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New Issue:

MOODY'S ASSIGNS Aaa RATING AND STABLE OUTLOOK TO $213 MILLION TENNESSEE GENERAL OBLIGATION BONDS;

06 Oct 2010

Aaa RATING AND STABLE OUTLOOK AFFIRMED ON $1.6 BILLION OUTSTANDING GENERAL OBLIGATION BONDS

State
TN

Moody's Rating

ISSUE

RATING

General Obligation Bonds, 2010 Series A

Aaa

  Sale Amount

$169,550,000

  Expected Sale Date

10/13/10

  Rating Description

General Obligation

 

General Obligation Bonds 2010 Refunding Series B

Aaa

  Sale Amount

$43,765,000

  Expected Sale Date

10/13/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Oct 6, 2010 -- Moody's Investors Service has assigned a rating of Aaa, with a stable outlook to the State of Tennessee's $169.6 million General Obligation Bonds, 2010 Series A and $43.8 million General Obligation Bonds, 2010 Refunding Series B. Concurrently, Moody's has also affirmed the Aaa ratings on $1.6 billion of outstanding state general obligation bonds. The rating outlook is stable. Bond proceeds will be used to fund state capital projects, retire a portion of the state's outstanding commercial paper and refund previously issued general obligation debt for debt service savings.

RATINGS RATIONALE

The rating reflects well managed state finances including maintenance of budgetary reserves, historically moderate debt levels, and a well funded retirement system.

Credit strengths are:

-State actions to stabilize finances in the face of significant fiscal stress

-Maintenance of budgetary reserves

-Modest state debt levels

-Well funded retirement system

Credit challenges are:

-Revenue weakening leading to major budget gaps in recent years

-Recent employment declines driven by manufacturing and construction sector weakening

-State reliance on sales tax

-Lack of certain financial management practices including limited executive authority to reduce spending without legislative approval and debt affordability analysis.

REVENUE DECLINES LEAD TO SIZABLE BUDGET GAPS

Following years of strong revenue growth, Tennessee began to feel the effects of the economic slowdown in fiscal 2008, when growth in state tax collections slowed to 1.6% vs. 7.8% growth in the prior year. Continued economic slowing, led by weakening in the state's manufacturing and construction sectors, resulted in revenue shortfalls of over $1 billion for fiscal year 2009 and fiscal year 2010. Declines in sales tax and franchise and excise tax collections accounted for the bulk of the shortfalls. Fiscal 2009 state tax collections declined by 8.9%, followed by an estimated decline of 1.1% for fiscal 2010.

The state expects modest growth of 1.7% in state tax collections for fiscal 2011, reflecting a return to growth (2%) for sales tax collections, following declines of 7.7% and 3.3% in fiscal years 2009 and 2010, respectively. Year-to-date general fund revenues through August 2010, however, were less than budgeted by about $11 million (-1.8%). This reflected better than expected sales tax collections, but under-performance in business related taxes.

With no broad income tax assessed, Tennessee is highly reliant on sales taxes. Sales tax collections represent more than 60% of state tax revenues, making underperformance in these revenues a key concern for the state.

BUDGET PLANS FOR RETURN TO STRUCTURAL BALANCE

Solutions for the fiscal 2009 and 2010 budget gaps relied heavily on the use of one-time resources, including federal stimulus moneys ($341 million in Fiscal 2009 and $1.2 billion in fiscal 2010) transfers from state reserves and other available state funds, but also included some new revenues programs and substantial cuts to base recurring expenditures.

The budget for fiscal 2011 was again supported significantly by non-recurring measures, including federal stimulus moneys ($760 million) reserve fund transfers ($366 million) and a temporary a one-year assessment on hospitals ($310 million), but also included cuts to base recurring expenditures. The state expects to end the year with a budgetary basis balance of $224.7 million (about 2.1% of general fund revenues) and rainy day fund balance of $257 million (2.4% of revenues).

While recent budgets relied heavily on federal stimulus moneys including as a temporary backfill for some of the base expenditure cuts, and other one-time resources, they also included multi-year plans that reflected annual declines in budget imbalance and a movement back to structural budget balance by fiscal 2012.

