Jan 18 - Fitch Ratings assigns an 'AA+' rating to the following State of
Nevada general obligation (GO) limited tax (LT) bonds:
--$26 million Nevada Municipal Bond Bank Project Nos. 84, 85, and 86, series
--$23 million Water Pollution Control Revolving Fund Leveraged Refunding Bonds,
--$3 million Water Pollution Control Revolving Fund Matching Bonds, series
The bonds are expected to sell via competitive bid on or around Jan. 29, 2013.
In addition, Fitch affirms the following ratings:
--$2 billion in outstanding state GO LT bonds at 'AA+';
--$45.7 million in outstanding state lease revenue bonds at 'AA'.
The Rating Outlook is Stable.
The bonds are a general obligation of the State of Nevada, to which its full
faith and credit are pledged. Debt service is supported by a statewide property
tax levy that is subject to both constitutional and statutory limitations. State
law further provides that if property tax revenues are insufficient to pay GO
debt service, moneys are to be borrowed from the general fund and repaid from
future property tax revenues.
KEY RATING DRIVERS
SIGNS OF IMPROVEMENT IN WEAKENED ECONOMY: Nevada remains among the states
hardest hit by the national recession. Employment declined almost as rapidly as
it had been increasing leading up to the recession but has now begun to show
signs of improvement. Unemployment levels remain above average although the
unemployment rate is down from its peak. Concentrated in the Las Vegas/Clark
County area, the state economy remains narrowly based on gaming and
CONSERVATIVE FINANCIAL MANAGEMENT: State financial operations are conservatively
managed to produce budgetary balance even in light of the deep recession that
had a severe impact on state revenues. Having spent down its rainy day fund in
the fiscal 2008-2009 biennium, the state adjusted revenues and reduced spending
to achieve balance in the fiscal 2010-2011 biennium and passed a balanced budget
for the fiscal 2012-2013 biennium. Some financial flexibility is derived from
the state's practice of appropriating only 95% of expected revenues and an
unappropriated general fund balance that remains satisfactory at almost 11% of
MANAGEABLE DEBT POSITION: Nevada's debt increased prior to the downturn in
response to the demands of a growing population, but remains only a moderate
burden on resources. Although the state restructured debt through downturn,
amortization is above average. Pension funding has declined but the state's
overall liabilities are below average.
Nevada's rating reflects the state's conservative debt position, solid financial
controls, and historically responsive financial practices, as well as its
success in managing rapid population growth and development prior to the
downturn. Nevada's debt is only a moderate burden on resources and is supported
by a separate statewide property tax levy, which, during the extended period of
tax base growth that preceded the recession, produced revenues in excess of that
needed for debt service. The state accumulates any excess in a reserve that, as
of June 30, 2012 equaled approximately 92% of fiscal 2013's debt service. With a
significant decline in the tax base due to the recession, the tax levy no longer
covers annual debt service and the state expects to gradually reduce the reserve
so as to not raise the tax levy rate, with a target of maintaining 50% of the
next fiscal year's debt service in reserve.
Nevada has been slow to emerge from the national recession but is beginning to
show signs of a return to growth. Nevada was among the states hardest hit by the
recession, during which employment fell almost as rapidly as it had been
previously increasing, gaming and related tourist activities declined,
population declined for the first time, and the state led the nation in housing
value declines and mortgage delinquencies. Nevada's economy remains based on
gaming and entertainment and had been characterized by rapid growth with the
population expanding at an extraordinarily rapid rate, 125% since 1990, compared
with 24% for the U.S. This rapid growth had been matched by employment gains,
and in particular, a surge in construction employment in the middle of the last
decade. The nature of the recession, led by a housing market crash and declines
in consumer spending, had a particularly severe impact on the state.
Non-farm employment in Nevada declined much further than the national average,
down 9.1% in 2009 and 2.7% in 2010 versus the national rate of 4.4% and 0.7%
during those years and an unemployment rate, which had been lower than the
national average for much of the last decade, significantly higher than the U.S.
rate. Nevada lost approximately 190,000 jobs in the recession, including over
90,000 construction jobs. Construction continues to decline, down 7.9%
year-over-year in November 2012.
