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.
The bonds are a general obligation, full faith and credit pledge of the state of
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.
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
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
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
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