NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to approximately $146.4 million of State of South Carolina general obligation (GO) bonds, consisting of:
--$85 million GO state economic development bonds, series 2013A;
--$26.5 million GO state highway refunding bonds, series 2013A;
--$16.5 million GO state research university infrastructure bonds, series 2013A;
--$3.4 million GO state institution bonds (issued on behalf of Winthrop University), series 2013A;
--$15 million GO state institution bonds (issued on behalf of Lander University), series 2013B.
The bonds are expected to sell competitively on November 26, 2013.
In addition, Fitch affirms the following ratings:
--Approximately $1.7 billion in outstanding GO bonds at 'AAA';
--Approximately $10.3 million in outstanding lease revenue bonds issued by the South Carolina State Budget and Control Board at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are GOs of the state, secured by a pledge of South Carolina's full faith, credit, and taxing power. By statute, state institution bonds are also secured by tuition fees received by the university.
RATING DRIVERS
STRONG FISCAL MANAGEMENT: South Carolina has a proven ability and willingness to support fiscal balance with a budget and control board providing centralized and autonomous fiscal oversight. The state's careful approach to financial operations and solid revenue growth has resulted in the restoration of reserves following their depletion during the recession.
DIVERSIFYING ECONOMIC BASE WITH SIZABLE MANUFACTURING COMPONENT: The state's economic base continues to expand into the services industry and the largest share of employment has moved into the trade, transportation, and utilities sector. The state's large manufacturing presence, which experienced significant losses in the recession, has stabilized. Wealth levels remain below national averages and unemployment rates remain above.
DEBT AND PENSION OBLIGATIONS ARE MANAGEABLE: Debt levels are in the lower/moderate range from infrequent borrowing and rapid amortization. Debt has fallen from more elevated levels related to transportation infrastructure bank issuance. On a combined basis, debt and unfunded pension liabilities are a manageable burden on state resources.
CREDIT PROFILE
South Carolina's 'AAA' rating rests on the state's proven ability and willingness to support fiscal balance. The state's centralized and autonomous budget and control board (BCB) is mandated to take prompt corrective action to maintain balanced operations, and constitutional reserve requirements benefit from established replenishment provisions. Debt levels have moderated from limited additional issuance and amortization of GO bonds is rapid. The state's large manufacturing sector, which quickly reflects changing economic conditions, has shown increasing stability following recessionary losses. Unemployment is high and wealth levels remain low, although the state's recent economic performance is significantly improved from the downturn.
STRONG FISCAL MANAGEMENT AND IMPROVED FINANCIAL OPERATIONS
Weak revenue results in the downturn, reflecting both underlying economic factors and the impact of tax cuts, resulted in large reductions in revenue estimates that the state responded to quickly with large budget cuts as well the use of reserves. Following very weak financial results in fiscal 2009, South Carolina voters, in November 2010, approved amendments to the state constitution that increased the funding of the general reserve fund from 3% to 5% of state general fund revenue and prioritized the use of the capital reserve fund, which is funded at 2% of general fund revenue, to replenishing the general reserve fund. In addition, pursuant to 2010 legislation, the BCB was mandated to take action to avoid a deficit within seven days if quarterly revenue collections are 2% or more below projections; before this change, the threshold for action was 4% and the period to address the shortfall was 15 days.
An improving revenue situation and strong budgeting procedures combined with the aforementioned constitutional and statutory changes provided for successive additions to the state's reserves in fiscal years 2010 to 2013. Fiscal 2013 ended with general fund revenues of $6.4 billion, up $301.6 million or 5% from the original board of economic advisors' (BEA) forecast, and 9.1% above revenues received in fiscal 2012. Components of the increase in revenues included individual income (PIT) tax (up 9.7% from fiscal 2012; that includes some push forward of income into calendar year 2012 due to federal tax law changes), corporate incomes (CIT) taxes (up 65.4% from fiscal 2012) and sales tax (up 4% from fiscal 2012). The state was able to bolster its reserve position by depositing $98 million to the general reserve fund (increase to $281.6 million, the constitutional full funding level) and a net $7.8 million deposit to the capital reserve fund (increase to $112.7 million; constitutional full funding). Reserves combined with the undesignated, unreserved general fund budgetary balance were equal to 10.7% of expenditures in fiscal 2013.
