Fitch Ratings assigns an 'AA+' rating to the following State of Washington bonds:
--$1.13 billion motor vehicle fuel tax general obligation (GO) bonds, series 2010F (taxable Build America Bonds-direct payment).
The bonds are expected to sell through negotiation on May 25, 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 no income tax.
--Frequent reviews of economic and financial forecasts allow the state to react to changing conditions.
--Debt levels are in the upper moderate range, and funding of substantial capital needs, particularly for transportation, is likely to 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. Motor vehicle fuel tax GO bonds, including the series 2010F bonds, are first payable from state excise taxes on motor vehicle and special fuels
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 no income tax, 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. The state reviews its general fund revenue forecast quarterly, and the most recent forecast revision, released in February 2010, was a relatively modest $118 million reduction that reflected a $150 million projected loss due to a September 2009 state supreme court decision offset by positive revenue collection experience since the prior forecast. However, the revenue forecast had been reduced significantly in June 2009, September 2009, and November 2009.
The negative revenue revisions and increased expenditure forecasts since budget enactment resulted in an estimated shortfall for the current fiscal 2009-2011 biennium of about $2 billion, even after exhausting reserves of $810 million that had been included in the enacted budget. In April 2010, the legislature passed a supplemental budget to address the shortfall through a combination of expenditure reductions, permanent and temporary tax increases, additional federal funds (primarily an extension of federal stimulus related to the Medicaid program), and fund balance. The governor earlier had presented a package of dramatic budget cuts to address the shortfall, but at that time expressed the intent to work with the legislature to identify revenue measures to offset cuts. In order to enact the revenue increases, the legislature suspended a November 2007 voter initiative that requires tax increases to be approved by a two-thirds vote of each house of the legislature or a vote of the people. This was allowable by simple majority vote because two years had passed since the initiative's approval by voters.
Washington's previously strong economic growth slowed in 2008 and economic performance deteriorated in 2009. The revenue system's reliance on a broad-based sales tax makes Washington particularly vulnerable to reductions in consumer spending. As noted above, Washington's revenue forecasts have been revised downward repeatedly and steeply in the current downturn. The February 2010 forecast assumes that state general fund revenues will continue to fall in fiscal 2010, down 2.8% following a 9.6% drop in fiscal 2009. Revenues are then projected to rise 8.8% in fiscal 2011. The revenue forecast is scheduled to be reviewed next in mid-June.
The 2003-2005 and 2005-2007 biennia each ended with a general fund-state balance equal to about 7% of cash receipts. 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. Following the enactment of the budget, 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). Following the April 2010 enactment of the supplemental budget for the current biennium, the state now forecasts a fiscal 2011 ending balance of $452 million, 3% of fiscal 2011 projected cash receipts; the constitutional budget stabilization account will be depleted.
Washington's economy, which had been performing much more strongly than that of the U.S. in recent years, entered the recession later than the U.S. and is now performing in line with the nation. Non-farm employment dropped 4.5% in 2009, compared to 4.3% for the U.S., and a year-over-year loss of 2.4% in March 2010 compares to a 1.7% decline for the nation. Construction employment dropped 20.4% in 2009 and continues to fall in 2010. Both Boeing and Microsoft announced layoffs in 2009, 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 still just below the national rate at 9.5%, 98% of the U.S. rate, in March 2010. The February 2010 state forecast projects nonfarm employment down 4.2% in 2009, then another 0.5% 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 2009. The state's personal income per capita, at 107% of the U.S. in 2009, ranks 12th among the states.
Washington's debt levels are trending into the upper moderate range, with net tax-supported debt of $16 billion after this sale equal to 5.7% of 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.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
State General Obligation Bonds:
The general obligation full faith and credit pledge is the broadest security a U.S. state government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. State ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State Government Tax-Supported Rating Criteria, dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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