MAINTENANCE OF BUDGETARY RESERVE FUNDS

As a result of positive revenue gains, the state increased its rainy day fund (the Revenue Fluctuation Reserve) balance from $178 million in fiscal years 2001 through 2003 (about 2% of revenues) to $750 million by fiscal year 2008, or about 6% of revenues. After transfers to support the fiscal 2009 and 2010 budgets, the balance declined to $557 million in fiscal year 2009, and is estimated at $453 million for fiscal year 2010 and $257 million for fiscal 2011 (2.4% of general fund revenues). Out-year projections indicate balances building up to $362 million by fiscal 2015. In addition to the Revenue Fluctuation Reserve, the state has available for fiscal 2011 budget needs $264 million (2.4% of general fund revenues) in a TennCare reserve.

EMPLOYMENT DECLINES IN 2008 and 2009; IMPROVEMENT IN 2010

After three years of moderate non-farm payroll employment growth (1.4% to 1.6%), Tennessee began to experience slowing in 2007 (0.5% growth), with a decline of 0.8% in 2008. Job losses increased and figures for 2009 show a year-over-year drop in employment of 5.6%, which was higher than the comparable national figure (-4.3%). Preliminary figures for August 2010 show year-over year growth of 0.4%, close the national figure of 0.2%. The state's unemployment rate was 6.7% in 2008 as compared to 5.8% for the nation. It increased significantly to 10.5% in 2009 vs. the national figure of 9.3%. Preliminary figures for August 2010 show state unemployment at 9.6%, equal to the comparable national rate.

The state's employment slowdown was primarily attributable to accelerated manufacturing and construction sector declines associated with weakening in the state's non-durable manufacturing sector, auto industry losses, and the deteriorating housing sector. The state has an above average reliance on manufacturing. The sector represents about 12% of state employment, as compared to 9% for the nation. Following recent significant manufacturing sector declines, (14% for fiscal 2009) the state is seeing stabilization. August 2010 year-over year growth for manufacturing jobs was of 1% vs. flat performance for U.S. Improvements in the manufacturing sector reflect stabilization in the automobile industry, as a major component of the state's manufacturing sector (about 15%), is related to automobile manufacturing.

MODEST LEVEL OF STATE DEBT

Tennessee's debt levels have historically been low relative to other states. Based on Moody's 2010 State Debt Medians report, Tennessee ranked 45th among states for net tax-supported debt per capita and net tax-supported debt as a percent of personal income. State net tax-supported debt per capita was $318, as compared to a 50 state median of $936. As a percentage of personal income, debt was 0.9%, significantly lower than the 50 state median of 2.5%. State debt is repaid quickly, with more than 65% amortized in 10 years. While the state does not perform a debt affordability analysis, debt issuance limitations are set by statute, and the state has been well below its capacity limitations. The state has adopted a new debt capacity policy, which will require the state to perform an annual debt affordability study should the state reach a 60% debt capacity metric. The state currently has a debt capacity metric of 38%.

As of the July 1, 2009 actuarial valuation, the state retirement system on a combined basis was well funded at about 91%. Tennessee's unfunded liability with regard to its other post-employment benefits is about $2 billion, according to a 2009 actuarial study. The state is currently funding this on a pay-go basis. Under its current benefits program, the state has the flexibility to revise benefits, and has done so in the past.

Outlook

The rating outlook for the State of Tennessee's general obligation bonds is stable. While the state has been challenged by ongoing financial stress, Moody's expects that the state's history of strong fiscal management, together with the availability of budgetary reserves, will provide for stability in state finances.

What would make the rating change - DOWN

-Ongoing reliance on non-recurring revenue sources to balance the state budget

-A state economy that does not rebound in tandem with the rest of the country or that cannot overcome manufacturing and other sector weaknesses and return to sustained growth

-An increase in spending pressures, particularly in the areas of health and education, which account for the majority of state expenditures, that poses a significant challenge to budget balance

The principal methodology used in rating Tennessee (State of) was Moody's State Rating Methodology rating methodology published in November 2004. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

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

Maria Coritsidis
Analyst
Public Finance Group
Moody's Investors Service

Kimberly Lyons
Backup Analyst
Public Finance Group
Moody's Investors Service

Edith Behr
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S ASSIGNS Aaa RATING AND STABLE OUTLOOK TO $213 MILLION TENNESSEE GENERAL OBLIGATION BONDS;
No Related Data.
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