NEW YORK–(BUSINESS WIRE)–
Fitch Ratings assigns an ‘AA+’ rating to the following bonds of the Alabama Public School and College Authority (the authority):
–$34.61 million Capital Improvement Pool Refunding Bonds, series 2015-A;
–$49.985 million Capital Improvement Pool Refunding Bonds, series 2015-B;
–$45.785 million Capital Improvement Pool Bonds, series 2015-C.
The bonds are expected to sell via negotiation on or about April 16, 2015.
The Rating Outlook is Stable.
The bonds are limited obligations payable from pledged revenues, including utility taxes and sales and use taxes. Each bond series is subordinate to prior issues; once issued, the 2015-A, B, and C bonds will occupy the 15th lien position respecting the pledged revenues.
KEY RATING DRIVERS
PRIMARY STATE FUNCTION: Although not a general obligation (GO) pledge, pledged revenues include major state revenue sources, including the sales tax, and finance a major state responsibility – K-12 and higher education. As such, the bonds are rated on par with the state’s GO bonds. Financing of education is centralized at the state level.
STRONG DEBT SERVICE COVERAGE: Pledged revenues provide ample coverage of debt service requirements both on an annual and maximum annual basis.
SPENDING CONTROLS: Balanced financial operations reflect the statutory requirement to balance the budget with across-the-board appropriation reductions if revenues fall short; debt service is excluded from this requirement.
SLOW GROWTH IN ECONOMY: The trend in Alabama’s economy is toward more diversification although it retains a sizeable manufacturing base. There is an ongoing positive shift from low paying textile and apparel jobs to higher paying durable subsectors including automobile and aerospace manufacturing.
CHANGE IN STATE GO RATING: Although not specifically linked to the GO bond rating, a change in the overall credit environment in the state would likely lead to a change in the PSCA rating.
REDUCTION IN DEBT SERVICE COVERAGE: The rating is sensitive to changes in debt service coverage, either due to significant fluctuation in pledged revenues, excessive leveraging of the pledged revenues, or statutory changes that reduce pledged revenues.
The rating reflects ample coverage of debt service by pledged revenues, the strength of the pledged revenues, which include major state revenue sources, and the core nature of the activities being financed (K-12 and higher education) as well as the strong budget controls exhibited by the state and its overall strong credit quality.
The authority provides capital financing for public education in Alabama, and, with $2.2 billion of debt outstanding (as of Jan. 1, 2015), is the most active debt issuer of the several authorities that issue debt in the state. The authority members are the governor, the state superintendent of education, and the director of finance, indicating the importance of this financing mechanism and the role of the state in education.
BROAD BASED TAXES ARE PLEDGED
The bonds are a limited obligation of the authority payable from pledged revenues, which include statewide sales, use, utility gross receipts and utility service use taxes. Pledged revenues not needed for debt service are deposited into the state Treasury to the credit of the Education Trust Fund (ETF), a special fund of the state that is the largest operating fund into which taxes and revenues are deposited. The ETF funds K-12 and higher education as well as smaller education, health, library and other programs. Each bond series has its own separate lien on pledged revenues subordinate to prior issues; once issued, the 2015-A, B, and C bonds will occupy a 15th lien position respecting the pledged revenues. Given the ample coverage of debt service by pledged revenues, discussed further below, the subordinate status is not a rating factor.
While the authority bonds are not general obligations of the state, the rating does reflect the state’s general credit quality as pledged revenues include major state revenue sources and finance a central state responsibility. Alabama has extensive earmarking of taxes and uses special obligations for nearly all of its capital needs. The general fund has a minor role in state operations and only a modest amount of debt issued against it. State general obligation bonds are rated ‘AA+’ by Fitch based on the state’s longer-term trend toward a more diversified economy despite a severe recessionary downturn in manufacturing, strong spending controls that contribute to balanced operations, and manageable debt levels.
AMPLE DEBT SERVICE COVERAGE
Pledged revenues provide ample coverage of debt service requirements both on an annual and maximum annual basis. Fiscal year 2014 revenues of $2.2 billion provide 8.5x coverage of maximum annual debt service. Pledged revenue declined modestly (-3.6%) in fiscal 2013 as anticipated, reflecting modest growth in revenues offset by a new school voucher related tax credit associated with the Alabama Accountability Act. Revenues rebounded with relatively strong 4.6% growth in fiscal 2014.
The series 2015-A and B bonds are being issued to refund outstanding debt for present value savings. The 2015-C bonds will finance loans to local school boards for capital projects under a pooled approach that allows capital funds of the state to be leveraged rather than being limited to support pay as you go financing. The authority also issues capital outlay bonds for capital improvements to public schools and institutions of higher education with proceeds considered grants to recipients. Overall debt levels in the state are at the low end of the moderate range, with tax supported debt equal to 2.2% of 2013 personal income.
STRONG FINANCIAL CONTROLS
State financial operations, including the ETF, benefit from strong spending controls, with a constitutional requirement to make across-the-board appropriation reductions, called ‘proration,’ when a deficit is projected in one of several funds. Debt service is not subject to proration. This device has been implemented several times, particularly through the most recent recession. The state generated a sizeable surplus in the ETF in fiscal 2013, allowing it to make a $330 million repayment to the rainy day fund at the end of the year. It is on schedule to repay the draw on the rainy day fund by the end of fiscal 2015.
In an attempt to minimize the unpredictability of mid-year reductions in education funding, in 2011, the state enacted legislation to create a new budget stabilization fund for education that will be used to offset future proration. The legislation limits future education appropriations to the 15-year rolling average of ETF revenues and deposits any excess revenues into a new ETF budget stabilization fund, after first repaying the fiscal 2009 draw on the rainy day fund.
MANUFACTURING BASED ECONOMY
Alabama’s economy was historically dominated by agriculture, natural resource extraction, and manufacturing, including textiles and iron and steel production. Today, the state still depends more heavily on manufacturing relative to the national average, but manufacturing has shifted away from textiles and apparel, particularly to the automotive sector. This sector was hard hit in the recent recession, but the foreign-owned automakers in the state, including Honda, Hyundai, and Daimler AG, continue to invest and produce in Alabama.
Alabama’s labor market has been slow to emerge from the recession and has lagged the nation since in job creation. As of February, non-farm employment had reached just 96.5% of its pre-recession peak, below the U.S. median of 102% and one of the weakest of the states. Most recently, non-farm employment grew 2% in February 2015, while employment nationally grew 2.3%. The unemployment rate, which is typically lower than the U.S. rate, remains slightly above the national rate at 5.8%.
For further information on Alabama’s GO rating, please see Fitch’s press release from July 22, 2014, ‘Fitch Rates Alabama GOS ‘AA+’; Outlook Stable’, available at ‘www.fitchratings.com‘.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s 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
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