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03 Dec 2019
New York, December 03, 2019 -- Moody's Investors Service has assigned a Aa3 rating to the State of Idaho's $21 million Revenue Bonds, Series 2019 (Idaho Department of Fish and Game Headquarters Office Project), issued by the Idaho Fish and Wildlife Foundation, Inc. The bonds are being issued on behalf of the Idaho Department of Fish and Game. The outlook is stable. The bonds are expected to price the week of December 9.
The rating of Aa3 is two notches below the State of Idaho's Issuer Rating (Aa1 stable), based on the need for annual legislative appropriation of the revenues funding lease payments, the moderately strong lease legal structure, and the narrow revenue base supporting lease payments. The rating also considers the essential nature of the leased asset, bondholder's leasehold interest on the asset, and the State of Idaho's incentive to retain market access to appropriation debt for its capital financing program.
Idaho's Aa1 credit strength is based on the state's history of conservative financial management, strong liquidity and fund balances that have improved steadily since the recession, and a very low debt burden. These strengths are somewhat balanced by below-average socioeconomics and moderate economic concentration that leads to above-average economic and revenue volatility. However, the economy is benefitting from strong in-migration and overall growth.
The stable outlook on the bonds reflects the state outlook. The state's stable outlook reflects the expectation that strong economic growth and conservative fiscal management will support structurally balanced financial performance and solid, stable reserves.
FACTORS THAT COULD LEAD TO AN UPGRADE
- An upgrade of the state's Aa1 Issuer Rating
- Continued long term economic growth
- Maintenance of structural balance in state finances and limited reliance on non-recurring revenue sources
FACTORS THAT COULD LEAD TO A DOWNGRADE
- A downgrade of the state's Aa1 Issuer Rating
- Significant economic slowing resulting in weaker revenue performance that severely strains state finances
- A shift away from the state's trend of well managed financial operations
The bonds are secured by a lease agreement between the Idaho Fish and Wildlife Foundation, Inc. (the foundation), as lessor, and the state, through its Idaho Department of Fish and Game (the department), as lessee. Debt service will be paid from annual rent payments made to the foundation by the department, which will be funded solely from the department's legally-available operating revenues, subject to annual legislative appropriation. The bonds are additionally secured by a leasehold interest on the leased facility. Unlike the department's Series 2018 bonds, the Series 2019 bonds will not have a mortgage lien on the project or a debt service reserve fund.
Pursuant to the lease agreement, the foundation will construct and the department will lease a new 72,000 square foot headquarters office building for the department in Boise, ID. The building, which will house 170 full-time staff and 10 temporary staff, will consist primarily of office, public meeting space, and classroom space. The new building will replace the department's existing 19,650 square foot headquarters that was constructed in 1965, on the existing headquarters property, which is adjacent to the . It will house the department's centralized functions, and provide space to service the core objectives of education, public communication, licensing, and training.
Pursuant to a ground lease, the state has leased the headquarters property to the foundation for the life of the bonds. The state, through the department, will lease the property back from the foundation, pursuant to an appropriation lease.
Lease payments will be automatically included in the department's base budget unless specifically removed, however are also subject to set-off and abatement if a portion of the building cannot be occupied. Set-off and abatement risks are partially mitigated by the requirement to maintain adequate insurance. The full annual lease payment is due by September 1, well in advance of debt service dates on December 1 and June 1. Debt service dates are late in the fiscal year, reducing risk due to late budget adoption.
Lease payments will be funded solely from legally-available revenues of the Idaho Department of Fish and Game, which have a very limited base. Department revenues are generated primarily from the sale of fishing and hunting licenses and deer and elk tags (more below), which can be sensitive to economic swings. The state has not historically provided any General Fund revenues to support the department.
Over the past six years, growth in legally-available department revenues has averaged 5.0% annually, reaching $49.5 million in fiscal 2019. This provides comfortable support for total annual lease payments of $1.6 million, which includes $650,000 and $1.2 million for the Series 2018 and Series 2019 leases, respectively, and $800,000 annually for other lease agreements with the foundation. The department closely monitors its budget and has satisfactory flexibility to reduce spending during the year. To increase revenues, the department must request authorization to raise license and tag fees from the legislature. Favorably, department revenues are statutorily restricted in purpose and cannot be diverted to other governmental purposes. In addition, the department maintains satisfactory reserves that would mitigate a temporary revenue decline. Reserves have grown over the past five years to $14.1 million in fiscal 2019, which is net of $4.4 million of one-time spending on programmatic projects. The department also maintains a $4.5 million rainy day fund, equivalent to its policy of maintaining 10% of estimated license revenues.
The flow of funds is somewhat weak; although the lease payments are pledged and assigned to the trustee, payments flow through a foundation-owned deposit account prior to remittance to the trustee. However, the risk of lease payments being diverted is partially mitigated by a deposit account control agreement that requires the bank to remit deposits directly and immediately to the trustee, and requires trustee approval before the control agreement can be revised. Risk remains, however, that lease payments could be subject to an automatic stay in the event of bankruptcy by the Idaho Fish and Wildlife Foundation, Inc.'s (the foundation). This is mitigated by the relatively limited operating scope of the foundation and the close supporting relationship between the foundation and the department.
Like most state lease bonds, there is no guarantee that debt service payments will be appropriated. In the event of state non-appropriation or non-renewal of the lease, the trustee may execute its leasehold interest and take possession of the facilities to re-let. However due to the state's high reliance on appropriation debt for market access, long history of continuous appropriations and renewals, and essentiality of the project to the state, we expect the incentive to appropriate will remain high.
USE OF PROCEEDS
Bond proceeds will finance demolition of the current headquarters building and construction of the new leased facilities (described above).
Idaho is the 39th largest state, with a population of 1.68 million. It had a gross domestic product of $68.5 billion as of Q4 2016, which ranks 42nd in the US, and per capita income of $39,107.
The Idaho Department of Fish and Game is an executive department of the state. The department is currently authorized by the state legislature to have up to 569 employees and its mission is to administer the wildlife policy of the State in order to protect, preserve, perpetuate, and manage all wildlife within the State. The Department's director is appointed by the Commission. The Commission consists of seven members appointed by the governor and confirmed by the State Legislature.
The Idaho Fish and Wildlife Foundation, Inc. is a 501(c)(3) with a very close supporting relationship with the department. The foundation is governed by a volunteer Board of Directors and has three employees, an executive director, a financial specialist and an administrative assistant, whose salaries are paid by the department. The foundation serves as a fund-raising entity, and additionally holds gifted funds, lands and conservation easements in trust for preservation and educational purposes. The state's comprehensive annual financial report identifies the foundation as a blended component unit, and its finances are blended with the departments.
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Please see www.moodys.com for any updates on changes to
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