Fitch assigns an 'AA+' rating to Nevada's (the state) $22.55 million
limited tax general obligation (LTGOs) natural resources bonds, series
2008A and to the $10 million LTGO open space parks, and natural
resources bonds, series 2008B. The bonds will sell competitively on
March 25. Fitch also affirms the 'AA+' rating on Nevada's approximately
$2.4 billion outstanding GOs. The Rating Outlook is Negative.
The Negative Outlook reflects the state's deteriorating financial
condition, where reserves could be reduced to minimal even if additional
budgetary corrective action is taken. Although the state continues its
healthy attraction of new investment and population, the effects of the
correcting housing market, including its influence on business and
consumer spending and ultimately state revenues that were bolstered by
housing activity, are quickly weakening the state's financial position.
The broad downward revision in the state's revenue projections, more
pointedly in sales and real estate property transfers taxes, reveals the
pervasive effect of the housing market downturn. Nevada was one of the
states most impacted by rapid home building and price escalation during
the first half of the decade, followed more recently by a stark
deceleration or drop in prices and building permits and a dramatic rise
in mortgage delinquency and foreclosure. Nevada's 'AA+' rating reflects
the state's conservative debt and historically responsive financial
practices, as well as its success in managing economic growth and
development. Nevada's debt is only a moderate burden on resources and
the state's financial operations have been positive since fiscal 2004,
allowing for improved reserves and general fund surpluses.
Nevada's population and economy have expanded at an extraordinarily
rapid rate, although employment growth has notably moderated more
recently. The state's population has grown over 110% since 1990,
compared with 21% for the U.S. Preliminary total non-farm employment for
2007 was 1.0% higher than 2006, following expansions of 6.1% and 4.6% in
2005 and 2006, respectively. As of January 2008, employment was up 0.8%
from its level one year ago, while national expansion rate was 0.7% over
the same period. In keeping with rapid growth, the construction sector
accounted for over 11% of the employment base in 2006, versus just 8.7%
in 2000, before declining throughout 2007, reflective of the housing
market. As of January 2008, construction was down 5.1% from its January
2007 level and accounted for over 9.5% of employment. Meanwhile, more
than one-quarter of Nevada jobs remain related to tourism and gambling.
The leisure and hospitality sector rose 1.2% in January 2008 from a year
ago, in part reflecting limited new casino-resort openings. The natural
resources and mining and the educational and health services sectors
posted encouraging gains of 3.4% and 4.9%, respectively, over the same
period. Nevada's 2006 personal income per capita, at a 106.5% of the
U.S. average, ranks 11th among all states.
Following a downturn in fiscal 2002 and 2003, revenues recovered in
fiscal 2004 then soared in fiscal 2005 and 2006, allowing for
replenishment of the reserve fund. The state's general fund benefited
from tax increases, which were passed during the downturn and broadened
the revenue base to include new taxes on live entertainment and a real
estate transfer tax, as well as a redesigned business tax and increases
in cigarette and liquor taxes. General fund collections softened in
fiscal 2007, growing 2.8% in total, as sales taxes grew just 1.6% and
the real property transfer tax dropped 27%. Surplus revenues, after an
appropriation to the reserve fund, were used for one-time expenditures,
including capital improvements.
The state began the current fiscal 2008 and 2009 biennium on July 1,
2007, with a $138.4 million general fund and $267.6 million reserve fund
balance, for a combined 12.9% of fiscal 2007 revenues. In late January
2008, the state cut the biennial general fund forecast by nearly $400
million and recognized the increased responsibility associated with the
local school support tax, which is part of the state's primary and
secondary school funding formula. In total, the current biennial
shortfall approximates $541.6 million. Although the sales tax projection
was reduced for the biennium, the state currently expects collections to
be down just 1.1% from in fiscal 2008 from fiscal 2007, before
rebounding by 5.8% in fiscal 2009, reflective largely of current and
anticipated commercial construction activity. Total general fund
receipts are now expected to decline 0.5% in fiscal 2008, before rising
5% in fiscal 2009. Through January, sales tax receipts were down 3.4%
from a year ago.
The governor responded by ordering agency spending reductions and
intends to seek legislative approval to use of $232 million of the
reserve. Based on available projections, the state anticipates ending
the biennium with a $177.3 million general fund and a $71.6 million
reserve fund balance, for a combined 7.6% of expected fiscal 2009
revenues. However, the state anticipates a further downward revision to
the revenue estimates; the new estimates are not yet available. The
legislature will next regularly convene in February 2009. A special
session can be called by the governor, but to-date the governor has
ruled out such action. Although the state can take additional corrective
measures -- the governor can implement more cuts without legislative
approval -- to offset further revenue losses and restore structural
balance, additional state reserves are limited.
Each series of the bonds are general obligations of the state, and the
state's full faith and credit are pledged. The state's total GO bonds
are limited obligations, as the constitution provides for an annual
property tax, 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. The state's tax rate
entirely dedicated to debt service is $0.17, of which $0.02 is exempt
from the $3.64 limit and state law includes a permanent appropriation
for such payment. With over 40% of state GO debt being self-supporting
from program revenues, debt ratios are moderate as net tax-supported
debt equates to about $2.2 billion, or 2.2% of 2006 personal income. The
state's pension system was 77.2% funded as of June 30, 2007.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
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