TEXT-Fitch rates North Carolina GO bonds 'AAA'
Feb 7 - Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds of the State of North Carolina: --$350.165 million GO refunding bonds, series 2013C; --$345.915 million GO refunding bonds, series 2013D. The bonds are expected to be sold via competitive bid Feb. 20, 2013. Fitch also affirms the 'AAA' rating on $4.5 billion of outstanding North Carolina general obligation (GO) debt. The Rating Outlook is Stable. SECURITY The bonds are a general obligation, full faith and credit pledge of the state of North Carolina. KEY RATING DRIVERS LOW LIABILITIES: The state has a low-to-moderate debt burden and strong debt management practices, including an affordability planning process. Over time the state has become more reliant on appropriation debt. Pension funding is among the strongest of the states. WELL MANAGED FINANCIAL OPERATIONS: Financial operations are conservative with a history of prompt action when necessary to maintain budget balance. The fiscal 2011-2013 biennial budget is meeting expectations including funding of reserves that were utilized during the recession. DIVERSE ECONOMY: The economy is expected to grow and diversify in the long run, but was severely affected by the recession and recovery has been slow. CREDIT PROFILE North Carolina's 'AAA' GO bond rating reflects its moderate debt burden, conservative financial operations and long-term prospects for continued economic expansion and diversification. LOW DEBT LEVELS AND WELL FUNDED PENSIONS Tax-supported debt approximates $8.6 billion, 40% of which is appropriation-backed. The state's debt burden remains on the low end of the moderate range, at 2.5% of 2011 personal income. Amortization is above average with 70% of GO and appropriation debt due in 10 years. There is approximately $205 million in appropriation debt authorized but unissued. The current offering refunds outstanding debt and termination costs of associated interest rate swap agreements. Although funding of the state's major pension system has declined, it remains nearly fully funded at 94% as of Dec. 31, 2011. On a combined basis, the burden of the state's net tax-supported debt and Fitch-adjusted unfunded pension obligations as a percent of personal income is amongst the lowest of the U.S. states rated by Fitch. CONSERVATIVE APPROACH TO FISCAL MANAGEMENT Financial operations are conservative, with the governor empowered to unilaterally reduce spending to maintain budget balance, after making provision for debt service. North Carolina used a variety of tools to balance its budget over the course of the recession, including spending reductions, temporary tax increases, use of reserves, and federal stimulus aid. The state faced a $2.6 billion current services gap in preparing the fiscal 2011-2013 biennial budget, including the loss of $1.6 billion in federal stimulus funds, $1.3 billion in foregone tax revenues as temporary increases expired, and increased operating costs of existing programs. The consensus revenue forecast upon which the budget was based assumed a slow recovery in fiscal 2012 followed by more rapid growth in fiscal 2013. The state closed the gap relying almost entirely on budget reductions, as well as the set aside of fiscal 2011 surplus funds. Budget performance for fiscal 2012 met expectations with tax revenue growth slightly higher than forecast. Tax revenues grew just 0.5% year-over-year in fiscal 2012, reflecting the expiration of temporary tax increases, but were 2.5% higher than forecast with solid growth in individual and corporate income tax revenues offsetting lower sales tax revenues due. General fund expenditures were slightly lower than budgeted but increased 5.8% after three years of reductions or no-growth. The revenue forecast for fiscal 2013 was revised slightly downward as of May 2012, projecting 4.3% growth rather than the 5.5% growth originally forecast. Tax revenues through the first five months of fiscal 2013 are tracking the forecast, up 4.1% year-over-year. The solid budget performance allowed the state to add $307 million to its rainy day fund, depleted as a budget balancing solution during the recession, bringing its current balance to $419 million. Other reserves total approximately $760 million in special and trust funds as well as approximately $713 million in the Golden Leaf trust, funded from tobacco settlement monies and used primarily for economic development in tobacco growing regions. TRANSITION TO SERVICE BASED ECONOMY The transition of the economy away from manufacturing toward services continues, with manufacturing employment now half of what it was in the 1990s. Employment in manufacturing grew for the first time in more than 15 years in January 2011 and has demonstrated year-over-year gains in every month but one since, including 1.8% year-over-year growth in December 2012. Professional and business service employment is one of the faster growing sectors, increasing 4.1% on a year-over-year basis in December 2012. Measured by per capita personal income, North Carolina is below average at 87% of the U.S. level, ranking 37th among the states. Leading into the recession, North Carolina's economy had been growing significantly in terms of both size and diversity; but its contraction over the course of the recession was severe. Employment fell 5.5% during calendar year 2009, notably worse than the national decline of 4.4%, with all sectors other than education and health services showing declines. Job losses began to abate toward the end of 2010 but employment overall fell 0.9% in 2010, again higher than the national decline of 0.7%. Economic growth has been somewhat slow emerging from the recession but future growth is expected to be stronger as the now smaller manufacturing sector begins to recover and business and professional service sectors grow with the overall economy. Employment growth has matched the U.S. rate at 1.7% year-over-year in December 2012. The state's unemployment rate of 9.2% remains higher than the national rate of 7.8% as of December 2012, reflecting in part the need to absorb higher in-migration. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria', dated Aug. 14, 2012; --'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012. Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. State Government Tax-Supported Rating Criteria