NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA+' rating on $141 million outstanding Idaho Housing and Finance Association (IHFA) unemployment compensation revenue bonds, series 2011.
The Rating Outlook is Stable.
SECURITY
Unemployment compensation revenue bonds are special, limited obligations of the IHFA secured by required payments of bond principal derived from the state's unemployment benefit account, which is funded by state unemployment benefit payroll taxes.
KEY RATING DRIVERS
PAYROLL TAXES SUPPORT BOND REPAYMENT: The 'AA+' rating is based on bondholders' claim on balances in the state's funds dedicated to ensuring unemployment benefits, which are funded by a broad state-wide unemployment payroll tax. Conservative structural features, including a very short final maturity (2015), and the fact that all interest and one-fourth of principal payments were set aside from existing balances at the time of bond issuance, strengthen the credit.
REFORMS IMPROVE SYSTEM SUSTAINABILITY: The state reformed its unemployment benefit system with bond issuance, raising the unemployment payroll tax rate to provide for both benefit payments and bond principal repayment. Although the state's unemployment payroll tax collections are not directly pledged to bondholders, revenues fund the accounts from which debt service payments are derived.
STRONG COVERAGE: Coverage of debt service by funds receiving payroll taxes is strong and well over the level projected at issuance. Unemployment rates in the state are continuing to decline, augmenting resources available for unemployment benefits and bond repayment.
NO ADDITIONAL BONDS: Funds in the state's unemployment benefit system are not accessible for other purposes and are continuously appropriated to bond repayment through maturity. No additional bonds are possible under this indenture.
WELL-ESTABLISHED UNEMPLOYMENT COMPENSATION SYSTEM: The state's system of assessing and collecting unemployment payroll taxes is well-established and has a strong collection history.
RATING SENSITIVITY
CONTINUED SOLID COVERAGE: The rating is sensitive to continued solid coverage by resources of the employment security fund and employment security reserve fund, as well as to broader trends in the state's labor market.
CREDIT PROFILE
The 'AA+' rating on the state of Idaho's unemployment compensation revenue bonds is based on the claim by bondholders on balances in the state's funds dedicated to ensuring unemployment benefits, which are funded by state unemployment payroll tax receipts. Credit quality is bolstered by conservative structural features and a very short maturity profile. Although bondholders do not have a direct claim on the state unemployment tax (SUTA) or reserve payroll taxes, the trust estate includes all required payments derived from these sources.
Structural features are conservative. The state dedicated from prior balances all interest payments through maturity and the first of four principal payments. All payments of principal and interest through maturity have been continuously appropriated, requiring no further legislative action. Further, the bonds fully amortize on Aug. 15, 2015.
Actual payroll tax collections since issuance have been well in excess of the original forecast assumptions, providing coverage of principal and interest above levels forecast at the time of issuance. Coverage of 2012 principal and interest by prior quarter trust fund balances was 6.6x by Fitch's calculation, compared to 4.9x coverage projected at issuance. Fitch calculates that coverage will remain solid, with 2013 principal and interest covered 8.8x by Fitch's calculation, based on June 30, 2013 balances. In the event of unforeseen weakness, the state may access advances from the federal unemployment trust fund to cover benefit payments, effectively leaving all payroll tax collections available to bondholders.
The bonds were authorized by the state legislature in 2011 as part of a broader plan to improve the sustainability of the state unemployment benefit system. Bond proceeds repaid a federal advance totaling $202 million that was drawn to cover benefit funding shortfalls during the downturn.
The state's unemployment benefit system is administered by the Idaho Department of Labor (DOL) through two trust funds. The primary fund is the employment security fund (ESF), a state trust fund which encompasses the state's account with the federal unemployment trust fund, as well as the benefit account from which unemployment benefits are drawn. The ESF receives the SUTA payroll taxes levied on Idaho employers. The ESF balance totaled $348 million as of June 30, 2013.
The SUTA tax is paid quarterly by Idaho employers on the first $34,800 in employee wages; the wage level is indexed to reflect changes in the state's overall wage base. The taxable wage rate is affected by multiple factors, including employer experience and a statutorily-determined target level for ESF funding. In an effort to reduce employer rates, the target ESF level was lowered in 2005, resulting in reduced collections to cover benefits during the recent recession. The legislature took corrective action in 2011, including raising the targeted ESF fund balance to 150% of the average three highest benefit years. The resulting SUTA tax rates have risen, from 0.918% in 2008 to 2.752% of payroll; the statutory ceiling is 3.36% of payroll. Collection of the SUTA tax is well-established and very strong, with a collection rate in excess of 95% over the last 20 years.
A separate trust fund, the employment security reserve fund (ESRF), is also administered by the state DOL to support the unemployment benefit system. The ESRF balance is available to loan to the ESF should ESF balances be insufficient to cover benefits (in lieu of federal advances), as security for federal advances, or to cover interest payments on advances. The ESRF balance totaled $114 million as of June 30, 2013. The ESRF is funded by a reserve tax levied at 17% of the SUTA tax and collected in the same manner. The tax is triggered if the ESRF balance falls below levels set under two tests, 1% of prior-year state taxable wages (approximately $109 million), and 49% of the ESF balance.
Under the state's authorization for the bonds, separate bond interest and principal payment accounts were established within the ESRF, funded at $20 million for interest and $50 million for principal payments out of the then-$112 million ESRF balance. The interest payment account covers all interest on the bonds through maturity. The bond payment account covered the first scheduled principal payment. Bond principal payments, once made from the ESRF bond principal account, are legally considered a loan obligation of the ESF; full repayment from the ESF to the ESRF is due no later than 90 days prior to the next principal payment date.
The balance of the ESF fluctuates through the calendar year, with SUTA tax receipts strongest in the second quarter reflecting the taxable wage base upon which the rate is levied and the required quarterly payment date 30 days after the quarter end. The highest benefit payout is in the first quarter of the year. The payment of bond principal in the third quarter (Aug. 15) thus benefits from the higher SUTA collections and relatively lower benefit payments.
Idaho's economy has grown at a measured pace during the recovery. Employment rose 1.9% in 2012, above the 1.7% pace for the U.S. June 2013 employment is up 3.3%, compared to 1.7% nationally. Unemployment in Idaho has historically trended below the nation; the June 2013 unemployment rate was 6.4% in Idaho compared to 7.6% nationally. Personal income growth has lagged the U.S., with 2012 personal income rising 3.3% in Idaho, compared to 3.5% nationally. The state ranks 49th in personal income per capita in 2012, at 79.1% of the national rate.
The bonds were issued by IHFA, which issues primarily for housing purposes in the state, but has also served as a conduit for other purposes, including transportation.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 14 Aug. 2012.
'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798775
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