Fitch Ratings assigns an 'AA+' rating to the following Idaho Housing and Finance Association (IHFA) unemployment compensation revenue bonds:
--$189.67 million series 2011.
The bonds are expected to sell via negotiation on or about Aug. 18, 2011.
The Rating Outlook is Stable.
KEY RATING DRIVERS
--The 'AA+' rating is based on bondholders' claim on balances in the state's funds dedicated to ensuring unemployment benefits, which are funded by a broad state-wide unemployment payroll tax. Conservative structural features, including the very short final maturity and the fact that all interest and one-fourth of principal payment have been set aside from existing balances, strengthen the credit.
--The state has taken action to bolster its unemployment benefit system, raising the unemployment payroll tax rate to provide for both benefit payments and bond principal repayment. Although the state's unemployment payroll tax collections are not directly pledged to bondholders, these revenues fund the accounts from which debt service payments are derived.
--Projected debt service coverage by payroll tax collections and existing fund balances is strong through bond maturity assuming a continued slow economic recovery. Coverage diminishes in the event that unemployment rates rise above historical experience for an extended period but remains sufficient due to the availability of federal government advances for unemployment benefit payments.
--Funds in the state's unemployment benefit system are not accessible for other purposes and are continuously appropriated to bond repayment through maturity. No additional bonds are possible under this indenture.
--The state's system of assessing and collecting unemployment payroll taxes is well-established and has a strong collection history.
SECURITY
Unemployment compensation revenue bonds are special, limited obligations of the IHFA secured by the trust estate, including required payments of bond principal derived from the state's unemployment benefit account, which is funded by state unemployment benefit payroll taxes.
CREDIT PROFILE
The 'AA+' rating on the state of Idaho's unemployment compensation revenue bonds is based on the claim by bondholders on balances in the state's funds dedicated to ensuring unemployment benefits, which are funded by state unemployment payroll tax receipts. Credit quality is bolstered by conservative structural features and a very short maturity profile. Although bondholders do not have a direct claim on the state unemployment tax (SUTA) or reserve payroll taxes, the trust estate includes all required payments derived from these sources.
Structural features are conservative. The state has already dedicated from existing balances all interest payments through maturity and the first of four principal payments. All payments of principal and interest through maturity have been continuously appropriated, requiring no further legislative action. Further, the bonds fully amortize on Aug. 15, 2015. Projected payroll tax collections and existing balances under a baseline scenario including continued slow economic recovery provide ample resources to cover benefit payments and principal repayment. In the event of unforeseen weakness, the state may access advances from the federal unemployment trust fund to cover benefit payments, effectively leaving all payroll tax collections available to bondholders.
The bonds were authorized by the state legislature in 2011 as part of a broader plan to improve the sustainability of the state unemployment benefit system. Bond proceeds are intended to repay federal advances taken in recent years to cover benefit funding shortfalls. As of Aug. 8, 2011, the balance of such advances totaled $202 million.
The state's unemployment benefit system is administered by the Idaho Department of Labor (DOL) through two trust funds. The primary fund is the employment security fund (ESF), a state trust fund which encompasses the state's account with the federal unemployment trust fund, as well as the benefit account from which unemployment benefits are drawn. The ESF receives the SUTA payroll taxes levied on Idaho employers. The ESF balance totaled $136 million as of June 30, 2011.
The SUTA tax is paid quarterly by Idaho employers on the first $33,300 in employee wages; the wage level is indexed to reflect changes in the state's overall wage base. The taxable wage rate is affected by multiple factors, including employer experience and a statutorily-determined target level for ESF funding. In an effort to reduce employer rates, the target ESF level was lowered in 2005, resulting in reduced collections to cover benefits during the recent recession. The legislature has taken corrective action to make the system more sustainable since then, including raising the targeted ESF fund balance to 150% of the average three highest benefit years. The resulting SUTA tax rates have risen, from 0.918% in 2008 to the statutory ceiling of 3.36% of payroll; the rate is expected to remain at this level for the foreseeable future. Collection of the SUTA tax is well-established and very strong, with a collection rate in excess of 95% over the last 20 years.
A separate trust fund, the employment security reserve fund (ESRF), is also administered by the state DOL to support the unemployment benefit system. The ESRF balance is available to loan to the ESF should ESF balances be insufficient to cover benefits (in lieu of federal advances), as security for federal advances, or to cover interest payments on advances. The ESRF balance totaled $112 million as of June 30, 2011. The ESRF is funded by a reserve tax levied at 17% of the SUTA tax. The tax is triggered if the ESRF balance falls below 1% of prior-year state taxable wages (approximately $109 million), provided the ESRF does not exceed 49% of the balance in the ESF.
Under the state's authorization for the bonds, separate bond interest and principal payment accounts have been established within the ESRF, funded at $20 million for interest and $50 million for principal payments out of the existing $112 million ESRF balance. The interest payment account covers all interest on the bonds through maturity. The bond payment account covers the first scheduled principal payment. Bond principal payments, once made from the ESRF bond principal account, are legally considered a loan obligation of the ESF, with repayment from ESF resources due immediately upon payment; full repayment from the ESF to the ESRF is due no later than 90 days prior to the next principal payment date.
The balance of the ESF fluctuates through the calendar year, with SUTA tax receipts strongest in the second quarter reflecting the taxable wage base upon which the rate is levied and the required quarterly payment date 30 days after the quarter end. The highest benefit payout is in the first quarter of the year. The payment of bond principal in the third quarter (Aug. 15) thus benefits from the higher SUTA collections and relatively lower benefit payments. Coverage of principal payments by the ESF balance and SUTA receipts is ample assuming continuation of a relatively slow economic recovery. In the event that payroll taxes and existing benefit fund balances prove insufficient to cover both transfers for bond principal repayment and unemployment benefits, the state may shift tax collections to bondholders while relying on federal advances to cover benefits.
The bonds are being issued by IHFA, which issues primarily for housing purposes in the state, but has also issued as a conduit for other purposes, including transportation.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug. 2010.
'U.S. State Government Tax-Supported Rating Criteria', dated 8 Oct. 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
Contacts:
Fitch Ratings
Primary Analyst
Douglas Offerman, +1-212-908-0889
Senior
Director
Fitch Inc., 1 State St. Plaza, New York, NY 10004
or
Secondary
Analyst
Ken Weinstein, +1-212-908-0571
Senior Director
or
Committee
Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com