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CORRECTION TO HEADLINE, JUNE 2, 2011 RELEASE: MOODY'S ASSIGNS Aaa RATING TO $635 MILLION OF UTAH G.O. BONDS

Global Credit Research - 02 Jun 2011

RATING AND STABLE OUTLOOK AFFIRMED FOR $3.1 BILLION IN OUTSTANDING G.O. BONDS

State
UT

Moody's Rating

ISSUE

RATING

General Obligation Bonds Series 2011A

Aaa

  Sale Amount

$635,000,000

  Expected Sale Date

06/14/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Jun 2, 2011 -- Moody's Investors Service has assigned a Aaa rating to the State of Utah's $635 million General Obligation Bonds, Series 2011A. Concurrently, we have affirmed the Aaa ratings assigned to $3.1 billion of outstanding general obligation bonds, the Aa1 ratings assigned to approximately $330 million of outstanding State Building Ownership Authority lease revenue bonds, the Aa2 ratings assigned to $66 million of outstanding state water recapitalization moral obligation bonds, and the Aaa programmatic rating assigned to the state's School District Bond Guaranty Program. Proceeds of the current issue, scheduled to price the week of June 13, will be used for a variety of building projects at Utah's higher education institutions and to help finance the state's ongoing highway construction program.

SUMMARY RATING RATIONALE

The ratings reflect Utah's tradition of conservative fiscal management; budgetary reserves that continue to provide an adequate cushion against further revenue downturns; a closely managed debt portfolio, although with debt ratios that have risen above national medians recently; a diversified state economy that slowed substantially amid the recession but that has fared better than the nation; and Utah's closely managed and well-funded pension and other post-retirement benefit plans. The outlook is stable.

Credit Strengths:

-- Conservative fiscal and debt management policies that include constitutional or statutory limits on appropriation growth and debt issuance, healthy reserve funds that accumulate based on a statutorily determined formula, short bond maturities that help to ease the state's debt burden, and well-funded retirement plans

-- Good economic diversity, strong population growth, high educational-attainment levels, and other economic fundamentals that, although they slowed quickly during the national economic downturn, have fared better than the nation

-- Strong population growth, reflected in a young, well-educated population

Credit Challenges:

-- Large revenue declines have required difficult decisions to manage the state's finances at the same time that it faces spending pressure for education, transportation and healthcare, driven by Utah's young, growing population

-- Personal income levels that on a per capita basis are low relative to the nation and the region, due largely to the young age of the state's population

-- A debt burden that has risen quickly to an above-average level as the state undertakes a large highway construction program

DETAILED CREDIT DISCUSSION

REVIVING REVENUE GROWTH HELPS FY 2011 AND FY 2012 BUDGETS

As in many other states, Utah's tax revenue collections have begun to revive in fiscal 2011 as the economy begins to recover. After three years of successive declines (by 1.8%, 12.5% and 8.0% in fiscal years 2008, 2009 and 2010, respectively), the taxes that are the main source of revenue for the General Fund and the Education fund (the state's two main operating funds) are on track to grow 10.8% in the current year based on their performance through April.

The increased momentum in tax revenues and other actions have helped the state address the loss of federal stimulus funds and its growing needs for public education funding and other population-driven services. Fiscal 2011 General Fund and Education Fund expenditures are budgeted to increase 8.8% compared to fiscal 2010. To meet expenditure needs, the state again drew on its rainy day fund after also drawing on the fund in the prior two years. Other gap-closing actions included an increased cigarette tax, ongoing baseline cuts to K-12 and higher education, and a one-time $113 million reduction in an earmark for the Centennial Highway Fund.

The fiscal 2012 adopted budget closed a projected $424 million shortfall. The state expects reviving tax collections to close $263 million of the gap, with a mix of recurring and nonrecurring actions- including a portion of the $104 million projected carry-over from fiscal 2011-addressing the remainder. General Fund and Education Fund expenditures are projected to grow 2.5% in fiscal 2012, and the state estimates that the cumulative effect of its actions to balance its budgets will have reduced the state's structural budget imbalance to a manageable $52 million (less than 2% of revenue) from $313 million in fiscal 2011. Given Utah's proactive approach to its finances, we expect that the state will take additional actions to eliminate the structural imbalance quickly.

As another example of Utah's early recognition of potential budget strain, the state is preparing to respond to possible federal spending reductions. Utah agencies have been asked to prepare plans to reduce expenditures from 5% to 25% by October 1, the beginning of the federal fiscal year. Approximately 25% of Utah's total funds budget comes from federal funds, slightly lower than the 50-state average.

BUDGET RESERVES CONTINUE TO PROVIDE ADEQUATE CUSHION AGAINST REVENUE SHORTFALLS

Utah's two budget reserves continue to help provide good financial flexibility. By statute, the General Fund Budget Reserve Account and the Education Budget Reserve Account annually receive 25% of any fiscal year-end surplus up to a cap of 6% of each fund's appropriations, respectively. Entering the current downturn, the funds' combined balances totaled $418.5 million, or 9.5% of revenues. The draws used to help balance the three consecutive budgets reduced that amount to $204 million, but the reserves still provide a 4.5% cushion against further revenue shortfalls.

