Fitch Rates Nevada's $345MM GO Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following state of Nevada general obligation (GO) limited tax (LT) bonds:

--$256.295 million Capital Improvement and Refunding Bonds, series 2015D;

--$20.94 million Natural Resources and Refunding Bonds, series 2015E;

--$47.085 million (Nevada Municipal Bond Bank Project Nos. 87, 88 and 89), series 2015F;

--$10.09 million Open Space, Parks, Natural Resources and Refunding Bonds, series 2015G;

--$10.465 million Safe Drinking Water Revolving Fund Matching and Refunding Bonds, series 2015H.

The bonds are expected to sell via competitive bid on or around Oct. 14, 2015.

In addition, Fitch affirms the following ratings:

--$1.52 billion in outstanding GO LT bonds at 'AA+';

--$2.55 million Nevada Real Property Corp. GO LT certificates, series 2009 at AA+';

--$88.2 million Nevada Real Property Corp. 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 and overall liabilities are below average. GO debt is funded by a dedicated property tax levy and does not place a burden on the general fund. The state refunded debt through the downturn to keep debt service within this tax levy. Pension funding has stabilized after recession-related declines.

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.

BUDGET BALANCE: The state made permanent several temporary taxes and enacted new revenue sources when enacting the fiscal 2015-2017 biennial budget. In addition to providing for more certainty in funding state services, the additional revenues diversify the revenue base somewhat, although the general fund will remain reliant on sales and gaming-related taxes.

RATING SENSITIVITIES

The rating is sensitive to changes in Nevada's fundamental credit characteristics, including conservative debt management and maintenance of structural budget balance.

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, 2015, equaled approximately 83% of fiscal 2016'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's economy remains based on gaming and entertainment, although recent economic development efforts aimed at diversification have been successful. For example, the construction of the Tesla 'gigawatt' factory outside of Reno is one of several positive developments in northwestern Nevada, where growth in advanced manufacturing, and warehousing and distribution activities are expected to contribute to additional diversification and population growth in that region.

Nevada was initially slow to emerge from the national recession but is showing signs of a stronger expansion. Non-farm employment is now growing at a stronger pace than the nation. After matching the U.S. growth rate at 1.7% in 2012, non-farm employment grew 2.6% in 2013, well above the U.S. rate of 1.7%, and 3.5% in 2014, also well above the U.S. rate of 1.9%. Strong growth continues into 2015 with a year-over-year increase of 3.0% in August, while the U.S. grew 2.1%. Overall, As of August, non-farm employment had reached 97.4% of its pre-recession peak, below the U.S. median of 101.8%, and indicative of the severity of the recession in Nevada.

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 9.6% year-over-year increase in August 2015. The unemployment rate, while still higher than the U.S. rate at 6.8% in August, is well off of its peak of 13.5%. 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 and into 2015. 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 did not appear to be keeping pace with the economic recovery and increasing demands of a growing population.

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.

The enacted budget for the 2014-2015 biennium, that ended June 30, 2015, continued many of tax increases that were due to expire and some of the revenue diversions included in prior budgets. Despite economic recovery, the state faced funding gaps even though the budget was balanced when enacted. Revenues fell short in both fiscal years of the biennium, particularly in the collection of taxes related to mining operations, and expenses related to education exceeded budget due to faster than anticipated enrollment growth. Budget balancing solutions included use of fund balance, reserve sweeps, transfer of the rainy day fund to the general fund, and use of excess balances to cover annual cost of contributions for employee health and unemployment funds, which allowed the state to suspend contributions from the general fund. It is of note that the state continued to need to take these types of one-time actions to balance the budget well into the economic recovery.

REVENUE ENHANCEMENTS

The enacted budget for the fiscal 2016-2017 biennium, which began July 1, 2015, attempts to restructure the revenue system to more accurately reflect economic activity. The budget made permanent many of the temporary tax increases, increased the business license fee for corporations, changed the way in which mining companies are taxed, and raised cigarette taxes. The legislature also enacted several new taxes, the most significant of which is a new commerce tax for businesses whose Nevada-based gross revenue exceeds $4 million. In the aggregate, the taxes are forecast to add $1.19 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, which is now scheduled to take effect 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

Debt ratios are moderate with net tax-supported debt of approximately $1.9 billion, or 1.7% of 2014 estimated personal income. Approximately 17% of state GO debt is supported by program revenues and considered self-supporting. The current offering, which consists primarily of refunding bonds for debt service savings, will also finance various projects including higher education facilities, water grants, and open-space projects, and will provide funding to the municipal bond bank.

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. The property tax pledge is statutorily limited to $3.64 per $100 of assessed valuation for all overlapping units of government, with 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, of which $.02 is exempt from the statutory limit, and state law includes a permanent appropriation for such payment.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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