OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the state of Maine's outstanding general obligation (GO) bonds rated by Fitch.

Fitch has also affirmed the rating on certain of the Maine Municipal Bond Bank's (MMBB) outstanding general resolution bonds (GRBs), supported by the state's moral obligation to replenish the debt service fund, at 'A+'. The rating on the GRBs is directly linked to the state's GO rating.

The Rating Outlook is Stable.

SECURITY
The state's full faith, credit, and taxing power are pledged to the GO bonds. Constitutional provisions provide for the payment of GO principal and interest from first general fund revenues should the debt service appropriation not be sufficient.

Bonds issued under the MMBB general resolution are general obligations of the bond bank, payable from loan repayments of participating local governments. The loans are obligations of the participating local governments. A moral obligation (MO) pledge of the state of Maine to restore draws on the debt service reserve fund provides additional security and is the basis for the rating.

KEY RATING DRIVERS

RESPONSIVE FINANCIAL MANAGEMENT: Frequent reviews of economic forecasts and financial projections allow the state to adjust to changing conditions. Maine's revenue outlook has improved recently, and the state historically addresses budgetary challenges in a timely and proactive manner. In fiscal 2015, unlike in prior years, Maine has not seen significant mid-year budgetary pressure from the state's Medicaid program, MaineCare.

CONSERVATIVE LONG-TERM LIABILITY POSITION: Debt ratios remain moderately low and amortization of GO bonds is rapid. Following pension reforms adopted in FY 2011, the unfunded actuarially accrued liability (UAAL) declined significantly and the state contributes its actuarially determined contribution (ADC) each year.

SLOWLY GROWING BUT STABLE ECONOMY: The state's economy remained less affected by recessionary weakness in the last downturn compared to broader national trends. However, the recovery that is underway is sluggish, hampered by weak demographic trends, and continues to limit the upside in the state's revenue forecasts.

MMBB RATING LINKED TO STATE: The MMBB rating is two notches below that of the state GO. The direct linkage reflects that the bond bank is an entity of the state, services a broad state purpose of providing lower cost financing for local governments, and finances basic infrastructure. The provision to intercept state aid indicates the further commitment of the MO provider, the state of Maine, to the bond bank. The MO mechanism and timing meet Fitch's criteria with all requirements related to the MO spelled out in the authorizing legislation for the bond bank.

RATING SENSITIVITIES

FUNDAMENTAL CREDIT CHARACTERISTICS: The 'AA' GO rating is sensitive to shifts in the state's fundamental credit characteristics, particularly its practice of prudent and proactive budgeting measures to address fiscal pressures and maintain a long-term trajectory of structural balance. The MMBB rating is sensitive to movement in the GO rating to which it is linked.

CREDIT PROFILE
The 'AA' rating reflects Maine's generally steady revenue performance and very manageable long-term liabilities, offset by persistent structural pressures, thin reserve levels and a relatively stagnant economic base. Proactive budgetary management allows Maine to address these challenges in a manner commensurate with the 'AA' rating. Fitch notes the governor's executive budget proposal for the upcoming biennium includes substantial and controversial tax structure changes, portending a potentially contentious budget adoption process.

ECONOMIC PROFILE LAGS OTHER STATES
Maine's economic growth prospects remain below average. During the recession, the state's peak-to-trough employment loss was less severe than most other states and the nation, but its recovery has significantly lagged. Through January, the state regained just over 36% of the jobs it lost during the recession, which is the weakest recovery amongst the states; U.S. employment fully recovered from recessionary losses last summer. January 2015 year-over-year (yoy) employment for the state grew just 0.2% versus the national increase of 2.3% over the same period. Maine's median age is one of the highest at 43.9 years compared to 37.6 years for the U.S. The state has seen virtually no net population growth since the start of the decade, and Maine's labor force has been flat-to-declining over the past year, all contributing to uncertainty about future workforce growth.

STABILIZED BUDGETARY OUTLOOK - CHALLENGES REMAIN
Fiscal operations have stabilized with the governor projecting the state to end the current biennium on June 30 with a modest \$7.2 million general fund balance, in line with the biennial beginning balance of \$7.7 million. Fitch notes that regular reviews of economic forecasts and financial projections allow the state to adjust to changing conditions. The most recent forecasts, in December 2014, led to an upward revision of FY 2015 general fund revenues by \$45.5 million, or 1.4% from budget. The administration anticipates the additional revenues should be sufficient to offset modest mid-year spending pressure.

