Fitch rates Vermont's $90 million GO bonds 'AAA,' Outlook Stable
Fitch Ratings has assigned an 'AAA' rating to State of Vermont general obligation (GO) bonds. It also stated that the Outlook is Stable. Fitch attributes this positive result to the state's low debt levels and conservative financial management. However, Fitch stated that Vermont's economy, while getting more diversified, is still narrowly defined and counts on the "cyclical" manufacturing sector more than the average state. The state will offer $27.3 million in "Citizen Bonds" on September 24.
The ratings refer to the following bonds:
--$27.3 million GO bonds, 2012 series E (Vermont Citizen Bonds);
--$62.4 million GO bonds, 2012 series F.
The bonds are expected to sell the week of September 24, 2012, the series E bonds through negotiation and the series F bonds through competitive bid.
In addition, Fitch affirms the 'AAA' rating on the state's outstanding GO bonds.
The Rating Outlook is Stable.
General obligations of the State of Vermont secured by the full faith and credit of the state.
KEY RATING DRIVERS
LOW DEBT LEVELS: Vermont's debt levels are low and are expected to remain so, as affordability planning is employed. The state's debt profile reflects nearly exclusive use of GO debt and rapid principal amortization.
CONSERVATIVE FINANCIAL MANAGEMENT: Vermont's revenue stream is diverse and revenue estimates are updated twice a year. The state takes timely action to maintain balance and reserves have been maintained at statutory maximum levels despite periods of declining revenue.
RELATIVELY NARROW ECONOMY: Vermont's economy has diversified but remains narrow with above-average exposure to the cyclical manufacturing sector. While statewide educational attainment and unemployment levels compare favorably to the nation, median resident age levels are well above the national average.
PENSION SYSTEM MODIFICATIONS IMPLEMENTED: The funded ratios for Vermont's pension systems have declined in recent years, though the state has funded its actuarially required contributions and has made modifications to benefits and employee contribution level.
Vermont's 'AAA' rating reflects its low debt burden, which is maintained through adherence to debt affordability guidelines, as well as its conservative financial management and maintenance of sound reserves. Outstanding debt, which is nearly entirely GO and matures rapidly, has declined from previously moderate levels. The state budgets conservatively, and its diverse revenue stream includes a state property tax for education.
Reserves in each of the state's three major operating funds as of the close of fiscal 2012 were fully funded and are expected to remain so through the current fiscal 2013. In addition to the general fund budget stabilization reserve, sized at 5% of prior year appropriations, the state has set aside additional monies to offset potential federal funding reductions. Additionally, during the 2012 legislative session, the legislature established the general fund balance reserve, replacing the former revenue shortfall reserve effective July 1, 2012. The general fund balance reserve will be funded going forward with general fund surpluses, up to a 5% of prior year appropriations cap.
The relatively narrow state economy is supported by larger-than-average employment in tourism, health and educational services, and manufacturing. The state has a relatively small income base with an older and well-educated population.
During the recession, Vermont employment dropped 3.5%, well below the national decline of 5.6%; the state saw small year-over-year growth in 2010 as U.S. employment continued to fall. In 2011, Vermont experienced a year-over-year increase of 0.7% compared to the nation's 1.1%, and 2% growth in July 2012 versus 2011 was above the 1.4% U.S. growth rate. Unemployment levels remain well below those of the nation, at 5% in July compared to 8.3% for the country. Although manufacturing sector employment, led by an IBM facility near Burlington, still exceeds the national level on a percentage basis, both employment and personal income reliance on this sector have dropped in recent years. Per capita personal income in 2011 totaled $41,832, in line with the national level.
Heavy rains from Tropical Storm Irene, which passed through Vermont in late August 2011, resulted in heavy flooding throughout the state. As a result, the state's office complex and the Vermont State Hospital, both in Waterbury, were heavily damaged, and more than 500 miles of roads and 30 bridges were impassable or destroyed. The state estimates cost for the recovery at about $600 million, with much of that expected to be federally funded. A portion of the state's share of costs will be financed through reallocated capital funds over the next few years. All closed bridges and state roads were re-opened by Jan. 1, 2012.
Revenue performance from the state's major tax sources in fiscal years 2009 and 2010 was decidedly negative as a result of the national recession, though the state took prompt action to maintain balance through expenditure reductions, the use of carried forward balances, and application of stimulus funds; operating surpluses in the state's general fund were achieved in each year. Revenue performance improved markedly in fiscal 2011, with 11.1% growth in personal income tax revenues and 4.7% growth in sales tax revenues, and the state closed the fiscal year with a $65 million general fund operating surplus on a $1.2 billion budget.
The fiscal 2012 general fund budget addressed a $176 million budget gap through utilization of $29 million from the human services caseload reserve, which was funded with the prior year's surplus, a reduced contribution from the state's general fund for support of the Education Fund, increased health care provider taxes, realization of labor savings related to pensions, and agency spending reductions. Revenue recovery continued during the year, with personal income tax revenues up 7.9% and sales and use tax revenues up 5%.
The enacted general fund budget for fiscal 2013 addressed a smaller gap, projected at $50 million. General fund revenues are projected to rise by 5.3%, with growth of 6.1% in personal income taxes and 3.1% in sales and use taxes. Base appropriations rise 5.9%. As noted earlier, reserve levels across the state's three major operating funds are expected to remain at their statutory maximum levels.
Vermont's tax-supported debt is nearly exclusively GO, and it amortizes rapidly. The state's debt burden is low. As of June 30, 2012, net tax-supported debt equaled 2% of 2010 personal income. Debt has declined since the 1990s as a result of a focus on debt affordability, and while annual issuance levels are projected to grow, Fitch expects debt ratios to remain low to moderate. Vermont continues to appropriate required contributions to its pension systems although funded ratios declined in recent years in part due to asset valuation declines. The state in recent years has implemented a series of changes to benefits, employee contributions, and actuarial assumptions.
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 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. Local Government Tax-Supported Rating Criteria