Fitch Affirms South Dakota's Health and Ed. Facil. Auth. Vocational Ed Revs 'AA'; Outlook Stable
Fitch Affirms South Dakota's Health and Ed. Facil. Auth. Vocational Ed Revs 'AA'; Outlook Stable
Fitch Ratings takes the following actions on the state of South Dakota, the South Dakota Health and Educational Facilities Authority (SDHEFA), and the South Dakota Building Authority (SDBA):
--SDHEFA vocational education program revenue bonds, affirmed at 'AA';
--SDBA revenue bonds, series 1996A, affirmed at 'AA'.
--Implied general obligation (GO) rating of the state, assigned at 'AA+';
The Rating Outlook is Stable.
SDHEFA's vocational education program revenue bonds are limited obligations of the authority, payable solely from lease rentals and amounts in the debt service reserve. Lease rentals are subject to appropriation by the state legislature and derive from two sources, program revenues collected by participating institutions and appropriations from the state's general fund.
SDBA's revenue bonds are special, limited obligations of the authority, the security for which derives from lease rental payments made by several departments and bureaus to the SDBA, subject to annual legislative appropriations and held in a separate trust fund by the state treasurer.
KEY RATING DRIVERS
RATINGS BASED ON STATE APPROPRIATION: The 'AA' rating on SDHEFA and SDBA bonds, one notch below the state's implied general obligation (GO) rating, reflects the credit quality of the state of South Dakota, the appropriations required for debt service payment and solid program mechanics. Bonds of SDHEFA are secured by lease payments, subject to annual legislative appropriation, deriving from a state subsidy and facility fee revenues charged to all students enrolled at South Dakota's four vocational technical institutes. This is a significant bonding program for the state and all bonds are on parity, cross-collateralized and cross-defaulted, providing strong incentive to appropriate. SDBA bonds likewise benefit from annual lease payments by the state subject to appropriation.
LOW LIABILITIES: The state's long-term liabilities are very low, including debt, pensions and OPEB. Tax-supported debt is primarily issued through the SDBA and SDHEFA, as the state does not issue general obligation bonds. The burden of retiree obligations is limited.
CYCLICAL ECONOMY: The state economy relies on the cyclical agriculture and natural resources sectors, although service sectors are now helping to lead growth.
CONSERVATIVE FISCAL MANAGEMENT: Fiscal management is conservative. The state's longstanding practice of planning and achieving budgetary balance has now been augmented with a recent voter-approved constitutional amendment requiring balance. Financial flexibility is provided by sizable reserve balances.
CONTINUED ADHERENCE TO CONSERVATIVE MANAGEMENT: The rating is sensitive to changes in South Dakota's prudent approach to fiscal and debt management. The Stable Outlook reflects Fitch's expectation that such changes are unlikely.
South Dakota's implied GO rating of 'AA+' reflects the general credit quality of the state. GO debt is constitutionally restricted to no more than $100,000, and thus debt issued for state purposes is done in the form of appropriation-supported borrowing, primarily through SDHEFA and SDBA. The state has no general obligation debt outstanding.
The state's conservative approach to fiscal management and limited, manageable burden of liabilities are key credit strengths, offsetting its exposure to economic and revenue cyclicality from its prominent agriculture, natural resource and banking sectors. The state has a longstanding history of achieving budgetary balance; prudent fiscal management policies include the establishment of various reserve funds that support certain spending priorities and provide a cushion in the event of unexpected revenue weakness. The state's liability burden likewise reflects its conservative management approach, with low net tax-supported debt and limited obligations to retirees.
South Dakota's economy has had a longstanding reliance on agriculture and natural resources, although services continue to grow. Key state sources of economic activity, including agriculture and banking, have been subject to cyclicality in recent years, affecting state employment, personal income and tax collection trends. South Dakota was much less severely affected by the last recession than the nation as a whole and recovery generally remains steady, albeit at a pace slightly below the nation's. Employment in the state rose 1.1% in 2011 and 1.6% in 2012, just below the respective U.S. growth rates of 1.2% and 1.7% over the same period. More recently, May 2013 employment was up 1.1% in South Dakota, compared to 1.6% nationally.
Unemployment has historically been much lower in South Dakota than in the nation. The unemployment rate in May 2013 was 4% in the state, compared to 7.6% nationally. Personal income growth has generally been more volatile than the nation as a whole. State personal income declined 0.2% in 2012 compared to a rise of 3.5% nationally. The decline was tied to the impact of drought conditions on farm income. Despite the decline, the state's personal income per capita has grown over time relative to the national average, and stands at 102.3% in 2012, ranked 18th among the states.
The state maintains sizable reserve funds, relying on balances to address unforeseen needs, including from recessionary weakness. The budget reserve fund balance stood at $71.1 million as of fiscal 2012, equal to 5.5% of general fund receipts; this figure includes $47.9 million in unobligated cash balance from fiscal 2012 overperformance. At fiscal 2014 budget adoption, the state was forecasting no unobligated cash in fiscal 2013 and $1.7 million in fiscal 2014, although fiscal 2013 actuals are expected to exceed forecast. Other reserve and trust funds receive constitutionally dedicated resources and support specified spending priorities through annual transfers to the general fund.
South Dakota cemented its longstanding practice of starting and ending each fiscal year with a balanced budget by passing a constitutional amendment requiring budget balance in 2012. About 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, 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, which are then allocated to support property tax relief through state aid to education.
Revenue collections in recent years have shown steady gains, reflecting the gradually recovering economy. General fund receipts for fiscal 2012 rose a solid 11.7% from fiscal 2011, to $1.28 billion, given solid sales tax growth and the recovery of bank franchise taxes after several years of weakness. The state's fiscal 2013 budget, adopted in March 2012, assumed modest growth in receipts of 1.9%, to $1.27 billion. As of the state's fiscal 2014 budget, the fiscal 2013 forecast was adjusted higher, to $1.35 billion, or 5.2% over actual fiscal 2012 receipts, reflecting higher collection trends and the carryforward of a sizable fund balance from fiscal 2012, much of which was subsequently transferred to the budget reserve fund. For fiscal 2014, the state forecasts a slight drop in revenues, to $1.33 billion, the result of lower one-time receipts and a cautious outlook on bank franchise taxes.
Fiscal 2013 spending is forecast to rise 7.8%, including supplementals proposed with the fiscal 2014 budget. Supplemental general fund spending needs included costs for state employee health insurance, economic development and wildfire suppression; the latter have been a source of unforeseen spending needs in the past. The state's fiscal 2014 adopted budget assumes spending growth of 2.1% over fiscal 2013, to $1.33 billion, and funds increases in schools, higher education, Medicaid and employee pay raises.
South Dakota's tax-supported debt burden is low, equal to approximately 1.6% of 2012 personal income. The reported funded ratio for the state's primary pension plan, the South Dakota Retirement System, was 92.6% as of June 30, 2012. Using Fitch's more conservative 7% discount rate, the plan would remain a well-funded 87.8%. Fitch measures the state's combined net tax-supported debt and unfunded pensions at 2.7% of 2012 personal income, among the lowest of states rated by Fitch. Additionally, the state's OPEB liability is small given that it consists only of an implicit rate subsidy for retirees.
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 state 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 (set at $1.65 million annually since fiscal 2010), 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. A 2013 statutory change will require legislative approval of future issuance and a minimum 103% coverage of maximum debt service upon new issuance.
Additional security is provided by a debt service reserve, fully funded at maximum annual debt service (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. 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.
Additional information is available at 'www.fitchratings.com'
'Tax-Supported Rating Criteria', dated 14 Aug. 2012.
'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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