Jan 16 - Fitch Ratings has assigned an 'AA+' rating to the following state
of Washington general obligation (GO) bonds:
--$551,910,000 various purpose GO refunding bonds, series R-2013C;
--$125,360,000 motor vehicle fuel tax GO refunding bonds, series R-2013D;
--$230,580,000 various purpose GO bonds, series 2013D;
--$323,450,000 motor vehicle fuel tax GO bonds, series 2013E
The bonds are expected to be sold through competitive bid on Jan. 23, 2013.
In addition, Fitch has affirmed the 'AA+' rating assigned to approximately $18
billion of outstanding state GO bonds.
The Rating Outlook on the state's GO bonds remains Negative.
The bonds are GOs of the state to which its full faith, credit, and taxing power
are pledged. Motor vehicle fuel tax GO bonds are first payable from state excise
taxes on motor vehicle and special fuels.
KEY RATING DRIVERS
REDUCED FINANCIAL FLEXIBILITY: The Negative Rating Outlook reflects the state's
constrained revenue raising and spending control flexibility. Maintenance of the
'AA+' rating will be based on sustainable budgeting that provides an adequate
cushion against future revenue underperformance. The state's current reserve
position is limited, although recent economic and revenue trends have been
SOLID ECONOMY: Washington's economy is characterized by generally sound
performance and increased diversification. The manufacturing sector remains
concentrated in the cyclical aerospace industry, although this concentration is
sharply reduced. Economic growth prior to the recession was primarily due to
strength in construction, aerospace (Boeing), and technology (Microsoft).
CONCENTRATED REVENUE SYSTEM: The state, with no income tax, relies on
consumption-based revenues. This makes Washington particularly vulnerable to
reductions in consumer spending.
RESPONSIVE FINANCIAL MANAGEMENT: Frequent reviews of economic and financial
forecasts allow the state to react to changing conditions. As the economy and
revenues repeatedly underperformed estimates in the recession, resulting in
significant negative forecast revisions, the state demonstrated its willingness
and ability to take actions to maintain budget balance.
ABOVE-AVERAGE DEBT LEVELS: Debt ratios are in the upper moderate range and
expected to remain so, reflecting funding of substantial capital needs,
particularly for transportation.
INITIATIVES AND REFERENDA A LIMITED RISK: The state's initiative and referendum
environment creates a level of operating and financial uncertainty. However, any
law approved by voters in this manner can be amended or repealed by the
legislature by a two-thirds vote in the first two years after approval and by a
simple majority thereafter.
WHAT COULD TRIGGER A RATING ACTION
Failure to maintain budget balance and an adequate reserve position using
primarily recurring gap-closing measures in the budget for the upcoming biennium
likely would result in a downgrade.
Washington's 'AA+' GO bond rating reflects a generally solid economy and a
demonstrated commitment to fiscal balance even as the state's financial position
substantially weakened in the downturn. Credit strengths are offset by a
concentrated revenue system that is reliant on the sales tax, with no income
tax, as well as above-average debt levels.
Washington reviews its general fund revenue forecast quarterly, and actual
revenue performance repeatedly and significantly underperformed downwardly
revised estimates in the recession. More recent performance has been in line
with expectations, with minimal changes at the forecast reviews in 2012. The
revenue system's reliance on a broad-based sales tax makes Washington
particularly vulnerable to reductions in consumer spending.
After state general fund revenue declines of 9.6% in fiscal 2009 and 4.1% in
fiscal 2010, followed by growth of 7.9% in fiscal 2011 that reflected in part
tax increases enacted in April 2010, the November 2012 forecast reports revenues
up 1.5% in fiscal 2012 and forecasts growth of 4.9% in 2013. The next forecast
update is scheduled to be released in March 2013.
In April 2012, the legislature restored budget balance following large negative
forecast revisions through a combination of ongoing and one-time actions. The
limited projected ending balance and reserve total for the end of the biennium
on June 30, 2013 is now $374 million, 2.4% of projected fiscal 2013 revenues.
Fitch believes that continued downside risk to the economic and revenue forecast
remains, although recent trends are generally positive. The long-term prospects
for the economy are solid, and key industries are showing strength.
Despite expected continued revenue growth, the state's budget for the upcoming
fiscal 2013-15 biennium is likely to continue to require difficult choices.
Washington already has taken extensive spending control action since the
recession began and given the difficulty of achieving the state's current
required supermajority legislative vote for tax increases such measures
effectively require voter approval. Pursuant to a new statutory requirement,
the budget must show projected balance over a four-year period rather than just
the biennium. The outgoing governor proposed budget options with and without
new revenues in December; the incoming governor has the option to present a
The need to address a 2012 state Supreme Court decision, which found state
education funding inadequate but provided the state some flexibility in terms of
the timing and amount of remediation, will add to a budget gap to be closed for
the coming biennium that is estimated at $904 million after required funding of
the budget stabilization account. In 2009, the state passed education funding
reform that the court noted positively in its ruling. The cost of implementing
that reform in the coming biennium is estimated at about $1 billion.
Washington's economy entered the recession later than the nation overall
following a period when it performed much more strongly than the U.S. Non-farm
employment in Washington rose as national employment fell in 2008, then dropped
4.6% in 2009 compared to 4.4% for the U.S. Washington's employment decline of
1.3% in 2010 was almost twice that of the U.S. Growth in 2011 was in line with
the U.S. pace, and performance in 2012 indicates a return to growth above the
national experience. In November 2012, Washington's year-over-year job growth
of 1.7% compared to 1.4% for the nation. The state's unemployment rate in
November 2012 was 7.8%, matching that of the U.S. Personal income per capita,
at 106% of the U.S. in 2011, ranks 14th among the states.
Washington's debt levels are in the upper moderate range and well above average
for a U.S. state, with net tax-supported debt of $18 billion equal to 6% of
personal income. Debt is almost exclusively GO. Capital needs are substantial,
particularly for transportation, and tolling is part of the funding solution.
The state has increased its focus on debt affordability. The legislature
authorized a constitutional amendment that was approved by voters on the
November 2012 ballot to lower the constitutional debt limit.
The state administers 13 defined benefit retirement plans, three with hybrid
defined benefit/defined contribution options. The closed public employees and
teachers plans (PERS and TRS1), which have been closed since 1977, are
underfunded, with an unfunded actuarial accrued liability (UAAL) of $5.5 billion
as of June 30, 2011, $3 billion of which is the responsibility of the state. On
a combined basis, the burden of net tax-supported debt and adjusted unfunded
pension obligations is slightly above the median for U.S. states rated by Fitch,
measured as a percent of personal income.
The state has taken various steps to manage pension funding. Legislation passed
with the fiscal 2011-2013 budget eliminated automatic annual COLAs for PERS and
TRS1 retirees that had been in place since 1995, a change still subject to legal
challenge. The state also passed legislation to lower the pension investment
return assumption from 8% to 7.9% as of July 1, 2013, declining to 7.7% as of
July 1, 2017.