Fitch Rates Minnesota's $1.1B GOs 'AA '; Outlook Stable
--\\$376,110,000 GO state various purpose bonds series 2015A;
--\\$310,000,000 GO state trunk highway bonds series 2015B;
--\\$7,200,000 GO taxable state various purpose bonds series 2015C;
--\\$386,495,000 GO state various purpose refunding bonds series 2015D;
--\\$14,890,000 GO state trunk highway refunding bonds series 2015E.
The bonds are expected to sell through competitive bid on Aug. 5, 2015.
In addition, Fitch has affirmed the following ratings:
--\\$6 billion in outstanding state GO bonds at 'AA+';
--\\$1 billion in state general fund appropriation bonds series 2012B, 2014A and 2014B at 'AA';
--\\$80 million in State of Minnesota certificates of participation (COPs), series 2014 (legislative office facility project) at 'AA';
--\\$103 million in St. Paul Port Authority (State of Minnesota Office Building) lease revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the state of Minnesota, to which its full faith, credit, and taxing powers are pledged. In addition, per the state constitution, payment of trunk highway bonds is a first charge on money coming into the state trunk highway fund, which receives a share of taxes on motor vehicles and motor vehicle fuels.
Per the state constitution, the state auditor is required to levy an annual tax on all taxable property in an amount that, when combined with balances on hand in the debt service fund, will pay principal and interest due on GO bonds through July 1 of the second ensuing year. A state property tax has not been required for this purpose since 1966. This provision results in debt service being funded well in advance of payment dates, as the deposit to the debt service fund is made on Dec. 1 of each year.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: Minnesota's revenue structure is subject to cyclical volatility, and revenue performance has been strong following a period of sharp declines in the recession. The state relies on non-recurring budget-balancing measures at times of recessionary weakness; however, positive budget variances during recoveries have allowed for the replenishment of reserves and repayment of deferred school aid. Budget forecasts are reviewed regularly and reserve funding practices have been strengthened.
BELOW-AVERAGE LIABILITY BURDEN: The state's debt levels are moderate, with rapid amortization of GO debt. On a combined basis, the burden of debt and unfunded pension liabilities is below average for a U.S. state. Other post-employment benefit obligations are minimal.
STRONG ECONOMIC PROFILE: Minnesota's economy is balanced and wealth indicators are positive.
RATING SENSITIVITIES
STABLE CREDIT CHARACTERISTICS: Minnesota's 'AA+' GO rating is sensitive to shifts in the state's fundamental credit characteristics including its financial management practices and manageable long-term liability burden.
CREDIT PROFILE
The 'AA+' GO rating reflects Minnesota's moderate liability position, a broad-based economy with above-average wealth levels, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts.
Revenues over the course of this economic expansion have been performing solidly above budget assumptions. The state has increased spending in core program areas, particularly education, while at the same time replenishing reserves and strengthening reserve funding practices by establishing automatic funding mechanisms.
With revenues continuing to overperform budget estimates in recent months, the combination of the state's official projection of a \\$865 million surplus at the end of the current biennium on June 30, 2017 plus an estimated \\$555 million in fiscal 2015 revenue overperformance above this projection totals \\$1.4 billion. This represents about 3% of total budgeted spending for the biennium. Fitch expects that the state will make decisions on the use of some of these funds in next year's legislative session, with proposals including both further increases in education funding and some form of tax relief. Pursuant to state law, 33% of the current biennium's ending balance projected in the November forecast will be transferred to the budget reserve.
The estimated surplus does not include \\$1.3 billion in budget reserves, which equate to 7% of fiscal 2016 spending.
FINANCES AND MANAGEMENT
Minnesota's general fund revenues are diverse, consisting of individual and corporate income, sales, and property taxes. Personal income tax revenues make up 54% of all general fund tax revenues, and sales tax revenues another 27%. The state's budget forecasting and management mechanisms are strong, with reviews of economic and revenue forecasts in February and November of each year. The forecast has been increased repeatedly and materially in the recovery. Recent revenue overperformance has primarily reflected strength in income tax results.
The state's revenues have become more exposed to volatility from capital gains in the income tax base over time, and the state has made volatility the focus of its reserve funding policy. Tax increases that have contributed to a comparatively high tax burden have been used for investments in program spending.