ECONOMIC DOWNTURN HITS UTAH HARD BUT STATE FARES BETTER THAN THE NATION OVERALL

While the recession hit Utah hard, overall the state has fared better than the nation and by some measures has begun to recover more quickly. Through most of the decade, Utah's employment growth well exceeded national levels but in 2009 declined slightly faster than average. Employment in Utah for the first four months of calendar year 2011 is 2% greater than the same period in 2010, twice the growth of jobs nationwide.

Utah's unemployment rates similarly have been well below the nation. While Utah's unemployment rate was as low as 2.7% in 2007, it peaked at 8% in the winter of 2010. Unemployment has fallen back to 7.4% in April 2011, well below the nation's rate of 9.0%. While Utah compares favorably to the nation has a whole, its unemployment rate has shown little improvement since the summer of 2010.

HIGH POPULATION GROWTH BENEFITS THE STATE BUT ALSO DRIVES COSTS

Notably strong population growth in recent years has helped to propel the state's economy, but at the same time pressures the budget, especially for education. Since 2000, Utah's population has increased almost 24%, well ahead of the nation's nearly 10% growth. Utah's birth rate is the nation's highest and its population is the nation's youngest: the state's median age is 28 compared to 37 nationally, while 34% of Utah's population is age 19 or younger, and approximately 10% is younger than age 5. While population growth has helped fuel the state's economic expansion, it also creates spending pressure going forward: funding for education, health services, and transportation infrastructure are among Utah's biggest challenges. Although Utah's personal income has increased strongly in recent years as the state gained higher-wage service jobs, its young population pulls per-capita wealth levels down. While Utah's personal income is increasing, on a per-capita basis it was only 80.3% of the U.S. level in 2010. Utah measures more favorably in terms of household wealth: the state's median household income was 118% of the U.S., based on 2009 figures.

DEBT PORTFOLIO IS CLOSELY MANAGED; RATIOS HAVE RISEN ABOVE NATIONAL MEDIANS RECENTLY

Utah takes a conservative approach to debt, which is closely managed through both constitutional and statutory formulas. The state constitution limits outstanding general obligation debt to 1.5% of the state's total taxable property value, while statute restricts outstanding general obligation debt to 45% of appropriations allowed under the state's spending limitation (which is based on population change and inflation); debt issued to finance highways is exempt from the statutory debt limitations. The constitution also limits general obligation debt to 20-year maturities, statute imposes a 15-year limit, and the state's policy has been to restrict state building-related general obligation debt to seven years.

While the state's debt ratios increased in the early 1990s as population grew and it undertook a variety of infrastructure projects, issuance had been limited until 2009. Amid continued strong population growth, low interest rates and the ability to issue Build America Bonds with a 35% federal interest rate subsidy, the state developed a $3.2 billion highway program. The Series 2011A bonds reflect the fourth issuance to finance that plan, following $1.4 billion issued during 2009 and an additional $1 billion in 2010. As a result of the new issuance, Utah's debt ratios have increased. While the state's net tax-supported debt as a percentage of personal income was 1.5% based on our 2009 state debt medians, it increased to 3.9% in 2011; by comparison, the U.S. median was 2.8%. While Utah's debt ratios have risen quickly, it still amortizes its debt quickly, reflecting its conservative approach. The state also does not currently have any outstanding variable rate debt and is not party to any interest rate swaps or other derivative agreements.

STATE FULLY FUNDS PENSIONS AND OPEB; RECENT RETIREMENT REFORMS PROVIDE LONG-TERM SAVINGS

Utah is a leader among states in approaching the long-term costs of its pension and other post-employment benefits (OPEB). Several plans cover state employees, public education employees, police, firefighters judges, governors and legislators. The combined funded ratio of those plans as of January 1, 2010 was 86%. That figure is lower than recent years, reflecting recent declines in the market value of the systems' portfolio and a reduction in 2007 of the actuarially assumed rate of investment return, from 8% to 7.75%. Utah also has made several changes recently to reduce its long-term retirement costs. In the 2010 legislative session, it created a new pension tier for employees hired after July 1, 2011 that will limit the state's employer contributions into the plans and provide long-term savings. Utah's approach to funding its OPEB liabilities also contrasts with most states. Starting in 2006, the state began to phase out post-employment retiree health and life insurance, and changed the treatment of unpaid sick leave, which now is converted into a health reimbursement account (previously it could be exchanged for post-employment insurance benefits). These actions reduced its liabilities going forward, and in 2007 the state established an irrevocable trust to pre-fund its OPEB costs, and has appropriated the actuarial required contribution to it every year since then.

Outlook

The outlook for the State of Utah is stable. Utah's tradition of strong fiscal and debt management have allowed it to proactively confront its slowing economy, downturn in revenue collections, and the ongoing spending pressures it faces, including education, transportation and healthcare.

What could change the rating - DOWN?

-- Departure from the state's tradition of conservative fiscal and debt management

-- Continued financial or economic weakening that cause the state to draw down reserves to inadequate levels or incur deficits

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Marcia Van Wagner
Analyst
Public Finance Group
Moody's Investors Service

Nicholas Samuels
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

CORRECTION TO HEADLINE, JUNE 2, 2011 RELEASE: MOODY'S ASSIGNS Aaa RATING TO $635 MILLION OF UTAH G.O. BONDS
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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