OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following State of Nevada general obligation (GO) limited tax (LT) bonds:

--\$85 million University System Projects Bonds (Revenue Supported) series 2015A;
--\$205 million Capital Improvement and Cultural Affairs Refunding Bonds series 2015B;
--\$20 million Natural Resources Refunding Bonds series 2015C.

The bonds are expected to sell via competitive bid on or around Feb. 25, 2015.

In addition, Fitch affirms the following ratings:

--\$1.8 billion in outstanding GO LT bonds at 'AA+';
--\$4.7 million Nevada Real Property Corp. GO LT certificates series 2009 at AA+';
--\$89.6 million in lease revenue bonds at 'AA.'

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the State of Nevada, to which its full faith and credit are pledged. Debt service is supported by a statewide property tax levy that is subject to both constitutional and statutory limitations. State law further provides that if property tax revenues are insufficient to pay GO debt service, moneys are to be borrowed from the general fund and repaid from future property tax revenues to the extent other moneys are not available.

KEY RATING DRIVERS

BELOW AVERAGE LIABILITIES: Nevada's debt places only a moderate burden on resources. Although the state refunded debt for budgetary relief through the downturn, amortization remains above average. Pension funding declined since the recession but the state's overall liabilities are below average.

ECONOMY IMPROVING: Growth in the state's economy is accelerating with employment growth across a broad range of sectors, positive trends in tourism and gaming, and some improvement in the housing market. Concentrated in the Las Vegas/Clark County area, the state economy remains largely based on gaming and entertainment although economic development efforts at diversifying are having some success.

CHALLENGE ACHIEVING BALANCE: State financial operations are conservatively managed to produce budgetary balance even in times of economic weakness. However, budget performance in the current biennium has been weaker than expected; revenues are below expectation and spending pressures related to the expanding population, particularly for education, will continue to challenge the budget.

RATING SENSITIVITIES

The rating is sensitive to limits in the state's economy, volatility in the revenue stream, and maintenance of structural budget balance. Enacting a balanced biennial budget and beginning to rebuild reserves will be important to maintenance of credit quality.

CREDIT PROFILE

Nevada's rating reflects the state's conservative debt position, solid financial controls, and historically responsive financial practices, as well as its success in managing rapid population growth and development. Nevada's debt is only a moderate burden on resources and is supported by a separate statewide property tax levy, which, during the extended period of tax base growth that preceded the recession, produced revenues in excess of that needed for debt service. The state accumulates any excess in a reserve that, as of June 30, 2014, equaled approximately 80% of fiscal 2015's debt service that is paid from property taxes.

With a significant decline in the tax base due to the recession, the tax levy no longer covers annual debt service and the state expects to gradually reduce the reserve so as to not raise the tax levy rate, with a target of maintaining 50% of the next fiscal year's debt service in reserve. The state has consistently exceeded this target. If property tax revenues are insufficient, funds for debt service are borrowed from the general fund and repaid from future property tax collections to the extent other funds are not available.

GROWTH ACCELERATING

Nevada was initially slow to emerge from the national recession but is showing signs of a stronger expansion. Nevada's economy remains based on gaming and entertainment, although recent economic development efforts aimed at diversification have been successful. Rapid growth in population prior to the recession was matched by employment gains, and in particular, a surge in construction employment in the middle of the last decade. The nature of the recession, led by a housing market crash and declines in consumer spending, had a particularly severe impact on the state.

The economy is showing signs of a stronger recovery. Non-farm employment has begun to grow again, now at a stronger pace than the nation. After matching the U.S. growth rate at 1.7% in 2012, non-farm employment grew 2.7% in 2013, well above the U.S. rate of 1.7%. Strong growth continued into 2014 with a year-over-year increase of 2.3% in December, just above the U.S. rate of 2.2%. Overall, Nevada has regained 58.6% of jobs lost in the recession. Although construction employment is still far below its former peak, the sector has been expanding since August 2013 and recent performance is quite strong with double digit growth through much of 2014 and a 7.7% year-over-year increase in December 2014. The unemployment rate, while still higher than the U.S. rate at 6.8% in December, is well off of its peak of 13.8%. The housing market continues to be weak but existing home sales and prices have begun to increase and mortgage foreclosures are declining.

The leisure and hospitality sector lost approximately 40,000 jobs during the recession but has been adding jobs since June 2010 and at an increasing rate through much of 2014, until beginning to taper off in the fall. Visitor trends are improving with visitor volume, occupancy rates, room tax revenues, and gaming revenues all expanding since 2011.

