Fitch Rates State of Washington's $1.2B GO Refunding Bonds 'AA+'; Outlook
NEW YORK -- January 16, 2013
Fitch Ratings has assigned an 'AA+' rating to the following state of
Washington general obligation (GO) bonds:
--$551,910,000 various purpose GO refunding bonds, series R-2013C;
--$125,360,000 motor vehicle fuel tax GO refunding bonds, series R-2013D;
--$230,580,000 various purpose GO bonds, series 2013D;
--$323,450,000 motor vehicle fuel tax GO bonds, series 2013E
The bonds are expected to be sold through competitive bid on Jan. 23, 2013.
In addition, Fitch has affirmed the 'AA+' rating assigned to approximately $18
billion of outstanding state GO bonds.
The Rating Outlook on the state's GO bonds remains Negative.
The bonds are GOs of the state to which its full faith, credit, and taxing
power are pledged. Motor vehicle fuel tax GO bonds are first payable from
state excise taxes on motor vehicle and special fuels.
KEY RATING DRIVERS
REDUCED FINANCIAL FLEXIBILITY: The Negative Rating Outlook reflects the
state's constrained revenue raising and spending control flexibility.
Maintenance of the 'AA+' rating will be based on sustainable budgeting that
provides an adequate cushion against future revenue underperformance. The
state's current reserve position is limited, although recent economic and
revenue trends have been positive.
SOLID ECONOMY: Washington's economy is characterized by generally sound
performance and increased diversification. The manufacturing sector remains
concentrated in the cyclical aerospace industry, although this concentration
is sharply reduced. Economic growth prior to the recession was primarily due
to strength in construction, aerospace (Boeing), and technology (Microsoft).
CONCENTRATED REVENUE SYSTEM: The state, with no income tax, relies on
consumption-based revenues. This makes Washington particularly vulnerable to
reductions in consumer spending.
RESPONSIVE FINANCIAL MANAGEMENT: Frequent reviews of economic and financial
forecasts allow the state to react to changing conditions. As the economy and
revenues repeatedly underperformed estimates in the recession, resulting in
significant negative forecast revisions, the state demonstrated its
willingness and ability to take actions to maintain budget balance.
ABOVE-AVERAGE DEBT LEVELS: Debt ratios are in the upper moderate range and
expected to remain so, reflecting funding of substantial capital needs,
particularly for transportation.
INITIATIVES AND REFERENDA A LIMITED RISK: The state's initiative and
referendum environment creates a level of operating and financial uncertainty.
However, any law approved by voters in this manner can be amended or repealed
by the legislature by a two-thirds vote in the first two years after approval
and by a simple majority thereafter.
WHAT COULD TRIGGER A RATING ACTION
Failure to maintain budget balance and an adequate reserve position using
primarily recurring gap-closing measures in the budget for the upcoming
biennium likely would result in a downgrade.
Washington's 'AA+' GO bond rating reflects a generally solid economy and a
demonstrated commitment to fiscal balance even as the state's financial
position substantially weakened in the downturn. Credit strengths are offset
by a concentrated revenue system that is reliant on the sales tax, with no
income tax, as well as above-average debt levels.
Washington reviews its general fund revenue forecast quarterly, and actual
revenue performance repeatedly and significantly underperformed downwardly
revised estimates in the recession. More recent performance has been in line
with expectations, with minimal changes at the forecast reviews in 2012. The
revenue system's reliance on a broad-based sales tax makes Washington
particularly vulnerable to reductions in consumer spending.
After state general fund revenue declines of 9.6% in fiscal 2009 and 4.1% in
fiscal 2010, followed by growth of 7.9% in fiscal 2011 that reflected in part
tax increases enacted in April 2010, the November 2012 forecast reports
revenues up 1.5% in fiscal 2012 and forecasts growth of 4.9% in 2013. The next
forecast update is scheduled to be released in March 2013.
In April 2012, the legislature restored budget balance following large
negative forecast revisions through a combination of ongoing and one-time
actions. The limited projected ending balance and reserve total for the end of
the biennium on June 30, 2013 is now $374 million, 2.4% of projected fiscal
2013 revenues. Fitch believes that continued downside risk to the economic and
revenue forecast remains, although recent trends are generally positive. The
long-term prospects for the economy are solid, and key industries are showing
Despite expected continued revenue growth, the state's budget for the upcoming
fiscal 2013-15 biennium is likely to continue to require difficult choices.
Washington already has taken extensive spending control action since the
recession began and given the difficulty of achieving the state's current
required supermajority legislative vote for tax increases such measures
effectively require voter approval. Pursuant to a new statutory requirement,
the budget must show projected balance over a four-year period rather than
just the biennium. The outgoing governor proposed budget options with and
without new revenues in December; the incoming governor has the option to
present a separate proposal.
The need to address a 2012 state Supreme Court decision, which found state
education funding inadequate but provided the state some flexibility in terms
of the timing and amount of remediation, will add to a budget gap to be closed
for the coming biennium that is estimated at $904 million after required
funding of the budget stabilization account. In 2009, the state passed
education funding reform that the court noted positively in its ruling. The
cost of implementing that reform in the coming biennium is estimated at about
Washington's economy entered the recession later than the nation overall
following a period when it performed much more strongly than the U.S. Non-farm
employment in Washington rose as national employment fell in 2008, then
dropped 4.6% in 2009 compared to 4.4% for the U.S. Washington's employment
decline of 1.3% in 2010 was almost twice that of the U.S. Growth in 2011 was
in line with the U.S. pace, and performance in 2012 indicates a return to
growth above the national experience. In November 2012, Washington's
year-over-year job growth of 1.7% compared to 1.4% for the nation. The state's
unemployment rate in November 2012 was 7.8%, matching that of the U.S.
Personal income per capita, at 106% of the U.S. in 2011, ranks 14th among the
Washington's debt levels are in the upper moderate range and well above
average for a U.S. state, with net tax-supported debt of $18 billion equal to
6% of personal income. Debt is almost exclusively GO. Capital needs are
substantial, particularly for transportation, and tolling is part of the
funding solution. The state has increased its focus on debt affordability. The
legislature authorized a constitutional amendment that was approved by voters
on the November 2012 ballot to lower the constitutional debt limit.
The state administers 13 defined benefit retirement plans, three with hybrid
defined benefit/defined contribution options. The closed public employees and
teachers plans (PERS and TRS1), which have been closed since 1977, are
underfunded, with an unfunded actuarial accrued liability (UAAL) of $5.5
billion as of June 30, 2011, $3 billion of which is the responsibility of the
state. On a combined basis, the burden of net tax-supported debt and adjusted
unfunded pension obligations is slightly above the median for U.S. states
rated by Fitch, measured as a percent of personal income.
The state has taken various steps to manage pension funding. Legislation
passed with the fiscal 2011-2013 budget eliminated automatic annual COLAs for
PERS and TRS1 retirees that had been in place since 1995, a change still
subject to legal challenge. The state also passed legislation to lower the
pension investment return assumption from 8% to 7.9% as of July 1, 2013,
declining to 7.7% as of July 1, 2017.
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 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
U.S. State Government Tax-Supported Rating Criteria
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