Fitch Ratings has assigned an ‘AAA’ rating to the State of Tennessee’s approximately $190 million general obligation (GO) bonds, consisting of:
–$111,460,000 GO bonds 2014 series A;
–$78,625,000 GO bonds 2014 refunding series B.
The par amount of the refunding series may change prior to sale. The bonds will be sold via negotiated sale on or about July 16.
Fitch has also affirmed the ‘AAA’ rating on:
–$1.8 billion outstanding state GO bonds.
The Rating Outlook is Stable.
Full faith and credit, payable as to principal and interest from any funds or monies of the state from whatever source derived.
KEY RATING DRIVERS
CONSERVATIVE DEBT PROFILE: The state’s debt profile is very conservative, with low debt ratios, swift amortization, few non-general obligation commitments, and strong security provisions. The state has fully funded its pension contributions for four decades.
CONSISTENTLY BALANCED FINANCIAL OPERATIONS: Financial operations are conservative and consistently balanced, although largely reliant on sales tax revenues. The state retains considerable operating flexibility, including large reserve balances.
DIVERSIFYING ECONOMY: The state has a large manufacturing sector which was a vulnerability in the last downturn, although the economy has returned to steady growth and continues to diversify. Wealth levels are below average.
CHANGES IN LONGSTANDING PRACTICES: The rating is sensitive to continued maintenance of the state’s conservative debt and fiscal management practices.
Tennessee’s ‘AAA’ GO rating reflects its low debt levels, among the lowest of any state, and an ongoing commitment to budget balance. Conservative fiscal management has been in evidence repeatedly over the last decade, including in the state’s proactive approach to maintaining fiscal balance and preserving flexibility in the form of budget reserves. The economy has registered generally steady growth through the recovery, with sales tax revenue, the state’s largest source of revenue, following suit.
In response to economic and revenue weakness during the last downturn, the state repeatedly lowered base spending while relying on one-time resources, including federal stimulus and state reserve balances, to maintain budgetary equilibrium. Despite reserve draws, including recent draws to cover unanticipated Medicaid-related program costs, balances remain ample.
VERY LOW LIABILITY BURDEN
The state’s debt places a very low burden on resources, is well-protected by security provisions, and amortizes rapidly. Taxes allocated to the general, highway and debt service funds are pledged to GO debt service, and their yield is the basis for a debt service limit that is only 34.5% used before the current sale. Net tax-supported debt of almost $2.2 billion as of June 30, 2014 equals 0.8% of 2013 personal income.
The state has met the full actuarially calculated required employer contribution to its pension system each year since 1972. The Tennessee Consolidated Retirement System (TCRS) had a system-wide reported funded ratio of 93.6% as of July 1, 2013. Using Fitch’s more conservative 7% investment return assumption (compared to the 7.5% used by TCRS) would result in a funded ratio of approximately 88.8%. On a combined basis, the state’s net tax-supported debt and the unfunded pension obligations of TCRS attributable to the state together equal 1.7% of 2013 personal income, the lowest level among Fitch-rated states; the statewide median is 6.1%.
CONSERVATIVE FINANCIAL OPERATIONS
Tennessee’s financial operations are conservative and its budget is consistently balanced. The state addressed recessionary weakness by repeatedly cutting recurring spending and by using one-time items, including reserve draws and federal stimulus. The state has generally benefitted from consistent tax revenue growth through the slow economic recovery.
Fiscal vulnerabilities include the state’s dependence on sales taxes, which make up 62% of total tax revenues, as well as challenges controlling the spending growth in TennCare, the state’s Medicaid program. However, the state has prioritized rebuilding flexibility in the form of the revenue fluctuation reserve (RFR), its rainy day fund, as well as a separate reserve for TennCare.
Fiscal 2014 performance continued the conservative course of recent budgets. During the fiscal year the state lowered its revenue expectations and adjusted the budget accordingly. The state estimates total tax revenues rising 1.1% over fiscal 2013 levels, to $11.8 billion, with sales tax collections rising 3.2%. Through May 2014 year to date, revenue collections across all funds were lackluster, with actual collections 2.3% below budget and roughly matching the prior year level, due largely to under-performance of franchise and excise taxes.
The fiscal 2014 budget remains balanced despite revenue underperformance, with total spending rising 2.8%, to $33.2 billion. General fund spending will rise 3.2%, with the state absorbing higher than planned TennCare spending through slower growth in other spending categories. Appropriations include an additional $100 million deposit to the RFR, although a small draw was made from the TennCare reserve. Together the RFR and TennCare reserves total $738 million (6.3% of total tax revenues) at year-end.
The fiscal 2015 adopted budget assumes tax revenues rising 2.8%, to $12.1 billion, with sales and use taxes rising 3.3%. General fund spending falls 1.1%, to $29 billion, with growth in the TennCare budget absorbed through reductions in other spending categories, including education and corrections. The state has budgeted a $35.5 million deposit to the RFR, which would bring the combined balance of the RFR and TennCare reserves to $773 million (6.4% of total tax revenues), assuming no further draws on the latter.
The state’s economic strengths lie in trade and manufacturing, although cyclicality in the latter has been a concern, particularly given the growing importance of automotive-related manufacturing. In the last downturn the state’s job losses exceeded the U.S., with nonfarm employment in the 2007-2010 period falling 6.5%, compared to 5.6% nationally. Job growth resumed in late 2010 and has been steady since then.
Employment in the state grew 1.3% in 2013, compared to 1.7% nationally. May 2014 employment in the state was up 2.1% year-over-year, compared to 1.8% nationwide. Certain services and durable goods manufacturing are showing solid gains; manufacturing sector growth has been a particular strength for the state in the current recovery. Tennessee’s unemployment rate was 6.4% in May 2014, down from 8.4% a year earlier and only slightly ahead of the 6.3% national unemployment rate during the same period. The state is less wealthy than average, with 2013 per capita income ranked 34th among the states at 88% of the U.S.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. State Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria