NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following state of Nevada unemployment compensation fund special revenue bonds:
--$572.86 million series 2013A.
The bonds are expected to be sold via negotiation on or about Oct. 29, 2013.
The Rating Outlook is Stable.
SECURITY
Special limited obligation of the state paid solely from a first lien on special bond contributions assessed on all covered employers in the state.
KEY RATING DRIVERS
BROAD PLEDGED TAX WITH STRONG COLLECTION HISTORY: The source of bond repayment is an assessment levied on most Nevada employers. The state's unemployment tax collection mechanisms are strong and well-established, with a collection rate over 98%. The assessment is collected in the same manner, and subject to the same penalties, as other employment related assessments.
ANNUAL RATE SETTING PROVIDES SOLID COVERAGE: The rate is established at least annually while bonds are outstanding to provide a minimum of 1.5x coverage of debt service in the following year, plus administrative costs. There is no limit on the rate and there is a 'true-up' mechanism to ensure coverage on the due date. The annual coverage requirement for principal permits use of excess coverage generated in prior years and held in reserve. The interest coverage component will be funded from proceeds.
STRONG LEGAL FRAMEWORK: The credit structure is strong, with a closed loop and an unlimited pledged tax subject to rate adjustment once per year or more frequently if needed. Additional bonds may be issued with rating confirmation; there is no additional bonds test.
LOW SEASONALITY IN COLLECTIONS: Because of the high taxable wage base used by Nevada, unemployment tax revenues are collected fairly regularly though the year, providing more consistent collections to cover debt service requirements than has typically been the case with similar transactions.
RATING SENSITIVITIES
The rating is sensitive to changes in the state economy and outlook that significantly affect collections of special bond assessments.
CREDIT PROFILE
The 'AA+' rating reflects the very strong security provided by employer payroll assessments as well as numerous structural protections. Bond proceeds will refund Nevada's $520 million borrowing from the federal unemployment program, incurred when the state's unemployment fund resources proved insufficient to cover benefits in the recession. A small contribution will also be made to the unemployment fund to establish a balance and cover current benefits to be paid from the fund.
STRUCTURE ENSURES SOLID COVERAGE
The special bond contribution is a separate levy, authorized by the state legislature solely for the purpose of repaying the bonds, and charged to contributing Nevada employers at the same time and in the same manner as the state's other, longstanding unemployment assessments. The administrator of the Employment Security Division of the Department of Employment, Training, and Rehabilitation (DETR) is required to assess special bond contributions by Dec. 1, 2013 for the initial year and subsequently on or before Oct. 1 of each year for assessments to be received in the 12-month period beginning each May 1 and ending April 30. There is a 'true-up' provision that requires the administrator to levy a supplemental special bond contribution if there are any projected insufficiencies in the principal or interest accounts 75 days prior to a payment date. Although not pledged, balances in the state's unemployment trust fund may also be drawn upon if there is a deficiency in the principal payment fund.
The special bond contribution must be set in an amount that ensures 1.5x coverage of annual principal and interest payments, plus administrative costs. The administrator will use retained balances in calculating projected coverage, which for principal, will be derived from excess collections in the first year, and for interest, will be funded from bond proceeds. Once the reserves are funded, the assessment will be sized to provide 1x coverage of principal and interest. The DETR administrator has adopted an assessment regulation establishing the procedure and methodology for determining and assessing special bond contributions.
Other legal provisions are solid, including covenants to not impair bondholders and to not repay federal advances within 60 days of any debt service payment. The state may issue additional bonds with rating confirmation.
BROAD ASSESSMENT BASE
Unemployment taxes, including the special bond contribution, are paid by employers and generated from a contribution rate levied against a taxable wage base. In the case of Nevada, the wage base is set at two-thirds of average annual wages and can fluctuate with changes in the economy. The wage base, which is $26,900 for 2013 and will rise to $27,400 in 2014, declined slightly during the recession before bottoming out in 2012. Contribution rates reflect each employer's history of unemployment claims and range from 0.25% to 5.4%, with a 2013 average of 2.25%. The assessment is expected to generate $500 million from 57,335 employers in 2013.
Nevada's wage base is higher than what Fitch has seen in other states with similarly structured securities. With a higher taxable wage base, the tax is collected for each employee for a greater number of pay periods rather than being concentrated in the beginning of the year. As a result, the seasonality of collections that often results in the need for special liquidity measures is less of a concern in this case. However, since collections are higher in the second and third quarters of the calendar year, reflecting first- and second-quarter employment, the first debt service payment of each year, scheduled for June 1, is sized at a higher level than the second, scheduled for Dec. 1. Retention of excess coverage in the bond funds and the requirement to levy supplemental assessments in the case of a shortfall ensures coverage of the latter payment.
The obligation assessment bonds benefit from the well-established nature of the state's unemployment assessment system. Contributing Nevada employers pay levies to the state's unemployment trust fund, from which state benefits are paid, with components based on their benefit experience, the status of the state fund, and whether the state has federal advances outstanding. Historical collection experience is very strong, with an almost 98% collection rate over the past five years.
ECONOMY RETURNING TO GROWTH
Concentrated in the Las Vegas/Clark County area, Nevada's economy remains narrowly based on gaming and entertainment. Nevada was among the states hardest hit by the recession, during which employment fell almost as rapidly as it had been previously increasing, gaming and related tourist activities declined, population declined for the first time, and the state led the nation in housing value declines and mortgage delinquencies. Nevada's economy had been characterized by rapid growth with the population expanding at an extraordinarily rapid rate (125% since 1990, compared with 24% for the U.S.). This rapid growth had been matched by employment gains, and in particular, a surge in construction employment in the middle of the last decade. The nature of the recession, led by a housing market crash and declines in consumer spending, had a particularly severe impact on the state.
The state's economy is returning to growth with positive trends in tourism and gaming, employment growth across a broad range of sectors, and some improvement in the housing market. Non-farm employment has grown on a year-over-year basis in every month since January 2011, and is up 1.9% as of August 2013, slightly higher than U.S. growth rate of 1.7%. Employment sectors demonstrating year-over-year growth include leisure and hospitality (+2.2%), education and health services (+3.7%), trade, transportation and utilities (+3.2%) and mining (+4.3%). Despite some improvement in the housing market, construction employment is down slightly after several months of employment growth. The unemployment rate, at 9.5% in August, remains well above the national average but is much reduced from the peak of 14% reached in 2010.
Additional information is available at 'www.fitchratings.com'
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
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=805495
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