Expenditures are generally in line with the biennial budget, including MaineCare, which has triggered notable mid-year budget gaps in recent years. Several years ago, the state began implementing major changes to MaineCare including reduced eligibility and provider payments, and elimination of previously covered services. The Legislature's Office of Fiscal and Program Review reports MaineCare general fund spending through January 2015 as essentially flat to fiscal 2014 levels. To date, the administration reports MaineCare's budgeted savings targets are on track to be met.

The outlook for the upcoming FY 2016-2017 biennium (beginning July 1, 2015) is challenging, but Fitch views it as within the state's ability to manage while maintaining adequate fiscal flexibility at the 'AA' rating level. In September 2014, the budget office reported an estimated current services general fund gap of \$461.1 million over the FY 2016-2017 biennium. But that gap includes a voter-approved increase to education funding that has been deferred since 2004, when it was passed, and that the governor recommends deferring again in his executive budget. Excluding that measure, the structural gap shrinks to \$164.4 million, or 2.3% of projected biennial appropriations. Importantly, that estimate came before the December 2014 revenue forecast which revised the forecast for FY 2016-2017 revenues upwards by \$67.5 million.

Reserve funding remains modest with a total of \$73.2 million in the state's main budget reserve funds at Jan. 30, 2015, representing a light 2.2% of fiscal 2015 general fund budgeted revenues. The budget stabilization fund is the main source of fiscal flexibility, with \$68.3 million, while the reserve for operating capital holds \$4.9 million. Both funds are reported within the general fund and have previously been accessed by the state for budgetary support. Positively, in fiscal 2014 the state transferred \$8.5 million into the budget stabilization fund pursuant to a statutory formula that allocates 48% of any unappropriated general fund surplus. Continued stabilization and improvement in budgetary performance will allow the state to gradually rebuild its reserves, though Fitch does not anticipate restoration to pre-recession levels in the near term.

EXECUTIVE BUDGET PROPOSES BROAD CHANGES
The governor's executive budget for the biennium beginning July 1, 2015 includes significant changes in tax structure, as well as continued changes in local government funding. On taxes, the governor proposes reducing the personal income tax by an estimated \$723 million over the biennium and partially offsetting that by raising the sales tax and broadening the applicable base, generating an estimated \$594.4 million over the biennium, along with a range of more modest changes. In addition, the executive budget includes a phase-out of municipal revenue sharing, saving \$250.1 million in the state's biennial budget versus the current estimate. All in, the proposed budget forecasts a net increase of \$115.7 million in available revenues over the biennium. The phase-in of income tax reductions continues into the following biennium, which could pose budget challenges for the state.

Legislative response to the budget has been mixed, although the tax law package has generated more vocal opposition. In 2013, the biennial budget process came down to a legislative override of a gubernatorial veto and reaching a consensus in the current cycle could also be challenging. Nevertheless, Fitch anticipates the final enacted budget will be largely structurally balanced given the overall steady budgetary outlook.

MANAGEABLE LONG-TERM LIABILITY PROFILE
Maine's combined net tax-supported debt and pension UAAL burden (relative to personal income) of 7.9% of 2013 personal income compared favorably to the median for U.S. states (6.1%) and was moderate overall as of Fitch's 2014 pension update report.

The state's debt ratios are relatively low and GO bond principal is rapidly amortized, all within 10 years. Net tax-supported debt as of June 30, 2014 totals approximately \$1.2 billion, equal to a moderately low 2.3% of 2014 personal income. This includes fiscal 2014 issuances of \$186 million (supported by liquor contract revenues) to repay a multi-year Medicaid liability owed to state hospitals, and a \$113 million GO issuance for capital projects.

The UAAL for Maine's primary pension system (Maine PERS), including state employees, teachers (both of which the state is legally responsible for), and participating local districts improved substantially following legislative changes enacted in 2011. After adjusting for Fitch's estimate of a standard 7% discount rate, the reported UAAL for Maine PERS decline to \$3.1 billion at June 30, 2011 from \$5.6 billion one year earlier. The adjusted funded ratio similarly improved to 78.1% from 70.4%. As of June 30, 2014, Maine PERS adopted the GASB 67 standard and reported a net pension liability for the state employee and teacher plan of \$2 billion, and a ratio of assets-to-liabilities of 84%. Actual contributions consistently match actuarially-required levels.