Consistent with historical practice, budgets during the recession relied extensively on non-recurring measures, particularly school aid shifts that historically have been a key part of budget balancing for the state. Pursuant to state law and consistent with the state's practice in prior downturns, strong revenue overperformance in the recovery was first applied to fund reserves to their policy targets and reverse the payment deferrals to school districts.
The state's most recent estimate has fiscal 2015 ending with reserves of \\$1.3 billion and an unallocated balance of \\$47 million, not including the \\$555 million in fiscal 2015 revenue overperformance that Fitch expects to be incorporated with the next forecast. These results are after the transfer of \\$455 million in fiscal 2015 balance to the health care access fund (HCAF) to cover costs shifted to HCAF from the general fund starting with the fiscal 2016 - 2017 budget.
The budget for the current biennium, which began on July 1, was enacted following a period of disagreement on the magnitude of education funding increases and several resulting gubernatorial budget vetoes. As the enacted budget left unallocated \\$865 million in ending fund balance, and actual fiscal 2015 revenue results are now projected to provide an additional \\$555 million above the February 2015 forecast on which the budget was based, this debate is expected to be revisited in next year's legislative session. As noted above, 33% of the ending balance forecasted this November will be transferred to the budget reserve; such transfers will continue until the reserve reaches the annually established target level (\\$2.2 billion for the current biennium).
Minnesota has a record of contentious budget negotiations at times of split government. Following the November 2014 elections, and after two years of single-party control, control is once again divided between the two political parties. Budget negotiations for the current biennium were more contentious than the prior budget session, during which the legislature enacted significant tax increases to provide funding for education and property tax relief. However, the process was significantly smoother than in some earlier years. Disagreements surrounding the budget for the fiscal 2012 -2013 biennium resulted in delayed budget adoption and a 20-day partial state government shutdown. In the face of a large projected shortfall, the final budget included not only significant school aid shifts but also deficit financing in the form of a tobacco settlement securitization that was subsequently refunded with state appropriation debt.
The Minnesota constitution prohibits borrowing for operating purposes beyond the end of the biennium. Although borrowing for cash flow purposes within a biennium is allowed, Minnesota has not done short-term borrowing since 1985.
ECONOMY
Minnesota's economy is broad based and resembles that of the nation, although the manufacturing and education and health services sectors are somewhat more important in the state than the national average. The state experienced job losses less severe than those of the U.S. in the recent recession, with a 4.7% decline between 2007 and 2010 compared to a 5.6% drop for the nation. The state's employment recovery has been generally consistent with that of the U.S. Employment growth has been modestly below national rates more recently, up 1.5% year-over-year in June 2015 compared to 2.1% for the U.S., but unemployment remains well below that of the nation (3.9%, 74% of the U.S. level in June) with solid labor force growth.
The state's population is well educated, and population growth and age are generally in line with the U.S. Wealth levels are above average. Minnesota's personal income per capita equaled 105.6% of that of the U.S. in 2014 ranking 15th of the states. Poverty levels are well below average, 11.5% in Minnesota compared to 15.4% for the nation overall.
DEBT & OTHER LONG-TERM LIABILITIES
Minnesota has well-established debt policies. A net tax-supported debt burden of approximately \\$8.5 billion after this sale equals 3.2% of personal income, on the lower end of the moderate range but slightly above the median for U.S. states. Amortization remains rapid, as about 70% of GO bonds, which equal 80% of net tax-supported debt, mature within 10 years.
Minnesota's use of appropriation-backed debt has increased in recent years. In 2012 the state issued \\$656 million in appropriation-backed debt to refund for debt service savings the tobacco securitization debt that was issued in 2011 for budget relief. In addition, in 2014 the state issued \\$462 million in appropriation-backed debt to fund its \\$348 million commitment to a new stadium for the Minnesota Vikings as well as the local share. The increased debt service cost to the general fund associated with the stadium bonds is expected to be offset by increased gaming revenues, among other revenues.
The state's unfunded pension liability is below average as a percent of personal income, and on a combined basis the burden of net tax-supported debt and adjusted unfunded pension obligations as a percentage of personal income is below the median for U.S. states. In addition, the state has very limited retiree health benefits.
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