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MOODY'S ASSIGNS Aaa RATINGS TO STATE OF GEORGIA'S $975 MILLION GENERAL OBLIGATION BONDS IN SIX SERIES

30 Sep 2010

STABLE OUTLOOK APPLIES TO CURRENT ISSUES AND APPROXIMATELY $9.2 BILLION OF OUTSTANDING G.O. AND GUARANTEED REVENUE DEBT

State
GA

Moody's Rating

ISSUE

RATING

General Obligation Refunding Bonds 2010A-1

Aaa

  Sale Amount

$68,930,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

General Obligation Refunding Bonds 2010A-2

Aaa

  Sale Amount

$252,125,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

General Obligation Refunding Bonds 2010A-1

Aaa

  Sale Amount

$170,165,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

General Obligation Bonds 2010C-1 and 2010C-2 (Federally Taxable Build America Bonds - Direct Pay)

Aaa

  Sale Amount

$360,400,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

General Obligation Bonds 2010C-3 (Federally Taxable Build America Bonds - Direct Pay)

Aaa

  Sale Amount

$94,605,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

General Obligation Bonds 2010C-4 (Federally Taxable Qualified School Construction Bonds - Direct Pay)

Aaa

  Sale Amount

$28,755,000

  Expected Sale Date

10/05/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Sep 30, 2010 -- Moody's Investors Service has assigned a rating of Aaa to the State of Georgia's planned offering of approximately $975 million of general obligation bonds in six series as presented above. The bonds include two series of tax-exempt refunding bonds, totaling $321 million, as well as $170 million of tax-exempt debt for new capital projects. In addition, the state is issuing federally taxable Build America Bonds ($360 million), Recovery Zone Economic Development Bonds ($94.6 million), and Qualified School Construction Bonds ($28.8 million). Federal subsidy payments for these taxable bonds are not pledged as security. Proceeds of the new-money taxable and tax-exempt bonds will fund a variety of state purposes, including school and higher education facility and transportation project construction.

RATING RATIONALE

The highest-quality rating is supported by Georgia's conservative fiscal management, moderate debt burden and well-funded pensions. Budgetary reserves were largely used up by the end of fiscal 2010, after rising to $1.5 billion (about 8% of revenues). The outlook for the state's debt, including the current issues and $9.2 billion of previously issued bonds, remains stable based on our expectation Georgia will take appropriate steps to restore balanced financial operations and replenish reserves as the economy recovers.

RATING REFLECTS FINANCIAL MANAGEMENT PRACTICES

Georgia's Aaa general obligation rating is based on financial management practices enforced by statutory and constitutional provisions that have helped keep financial operations largely balanced and have encouraged recovery from revenue downturns such as in fiscal years 2002 and 2003. The state's constitution limits growth in appropriations to net projected revenues from existing sources, plus appropriations from reserves. Projected revenue is determined by the governor, giving the executive strong power to constrain expenditures. A history of prompt spending cuts in response to revenue shortfalls has been an important aspect of the state's credit profile. Georgia has addressed reporting issues that had delayed release of its audited financial statements for several years, and it has begun publishing multi-year financial plans showing out-year budget projections, a practice typically associated with the highest-rated states.

STATE REPORTED NEGATIVE AVAILABLE GENERAL FUND BALANCE FOR FISCAL 2009

Like other states, Georgia faced adverse economic conditions and sharp revenue declines in fiscal 2009. These conditions led to a negative available balance in the state's general fund of $493 million or almost 3% of state source revenues, reported under Generally Accepted Accounting Principles in the state's 2009 comprehensive annual financial report (CAFR). The negative balance represented a sharp deterioration from fiscal 2008's positive available general fund balance of $1.2 billion. GAAP-based available fund balance levels are important indicators of states' financial and governance strength. Georgia has a history of rebuilding these fund balances rapidly in response to economic growth, primarily by replenishing its rainy-day fund, the Revenue Shortfall Reserve (RSR). By law, the RSR receives any fiscal year-end surplus and can hold as much as 15% of prior-year net revenues. We expect RSR replenishment in fiscal years 2011 and 2012 will preclude negative available balances in those periods. Georgia has a somewhat volatile economy, outpacing the nation during expansions and underperforming during contractions. This tendency may help the state exceed budgetary targets and rebuild reserves.

NEGATIVE AVAILABLE FUND BALANCE POSITION OFFSET BY TOTAL FUND BALANCE

The presence of a negative fund balance in fiscal 2009, and potentially in the forthcoming audit for fiscal 2010, while significant, is mitigated by the fact that the state's total general fund balance position remained strong. The total fund balance includes amounts that have been reserved or designated for specific purposes, and are therefore not part of the available balance. Georgia's conservative approach to accounting for these resources is evident in the fiscal 2009 year-end total general fund balance of more than $3 billion, about 18% of revenues for the year. Components of the total fund balance included items that are, or could become, available for general operations: $259 million appropriated from the RSR for fiscal 2010 and $102 million reserved for debt service on authorized, but unissued, bonds. Total general fund balance also included $1 billion each of lottery and gasoline excise tax revenues. These amounts were legally constrained to specific operating needs of the state (education programs and transportation projects, respectively).

