Published: June 01, 2010
Fitch Rates South Dakota Health and Educ. Facil. Auth. $24MM Vocational Ed Revs 'AA'; Outlook Stable
NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns an 'AA' rating to the following South Dakota
Health and Educational Facilities Authority taxable vocational education
program revenue bonds:
--$17.3 million series 2010A (Build America Bonds);
--$6.4 million series 2010B (Recovery Zone Economic Development Bonds).
In addition, Fitch affirms the following ratings:
--$37.4 million in outstanding vocational education program revenue
bonds at 'AA'.
The Rating Outlook is Stable. The bonds are expected to sell via
negotiation on June 3.
RATING RATIONALE:
--The bonds are secured by a state subsidy, subject to annual
legislative appropriation, and facility fee revenues charged to all
students enrolled at South Dakota'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 on all parity bonds.
--The state economy has a long history in agriculture, although growing
service sectors are forecast to help lead the recovery. South Dakota's
unemployment rate continues to be among the lowest of the states, and
wealth levels remain below average.
--Financial flexibility is healthy, guided by a requirement to start and
end the fiscal year with a balanced budget.
--The state's long-term liabilities, including debt, pensions and OPEB,
are low. Debt is primarily issued through the South Dakota Building
Authority (SDBA) and the South Dakota Health and Educational Facilities
Authority (SDHEFA), as the state does not issue general obligation bonds.
KEY RATING DRIVERS:
--The state's ability to maintain structurally balanced operations and
continued adherence to sound financial policies and practices.
--Continued economic diversification should promote increased wealth
levels.
SECURITY:
The bonds are secured by a state subsidy, subject to annual legislative
appropriation, and facility fee revenues charged to all students
enrolled at South Dakota'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 on all parity bonds. The interest subsidies to be received from
the U.S. Treasury for the Build America Bonds and the Recovery Zone
Economic Development Bonds are pledged as security for the bonds, and
will be deposited into the tuition subaccount held by the bond trustee,
along with other pledged revenues.
CREDIT SUMMARY:
The SDHEFA issues debt to finance higher education and health care
facilities. Security on the bonds is derived from lease rental payments
made by the Board of Education from facility fee revenues charged by the
four participating schools with rates set to equal to 103% of annual
debt service and a subsidy from the state (currently $1,650,000),
subject to annual legislative appropriation. Security features include
the standard covenant to budget subject to appropriation, and
cross-collateralization and cross-default provisions provide strong
incentive to appropriate. Additional security is provided by a debt
service reserve, fully funded at maximum annual debt service on
vocational educational facilities bonds. These provisions are
strengthened by other covenants that provide for supplemental state
appropriations in the event that pledged revenues are not sufficient to
make rental payments, although this has never been necessary. The
facility fee tuition collection and deposit agreement along with the
master lease underpin debt security. While lease payments are due two
days prior to the February 1 and August 1 debt service payment dates,
state practice is to transfer on July 31 all amounts due for the entire
bond year.
Approximately $37.4 million of parity bonds are outstanding under the
master lease and resolution. The tuition subaccount held by the bond
trustee, which receives the facility fee revenues and appropriated
payments, is pledged and assigned for benefit of bondholders and is not
available to transfer to the state's general fund. Including the current
issuance, maximum annual debt service is $5.1 million in fiscal 2012.