VOLATILE REVENUE SYSTEM

The economic downturn had a severe impact on the state's financial operations, with the economically sensitive revenues upon which the state relies, sales tax and gaming-related revenues, falling dramatically. With the economy on the rebound, revenue growth does not appear to be keeping pace with the economic recovery and increasing demands of a growing population. The state has faced funding gaps in the current biennial budget, which was balanced when enacted.

The state took action through three biennial budgets to stabilize financial operations in light of significantly reduced revenues. Following the drawdown of the rainy day fund to solve a fiscal 2008 - 2009 biennial budget gap, the state responded to additional financial stress in the fiscal 2010 - 2011 biennial budget with a significant but temporary increase in taxes, including sales and business taxes, and an increase in the lodging tax and other fees. The legislature also made changes to shore up the depleted rainy day fund. Revenues exceeded budget expectations in both years of the fiscal 2012-13 biennium that ended June 30, 2013.

The enacted budget for the current fiscal 2014 - 2015 biennium continued many of tax increases that were due to expire and some of the revenue diversions included in prior budgets. Despite economic recovery, revenues have fallen short in both fiscal years of this biennium, particularly in the collection of taxes related to mining operations, and expenses related to education have exceeded budget due to faster than anticipated enrollment growth. Budget balancing solutions include use of fund balance, proposed reserve sweeps, transfer of the rainy day fund to the general fund, and budget reductions including in contributions for employee health and unemployment funds. It is of note that the state continues to need to take these types of one-time actions to balance the budget this far into the economic recovery.

The governor's proposed budget for the fiscal 2016 - 2017 biennium, which begins July 1, 2015, attempts to restructure the revenue system to more accurately reflect economic activity. The budget would make permanent most of the temporary tax increases, restructure the business license fee from a flat fee to a tiered fee based on the size of the entity, change the way in which mining companies are taxed and raise cigarette taxes. These proposed taxes would add \$1.1 billion to the next biennium to address growth pressures and allow the state to rebuild reserves.

GENERALLY CONSERVATIVE FINANCIAL MANAGEMENT

Among the state's financial control tools are a constitutional requirement to balance the budget, 95% budgeting - the budget must provide for a reserve of not less than 5% of all proposed general fund operating appropriations and authorizations - and a requirement to set aside 1% of expected revenues at the start of each fiscal year in the rainy day fund. The state has repeatedly delayed implementation of the rainy day funding mechanism; the governor's proposed budget would reinstate the requirement effective July 1, 2017. Revenues are estimated on a regular basis by the Economic Forum, composed of members appointed by the governor, the Senate majority leader, and the speaker of the Assembly. The governor must use the Economic Forum projection in preparing the biennial budget. The state also conducts regular, frequent debt affordability analyses to ensure its ability to pay debt service within the existing property tax rate and has a policy of maintaining a minimum reserve of half of the following year's debt service in the Consolidated Bond Interest and Redemption Fund.

MODERATE LONG-TERM LIABILITIES

With about 30% of state GO debt supported by program revenues and considered self-supporting, debt ratios are moderate with net tax-supported debt of approximately \$2.1 billion, or 2.0% of 2013 estimated personal income. The current offering will finance higher education facilities and refund outstanding debt for debt service savings.

The system-wide funded ratio of Nevada PERS was 71.5% as of June 30, 2014. Using a more conservative 7% investment return assumption, the funded ratio would fall to 62.5%. Beginning in fiscal 2014, the state's pension systems issued financial statements under new GASB statement 67 reporting standards, which show assets equaling 76.3% of liabilities; the higher ratios under the new standards primarily reflect the full recognition of asset gains in recent years. The burden of the state's net tax-supported debt and Fitch-adjusted unfunded pension obligations as a percent of personal income remains below the median of the U.S. states rated by Fitch.

The bonds are general obligations of the state, and the state's full faith and credit are pledged, although the property tax pledge is statutorily limited to \$3.64 per \$100 of assessed valuation for all overlapping units of government. Statutes further provide priority for taxes levied for debt service and a requirement to borrow from the general fund, to be repaid from future property tax revenues, if the annual collection is insufficient to pay GO debt service. The state's tax rate dedicated to debt service is \$0.17 and state law includes a permanent appropriation for such payment.