The economy is showing signs of modest recovery. Non-farm employment has begun
to grow again, up 1.2% year-over-year in November 2012, below the U.S. increase
of 1.4%. The unemployment rate, while still higher than the U.S. rate at 10.8%
in November is well off of its peak of 14%. The housing market continues to be
weak, but existing home sales and prices have begun to stabilize and mortgage
foreclosures are declining. The leisure and hospitality sector lost
approximately 40,000 jobs but has been adding jobs since June 2010 and is up 1%
year-over-year in November 2012. Visitor volume to Las Vegas decreased in 2008
and 2009 before beginning to rebound in 2010. Statewide gaming revenues,
accordingly, also declined in 2008, 2009 and 2010, before turning around in
2011. Visitor trends are improving with visitor volume, occupancy rates, room
tax revenues, and gaming revenues all expanding in 2011 and 2012.
The economic downturn had a severe impact on the state's financial operations,
with economically sensitive revenues falling dramatically. The state took action
through three biennial budgets to stabilize financial operations in light of
significantly reduced revenues. Following the drawdown of the rainy day fund to
solve a fiscal 2008-2009 biennial budget gap, the state responded to additional
financial stress in the fiscal 2010 - 2011 biennial budget with a significant
but temporary increase in taxes including raising sales and business taxes, and
an increase in the lodging tax and other fees. The legislature also made changes
to shore up the depleted rainy day fund.
With a slow and modest economic recovery projected for the current biennium,
which began July 1, 2011, a $3 billion current services deficit was projected,
reflecting the loss of $1.1 billion in revenue enhancements that were to sunset
at the end of the fiscal 2010-11 biennium, the reduction in federal stimulus
aid, increased Medicaid caseloads, and increased education costs. Gap closing
solutions included both expenditure reductions and revenue enhancement, through
the extension of four of the temporary taxes enacted in the prior budget, to
achieve balance. Education and public safety spending increased while other
government functions were reduced. Employee expenses were reduced through the
continuation of six furlough days, a 2.5% reduction in employee salaries, a 1%
increase in the employee retirement contribution (from 11.25% to 12.25%), a
redesign of health benefits, and a continuing freeze on pay increases. Revenues
exceeded budget expectations in fiscal 2012. Tourism related revenues have
improved, with the sales tax up 6% year-over-year and live entertainment tax
revenues up 4.9% year-over-year. Year-to-date revenues for the current year, the
second year of the biennium, remain on forecast.
The governor's recently released budget for the upcoming fiscal 2014-2015
biennium proposes a continuation of the expiring tax increases, providing an
additional $649 million, and continues revenue diversions included in the prior
budget. These diversions include directing the increase in the sales tax to the
school fund, alleviating some pressure on the general fund. The governor
proposes a modest increase in education funding, both in K-12 and higher
education. Medicaid funding is also expected to rise, reflecting implementation
of the Affordable Care Act and increased caseloads. Employee furloughs are
reduced to three per year, which will cost the state an additional $40 million.
Among the state's financial control tools are a constitutional requirement to
balance the budget, 95% budgeting - the budget must provide for a reserve of not
less than 5% of all proposed general fund operating appropriations and
authorizations - and a new requirement to set aside 1% of expected revenues at
the start of each fiscal year in the rainy day fund. Revenues are estimated on a
regular basis by the Economic Forum, comprised of members appointed by the
governor, the Senate majority leader, and the speaker of the Assembly. The state
budget director must use the Economic Forum projection in preparing the biennial
budget. The state also conducts regular, frequent debt affordability analyses to
ensure its ability to pay debt service within the existing property tax rate and
has a policy of maintaining a minimum reserve of 50% of the following year's
debt service in the Consolidated Bond Interest and Redemption Fund.
The bonds are general obligations of the state, and the state's full faith and
credit are pledged, although the property tax pledge is statutorily limited to
$3.64 per $100 of assessed valuation for all overlapping units of government.
Statutes further provide priority for taxes levied for debt service and a
requirement to borrow from the general fund, to be repaid from future property
tax revenues, if the annual collection is insufficient to pay GO debt service.
The state's tax rate dedicated to debt service is $0.17 and state law includes a
permanent appropriation for such payment.
The current offerings will refinance loans to local governments through the
Nevada Bond Bank and the water pollution control revolving fund that are used to
pay for improvements to local water and sewer systems. With about 30% of state
GO debt supported by program revenues and considered self-supporting, debt
ratios are moderate with net tax-supported debt of approximately $2.2 billion,
or 2% of 2011 estimated personal income. The system-wide funded ratio of Nevada
PERS was 71% as of June 30, 2012, down from most recent peak of 77.2% in 2007.
Using a more conservative 7% investment return assumption, the funded ratio
would fall to 63.9%. Although pension funding has declined, the burden of the
state's net tax-supported debt and Fitch-adjusted unfunded pension obligations
as a percent of personal income is below the median of the U.S. states rated by
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
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