintaining budget balance in the current downturn and developing sustainable long-term budget solutions.
SECURITY:
The bonds are GOs of the state to which its full faith, credit, and taxing power are pledged.
CREDIT SUMMARY:
Washington's 'AA' GO bond rating is based on sound financial and debt policies and a generally solid economy, although the state's financial and economic position has substantially weakened in the current downturn, particularly in consumer spending. Credit strengths are tempered by a concentrated revenue system, with an income tax constitutionally forbidden, as well as above-average and rising debt levels. The economy has diversified, although growth in recent years was concentrated in the construction, aerospace (Boeing), and information (Microsoft) sectors, all of which have been negatively affected by current economic conditions. The state's enacted budget for the fiscal 2009-2011 biennium closed a large projected gap, primarily through substantial spending control and federal stimulus dollars; however, the general fund revenue forecast was reduced in June 2009, September 2009, and again, most recently, in November 2009. The negative revenue revisions and increased expenditure forecasts since budget enactment result in an estimated $1.8 billion shortfall for the current fiscal 2009-2011 biennium; at the time of budget enactment, the state had projected a total reserve of $810 million at the end of the biennium. Earlier this month the governor presented a package of dramatic budget cuts to address the shortfall, but is expected to work with the legislature to identify revenue measures to offset cuts. Although, pursuant to a November 2007 voter initiative, tax increases require approval by a two-thirds vote of each house of the legislature or a vote of the people, since two years have now passed since its approval by voters the initiative can be suspended by a majority vote of the legislature. The legislative session is scheduled to begin on Jan. 11, 2010.
Washington's previously strong economic growth has slowed. The state's economy is performing in line with the nation's, and the revenue system's reliance on a broad-based sales tax makes Washington particularly vulnerable to reductions in consumer spending. Washington's revenue forecasts have been revised downward repeatedly and steeply in the current downturn. The November 2009 forecast assumes that state general fund revenues will continue to fall in fiscal 2010, down 2.9% following a 9.6% drop in fiscal 2009. Revenues are then projected to rise 9.7% in fiscal 2011. The revenue forecast is scheduled to be reviewed next in mid-February.
The April 2009 enacted budget for the fiscal 2009-2011 biennium addressed a gap of about $9 billion. Gap-closing measures included: approximately $4.4 billion in spending control/reduction, with about $449 million of that from modifications to pension assumptions and methods; $777 million in use for operations of monies that have historically been used for capital; $600 million in fund balance; and $3 billion in federal stimulus. There were no significant tax increases in the budget.
The 2003-2005 and 2005-2007 biennia each ended with a general fund-state balance equal to about 7% of cash receipts. Following the April 2009 enactment of the budget for the current biennium, the projected ending balance for the 2007-2009 biennium was about $430 million, rising to $810 million at the end of the 2009-2011 biennium. Fiscal 2009 was projected to end with minimal funding in the constitutional budget stabilization account that receives 1% of general state revenues every year up to a total of 10%, but the balance in the fund was projected at $250 million at the end of fiscal 2011. With subsequent negative revisions, the fiscal 2009 ending balance is now reported at $214 million (2% of fiscal 2009 cash receipts). Without budget balancing action, based on November 2009 revenue and expense projections the current biennium would end with a $1.8 billion deficit.
Washington's economy, which had been performing much more strongly than that of the U.S. in recent years, is now decelerating in line with the nation. Non-farm employment dropped 3.6% year-over-year in November 2009, which compares to a 3.4% loss for the U.S. Construction employment dropped 17% and employment was down year-over-year in all sectors except education and health services. Both Boeing and Microsoft have announced layoffs this year, and the 2008 failure of Washington Mutual, one of the state's largest employers, and its purchase by JPMorgan Chase resulted in significant job losses. The state's unemployment rate has risen sharply from a year ago but is below the national rate at 9.2%, 92% of the U.S. rate, in November 2009. The November 2009 state forecast projects nonfarm employment down 4% in 2009, then another 0.2% in 2010; unemployment is projected to rise to 9.7% in 2010. Personal income growth, though decelerating, considerably exceeded national levels from 2006 through 2008 and declined at a slower rate than that of the U.S. in the first three quarters of 2009. The state forecasts personal income in 2009 down 1.3% from 2008. The state's personal income per capita, at 107% of the U.S. in 2008, ranks 13th among the states.
Washington's debt levels are trending into the upper moderate range, with net tax-supported debt of $16.3 billion after this sale equal to 5.8% of 2008 personal income. Debt is almost exclusively GO. Capital needs are substantial, particularly for transportation.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'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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