Fitch Ratings assigns an 'AA' rating to the following South Dakota Health and Educational Facilities Authority (SDHEFA) vocational education program revenue refunding bonds:
--$6.5 million, series 2011B.
The bonds are expected to price via negotiated sale on or about Oct. 11, 2011. In addition, Fitch takes the following rating actions:
--Approx. $91.5 million in outstanding SDHEFA vocational education program revenue bonds, affirmed at 'AA';
--Approx. $6.3 million in outstanding revenue bonds issued by the South Dakota Building Authority (SDBA) series 1996A, affirmed at 'AA'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
--The bonds are secured by a general fund subsidy of the State of South Dakota (the state), subject to annual legislative appropriation, and facility fee revenues charged to all students enrolled at the state's four vocational technical institutes. All bonds are on parity and are cross-collateralized and cross-defaulted, providing strong incentive to appropriate. Additional security is provided by a debt service reserve, fully funded at maximum annual debt service (MADS) on all parity bonds.
--The state's economy is becoming more diverse, with a longstanding reliance on agriculture and a growing service sector. The unemployment rate continues to be among the lowest of the states.
--Financial flexibility is healthy, guided by the historical practice of starting and ending the fiscal year with a balanced budget. Reserve balances are strong.
--The state's long-term liabilities, including debt, pensions and other post-employment benefits (OPEB), are low. Debt is primarily issued through the SDBA and the SDHEFA, as the state does not issue general obligation bonds.
SECURITY
The bonds are secured by a subsidy from the state, subject to annual legislative appropriation, and facility fee revenues charged to all students enrolled at four state vocational technical institutes.
CREDIT PROFILE
The SDHEFA issues debt to finance higher education and health care facilities. Security on the vocational education program revenue bonds is derived from lease rental payments made by the board of education from facility fees paid by students of the four participating vocational technical institutes with rates set to equal 103% of annual debt service, and from a state subsidy (currently $1.65 million), subject to annual legislative appropriation.
Security features include a covenant to budget subject to appropriation, and cross-collateralization and cross-default provisions that provide strong incentive to appropriate. Additional security is provided by a debt service reserve, fully funded at MADS on vocational educational facilities bonds. These provisions are strengthened by another covenant that provides for supplemental state appropriations in the event that pledged revenues are not sufficient to make rental payments. This provision has never been triggered.
The facility fee tuition collection and deposit agreement along with the master lease underpin debt security. Lease payments are due two days prior to the Feb. 1 and Aug. 1 debt service payment dates, although state practice is to transfer on July 31 all amounts due for the entire bond year. About $91.5 million of parity bonds is outstanding under the master lease and resolution. The tuition subaccount held by the bond trustee, which receives the facility fee revenues and appropriated subsidy payments, is pledged and assigned for benefit of bondholders and is not available to transfer to the state's general fund. MADS is $6.5 million in fiscal 2012.
The state's financial profile is conservative, guided by a longstanding practice of starting and ending each fiscal year with a balanced budget. About 62% of general fund revenues come from the state's broad-based 4% sales tax, with additional revenue generated by a contractor's excise tax, bank franchise and insurance company taxes, and other smaller levies. There are no individual or corporate income taxes. The general fund also receives transfers from the property tax reduction fund (PTRF), which are then allocated to fund property tax relief through state aid to education.
Revenue collections weakened during the economic downturn, led by declines in sales and bank franchise taxes, although a slow recovery now appears to be underway. Fiscal 2011 general fund revenues at the time of budget adoption were expected to rise 2.9%, to $1.165 billion. The fiscal 2011 revenue outlook was lowered slightly in March 2011, to $1.148 billion, during the state's fiscal 2012 budget process, and legislative changes lowered spending by $15 million to maintain balance. However, actual collections overperformed during the year, with sales tax collections rising 8.9% from the previous year, offsetting declines in bank franchise and PTRF receipts. The state applied the higher actual receipts to refund a previous bank franchise tax overpayment, leaving revenues at the March 2011 forecast level.
The state's fiscal 2012 budget, adopted in March 2011, assumed limited revenue growth of only 0.3% over the March forecast for fiscal 2011 revenues, with total revenues of $1.153 billion. Appropriations are balanced with revenues. The spending plan absorbed $85 million in spending growth, including to replace expiring federal stimulus aid while implementing broad cuts of nearly $127 million, equal to 10% of general fund spending for most state agencies. The state maintains a strong reserve position, with both a budget reserve fund of $43 million and a property tax reserve fund balance of $64 million. Together, the two reserves equal about 9.3% of general fund revenues. Neither fund has been tapped during the course of the downturn.
South Dakota's economy has had a longstanding reliance on agriculture and natural resources, although services continue to grow, driven by professional and business services and financial services. The recent recession had a broad impact on key state employment sectors, but began later and was less severe than in the U.S. as a whole. In 2009 and 2010, employment in the state fell 1.9% and 0.4%, respectively, compared to U.S. losses of 4.4% and 0.8%. Growth is emerging again, with August 2011 employment up 0.9% in the state, compared to 1% nationally. Unemployment has historically been much lower in the state than the nation; the unemployment rate in August 2011 was 4.7% in the state, compared to 9.1% nationally. Personal income growth has generally been more volatile but stronger over time than the nation as a whole. In South Dakota, personal income in 2010 rose 1.5% over 2009, compared to 3% nationwide; in the first quarter of 2011, the state's personal income rose 7% over the first quarter of 2010, compared to 4.7% nationally.
South Dakota's debt burden is low, equal to approximately 1.6% of 2010 preliminary personal income. The state constitution prohibits general obligation bonds in excess of $100,000, and as a result, tax-supported debt is limited primarily to appropriation-backed debt issued by SDHEFA and SDBA. The state's primary pension plan, the South Dakota Retirement System, is well funded at 96.3% as of June 30, 2010. Additionally, the state's OPEB liability is small given that it consists only of an implicit rate subsidy for retirees.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 15 Aug. 2011.
'U.S. State Government Tax-Supported Rating Criteria', dated 15 Aug. 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
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