The fiscal 2014 enacted budget was based on BEA certified general fund budgetary revenues of $6.38 billion, incorporating conservative forecast increases in operating revenue from actual collections in fiscal 2013. PIT revenue was expected to grow 0.1% from actual fiscal 2013 collections, CIT revenue was forecast to decline by 29% from fiscal 2013, and sales tax revenue was expected to grow by 1% from fiscal 2013 collections. The state anticipates the total budget, including federal sources and other dedications, to decline by 3.6% from fiscal 2013 incorporating an over 12% reduction in federal funds due to an accounting change related to the federal food stamp program. The state budget fully funds required deposits to its reserve fund to maintain the funds at the constitutionally required amounts.
Year to date through September 2013, general fund revenues are 1.6% above forecast for the quarter and 2% ahead of collections for the same period in fiscal 2013. Sales tax revenues exhibited 4.4% quarterly growth as compared to the 1% forecast; the PIT was up 3.6% compared to the 0.5% decline that was expected, and the CIT declined more moderately than projected; 10.6% compared to 25.5% forecast.
DIVERSIFYING ECONOMIC BASE WITH STILL SIZABLE MANUFACTURING PRESENCE
As in prior downturns, the state's economy performed worse than that of the nation in the recent downturn; the state lost 7% of its jobs between 2008 and 2010 as compared to 5.7% for the U.S. Since 2010, the state has steadily added jobs although at a slower pace than the nation; 2012 employment growth of 1.5% compared to 1.7% national employment growth. Year over year (yoy) in September 2013, the state's employment growth matched the U.S. at 1.7%, increasing by 32,000 jobs, although pre-recessionary peak employment has yet to be reached. The sectors showing the strongest yoy growth were construction at 5.4%; financial activities at 2.7%, leisure and hospitality at 4.4%, and trade, transportation, and utilities at 2.4%.
Yoy growth in manufacturing employment was fairly modest at 0.8% in September but it continued the improvement in this sector first begun in February 2010. The aerospace, automobile, and tire manufacturing industries have been growing sources of employment over the past few years. However, overall annual manufacturing employment in 2012 remained 55,000 jobs below a peak of 274,900 reached in 2003.
Unemployment levels historically trend above national averages and September 2013 was no exception at 8.1% compared to the U.S. rate of 7.3%. South Carolina's wealth levels are below average, with personal income per capita in 2012 ranking 48th among the states at 80% of the U.S.
DEBT AND LIABILITIES ARE MANAGEABLE
State tax-supported debt, which increased notably earlier in the last decade due to transportation infrastructure bank issuance, has since declined and debt now equates to a manageable 2.3% of 2012 personal income, not inclusive of the current issue. Debt of the transportation infrastructure bank, created in 1997, accounts for just over half of the state's net tax-supported debt. Principal amortization is rapid, with 90% of GO bond principal repaid in ten years.
The reported funding level of the state employee retirement system (SCRS) was 67.4% as of June 30, 2012, a small increase from the prior fiscal year due to pension reform measures implemented by the state in the 2012 legislative session. Reform measures addressed cost of living increases, investment return assumptions, and benefit assumptions. Using Fitch's more conservative 7% discount rate assumption, the retirement system's funded ratio would be 63.8%. On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals 5.7% of 2012 personal income; below the median of 7% for U.S. states rated by Fitch. The calculations include 30% of the liability of SCRS and 34% of the liability of the state police officers retirement system which Fitch estimates is attributable to the state.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report '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. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808603
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.