The state's financial profile is healthy, guided by a requirement to
start and end the fiscal year with a balanced budget. Approximately 60%
of General Fund revenues come from the state's broad-based 4% sales tax,
with additional revenue generated by a contractor's excise tax, an
insurance company tax, and other smaller taxes; South Dakota does not
charge an individual or corporate income tax. The General Fund also
receives transfers from the Property Tax Reduction Fund (PTRF), which
are then allocated to fund property tax relief at the local level,
through state aid to education. South Dakota's revenues did not begin to
weaken until midway through fiscal 2009. Actual fiscal 2009 revenues
were 4.5% below the adopted General Fund budget, with actual General
Fund spending 5.4% below the budgeted level. The adopted General Fund
budget for fiscal 2010 included various spending cuts (including
education), $101 million in stimulus funds, some small revenue
enhancements, and several one-time fund transfers totaling $17.8
million. Through March 2010, total General Fund receipts were only 0.4%
below the adopted budget for fiscal 2010 and state officials expect
revenues to remain in line with this forecast. The adopted fiscal 2011
budget factors in slight natural revenue growth from improving economic
conditions, and also includes some revenue enhancements, including a
change in sales and contractor's excise taxes for construction of
certain facilities, several one-time fund transfers, and $76.6 million
in stimulus money; the budget does not include any expectation of an
FMAP extension, which would generate an estimated $37.3 million for the
state. South Dakota's reserve position is strong, providing considerable
financial flexibility; current balances in the state's Budget Reserve
Fund and PTRF equal nearly 13% of fiscal 2011 General Fund expenditures.
South Dakota's mostly rural economy is driven by agriculture, education
and health services, government, and wholesale and retail trade,
although solid growth in professional and business services is forecast
over the next few years. Gains in state nonfarm employment have outpaced
the U.S. over the past 20 years. In the last downturn, job losses across
the state were fairly mild relative to the national contraction, and
South Dakota entered the current recession later than the U.S.; South
Dakota continued to experience employment growth of 1.2% in 2008, while
the U.S. declined by 0.6%. In 2009, the state's nonfarm employment
losses were, again, milder than national trends, with a decline of 1.9%
in South Dakota compared to a decline of 4.3% across the U.S. The
state's unemployment rate of 4.7% in April 2010 is the second lowest in
the nation, and well below the U.S. rate of 9.9%. On an annual basis,
South Dakota's unemployment rate has been below the national average for
at least the past 20 years. Gains and losses in personal income have
been more volatile than the trends in state employment, with stronger
growth than the nation in 2007 and 2008 and a larger decline in 2009.
The state ranked 25th among the states by measure of personal income per
capita in 2009, equal to 94.4% of the U.S. level. South Dakota is the
fifth smallest state in the nation, with an estimated 812,383 residents
in 2009, and continues to grow at a slower pace than the nation.
South Dakota's debt burden is low, equal to approximately 1.5% of 2009
personal income. The state is constitutionally prohibited from issuing
GO bonds in excess of $100,000, and as a result, South Dakota primarily
issues appropriation-backed debt via the Health and Educational
Facilities Authority and the Building Authority. The state's primary
pension plan, the South Dakota Retirement System, remains well funded at
91.8% as of June 30, 2009, and the unfunded liability is low as a
percentage of personal income at about 2%. Additionally, the state's
unfunded OPEB liability is very manageable, equal to approximately $67
million, or 0.2% of personal income; South Dakota only covers the
implicit rate subsidy for retirees.
Applicable criteria available on Fitch's website at 'www.fitchratings.com'
includes:
--'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 Appropriation-Backed Bonds:
A U.S. state government's overall credit quality is reflected in the
rating for its general obligation (GO) full faith and credit pledge, the
broadest security that a state can provide to the repayment of its
long-term borrowing. In cases where bond payment requires annual or
biennial legislative appropriation, this lesser long-term commitment to
repayment is reflected in a lower rating than the GO rating. Such debt
is typically rated one notch below the GO rating. If concerns about
non-appropriation are heightened, for example in cases where there is
not clear essentiality for the project being funded, such debt can be
rated two or more notches below the GO rating. Conversely, if the risk
of non-appropriation is judged to be effectively eliminated, for example
through a mechanism that traps substantial operating funds if
appropriation is not made, the appropriation debt can be rated on par
with the GO credit.
State GO 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'.
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.
Fitch Ratings, New York
Alexandra K. Edwards, +1-212-908-9181
Kenneth
T. Weinstein, +1-212-908-0571
Media Relations:
Cindy Stoller,
+1-212-908-0526
cindy.stoller@fitchratings.com
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