CURRENT-YEAR PLAN RELIES ON NON-RECURRING MEASURES

Severe fiscal challenges are evident in the state's plan for the year ending June 30, 2011. Georgia is anticipating a one-time infusion of $288 million from the sale of Georgia Environmental Finance Authority (GEFA) water and sewer loans to local governments. Like other states, Georgia is using non-recurring federal stimulus funding provided under the American Recovery and Reinvestment Act of 2009 (ARRA) for a significant share of operating needs in the current fiscal year. Together the ARRA and GEFA revenues account for about $1.36 billion, or 7.8% of the state's total appropriations. The state's budget incorporates recurring tax and fee increases of $531 million, or 3% of appropriations. These consist of measures such as ending an insurance premium tax exemption applicable to care management organizations, producing $68 million, and phasing out certain sales tax exemptions, generating $32 million. New fees consist primarily of a 1.45% tax on annual hospital provider revenues, expected to produce $229 million. The budget anticipates 4.7% growth in tax revenues, including the new sources, and 4.2% growth in total sources. Revenues have exceeded projected growth in the fiscal year's first two months. Total tax collections rose 8.6% in July and August from the same period in fiscal 2010, reflecting a drop-off in individual income tax refunds that allowed 13.7% growth in individual income tax collections. Withholding revenue also has been improving since March, based on the three-month moving average, year-over-year. Sales and use and motor fuels taxes contributed to outperformance in the period. Three-month moving average gross sales tax collections resumed growth in April.

STATE IS WITHHOLDING ALLOTMENTS OF APPROPRIATED FUNDS TO OFFSET REVENUE SHORTFALLS

To guard against weaker-than-projected revenue performance in coming months, the state is withholding allotted funds of most agencies at 4%, providing an approximately $267 million cushion. A portion of this will offset the shortfall of $184 million in the amount the state budgeted for ARRA (reflecting $147 million less than budgeted in enhanced Medicaid payments from the federal government and $37 million less in K-12 stabilization funds). Agencies have also prepared to save additional amounts if economic growth stagnates. A 6% reduction in allotments would save about $550 million, for example.

FISCAL 2012 GAP ESTIMATED AT $600 MILLION

In fiscal 2012, the state anticipates a gap of about $600 million on a preliminary basis based on the loss of ARRA funding, offset by revenue growth of 3.6%, which produces $588 million. The state is expected to consider expenditure cuts as well as revenue system restructuring, to be proposed early next year by the state's Special Council on Tax Reform and Fairness. The extent to which the coming fiscal year's budget is structurally balanced and also allows for reserve rebuilding will be a critical factor to the state's rating and outlook.

BOND ISSUANCE GOVERNED BY 1972 CONSTITUTIONAL AMENDMENT

Georgia's debt issuance practices are governed by a 1972 constitutional amendment that created the Georgia State Financing and Investment Commission to oversee debt issuance. The constitution does not allow debt to cover a revenue shortfall unless it is repaid within the same fiscal year by taxes levied for that year. The state issues only general obligation bonds or full faith and credit-guaranteed revenue bonds. The state's constitution further mandates conservative debt issuance practices by imposing a 25-year maximum term and a maximum annual debt-service cap at 10% of prior-year net revenues. Georgia has minimal exposure to variable-rate debt, with a single issue of such securities equal to about 3% of total debt outstanding. While Georgia in 2005 passed a law allowing interest rate swaps, it has not entered any swap agreements.

DEBT BURDEN, WHILE MODERATE, IS RISING

In Moody's 2010 State Debt Medians report, Georgia's debt per capita ranked 21st, at $1,120, compared with the $936 50-state median. Its 3.3% debt-to-income ratio was 19th, compared with the 2.5% median. Though still moderate, Georgia's debt burden is rising relative to other states, reflecting additional G.O. debt for capital projects as well as issuance of up to $3 billion of grant anticipation notes by the Georgia State Road and Tollway Authority. Such securities, which finance Federal Highway Administration-approved road construction projects, are included in the calculation of states' tax-supported debt even though pledged revenues come from the federal government and Georgia itself is not the legally obligor.

PENSION PLANS ARE WELL FUNDED; SUBSTANTIAL LIABILITY FOR OPEB IS BEING ADDRESSED

The state's debt profile is bolstered by pension funded status that is among the best in the nation. The largest pension unit, the Employees' Retirement System of Georgia, had a funded ratio of 85.7% as of June 30, 2009; the Teachers Retirement System of Georgia had a funded ratio of 87.2%.

STATE IS SEPARATING RETIREE HEALTH TRUSTS FOR STATE AND SCHOOL EMPLOYEES

The state has reported a $16.3 billion unfunded, actuarial accrued liability (UAAL) for OPEB provided by the State Health Benefit Plan. The annual required contribution (or ARC) to both provide for current service and amortize the liability for past service is $1.37 billion, or about 8% of state revenues. More than three quarters of the ARC is attributable to school systems, and the state has created a separate retiree health benefit fund to provide for state employees, and another to provide for school district employees. This strategy and others the state is implementing will significantly reduce the state's ARC in future years. The state notes that new accounting standards for reporting retiree health benefit liabilities (GASB Statements 43 and 45) are not funding requirements, and that its OPEB plans will remain subject to appropriation and under the control of state agencies.

Outlook

The outlook for Georgia's general obligation credit rating is stable, based on Moody's expectation that the state will take appropriate actions to restore balanced financial operations and replenish its reserves.

What could move the rating -- Down:

-- Continued trend of worsening fund balance position

-- Further reliance on non-recurring fiscal measures in fiscal 2012 budget

-- Overly optimistic budget-basis revenue forecasts for fiscal 2012

PRINCIPAL METHODOLOGY

The principal methodology used in rating this issue was Moody's State Rating Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Credit Policy & Methodologies directory.

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'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

Edward Hampton
Analyst
Public Finance Group
Moody's Investors Service

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

Contacts

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


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MOODY'S ASSIGNS Aaa RATINGS TO STATE OF GEORGIA'S $975 MILLION GENERAL OBLIGATION BONDS IN SIX SERIES
No Related Data.
© 2020 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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