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MOODY'S ASSIGNS Aaa TO THE STATE OF GEORGIA'S $355 MILLION IN STATE ROAD AND TOLLWAY AUTHORITY BONDS

07 Mar 2011

OUTLOOK IS STABLE

Georgia (State of)
State
GA

Moody's Rating

ISSUE

RATING

Guaranteed Revenue Refunding Bonds, Series 2011A

Aaa

  Sale Amount

$203,460,000

  Expected Sale Date

03/09/11

  Rating Description

General Obligation

 

Guaranteed Revenue Refunding Bonds, Series 2011B

Aaa

  Sale Amount

$151,675,000

  Expected Sale Date

03/09/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Mar 7, 2011 -- Moody's Investors Service has assigned a rating of Aaa and stable outlook to the Georgia State Road and Tollway Authority's Guaranteed Revenue Refunding Bonds, consisting of $203.5 million Series 2011A and $151.7 million Series 2011B. The sale amounts are subject to change based on market conditiona at pricing. The bonds are being issued to generate net present value debt service savings of approximately $29 million.

RATINGS RATIONALE

The bonds are special limited obligations of the Authority, payable from pledged revenues consisting primarily of a portion of the state motor fuels taxes. The bonds are also guaranteed by the state (general obligation bond rating of Aaa) and will be entitled to its full faith, credit and taxing power for bond repayment. The state's Aaa rating reflects its 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 remains stable based on our expectation Georgia will take appropriate steps to restore balanced financial operations and replenish reserves as the economy recovers.

Credit Strengths

--Conservative fiscal management, including prompt responses to revenue declines

--History of rapid reserve building (after the 2001 recession)

--Relatively well funded pensions

Credit Weakness

--Near depletion of reserves

--Economic and revenue weakness

DETAILED CREDIT DISCUSSION

RATING REFLECTS STATE GUARANTEE, THOUGH STRENGTH OF PLEDGED REVENUES MAKE UTILIZATION UNLIKELY

The bonds represent guaranteed revenue bonds of the state, entitled to the full faith, credit and taxing power of the State of Georgia. They are also limited and special obligations of the authority, payable solely from pledged motor fuel tax revenues received by the authority pursuant to a joint resolution between the State Transportation Board and the authority.

The Georgia Department of Transportation (DOT) is the agency that receives and has control of all state motor fuel tax revenues. All motor fuel tax collections from the preceding fiscal year are appropriated in each year to the DOT, and must be used to maintain an adequate system of public roads and bridges. Pursuant to the joint resolution, the DOT is directed to transfer to the authority so much of the motor fuels tax received as shall be necessary to allow payment on the bonds.

Total motor fuel tax collections were $853 million in fiscal 2010, projected to grow to $898 million in fiscal 2011, and $913 million in fiscal 2012. While the rating for these bonds rests on the state's pledge of its credit which secures the guarantee, the legal security provided by the authority's pledged revenues makes it unlikely that the state guarantee will be utilized.

STATE REPORTED SLIGHT NEGATIVE AVAILABLE GENERAL FUND BALANCE FOR FISCAL 2010

Like other states, Georgia faced adverse economic conditions and sharp revenue declines during the economic downturn. These conditions led to a negative available balance in the state's general fund of $493 million or almost 3% of state source revenues in fiscal 2009. The recently released fiscal 2010 comprehensive annual financial report (CAFR) shows an improved but still slightly negative fund balance of $41 million (general fund), less than 1% of state source revenues in fiscal 2010. The negative balance represented a sharp deterioration from fiscal 2008's positive available general fund balance of $1.5 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 the slight negative fund balance in fiscal 2010 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 2010 year-end total general fund balance of approximately $3.7 billion, about 20% of revenues for the year. Components of the total fund balance included items that are, or could become, available for general operations including $57.5 million reserved for debt service on authorized, but unissued, bonds. Total general fund balance also included $883 million of lottery and $1.366 billion of gasoline excise tax revenues. These amounts were legally constrained to specific operating needs of the state (education programs and transportation projects, respectively).

TAX REVENUE GROWTH OF 4.2% EXPECTED IN FISCAL 2011

Like other states, Georgia incorporated use of non-recurring measures in its fiscal 2011 budget. Georgia expects to receive a one-time infusion of $288 million from the sale of Georgia Environmental Finance Authority (GEFA) water and sewer loans to local governments and the 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 $1.156 billion, or 7.8% of the state's total appropriations. The state's budget also incorporated recurring tax and fee increases of $468 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 $216 million. The budget anticipates 4.2% growth in tax revenues, including the new sources, and 8.5% growth in total sources. Revenues have exceeded projected growth year to date. Total year to date tax collections rose 8.1% in January from the same period in fiscal 2010, primarily reflecting growth in individual income tax and sales and use taxes.

STATE IS WITHHOLDING ALLOTMENTS OF APPROPRIATED FUNDS TO PROVIDE ADDITIONAL BUDGETARY FLEXIBILITY

In the beginning of the fiscal year the state implemented a withholding of allotted funds of most agencies at 4%, providing an approximately $267 million cushion. A portion of this was intended to 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). The remainder of the withheld allotments will add to the fiscal 2011 operating surplus. The state also maintains $116 million in the RSR.

GOVERNOR'S FISCAL 2012 BUDGET RECOMMENDATION ANTICIPATES 3.9% IN TOTAL GENERAL FUND REVENUE GROWTH

The proposed fiscal 2012 budget anticipates revenue growth of 3.9%, or $650 million, which offsets a portion of the $1.1 billion in loss of ARRA funding. To close the remaining gap, the Governor has proposed agency reductions of 7.0%, except in the K-12 funding area, which will be reduced by 1%. The expenditure reductions together with the growth in general fund revenues moves the state closer to a structurally balanced budget position in fiscal 2012.

BOND ISSUANCE GOVERNED BY 1972 CONSTITUTIONAL AMENDMENT

Georgia's debt issuance practices are governed by a 1972 constitutional amendment that authorized the state to issue general obligation and guaranteed revenue bonds and created the Georgia State Financing and Investment Commission to oversee the state's 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 $1.65 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 legal 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 negative fund balance position

--Reverse in economic growth without plans in place to offset declines

-- Over-reliance on non-recurring fiscal measures in out-years

The principal methodology used in this rating was Moody's State Rating Methodology published in November 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public 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

Kimberly Lyons
Analyst
Public Finance Group
Moody's Investors Service

Edward Hampton
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

MOODY'S ASSIGNS Aaa TO THE STATE OF GEORGIA'S $355 MILLION IN STATE ROAD AND TOLLWAY AUTHORITY BONDS
No Related Data.
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