|[September 19, 2013]
Fitch Rates Alabama Public School and College Authority's $103MM Bonds 'AA+'
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'AA+' rating to the following bonds of the
Alabama Public School and College Authority (the authority):
--$80 million capital improvement pool bonds, series 2013-C;
--$23.195 million capital improvement pool bonds, series 2013-D.
The bonds are expected to sell via competitive bid on or about Oct. 2,
2013. Fitch also affirms the 'AA+' rating on the authority's $1.44
billion outstanding capital improvement pool and qualified school bonds.
The Rating Outlook is Stable.
Limited obligation payable from pledged revenues, primarily sales and
use taxes. Each bond series is subordinate to prior issues; once issued,
the 2013 C & D bonds will occupy the 14th lien position respecting the
KEY RATING DRIVERS
PRIMARY STATE FUNCTION: Although not a general obligation (GO) pledge,
pledged revenues include major state revenue sources, including the
sales tax, and finance a major state responsibility - K-12 and higher
education. As such, the bonds are rated on par with the state's GO
bonds. Financing of education is centralized at the state level.
STRONG DEBT SERVICE COVERAGE: Pledged revenues provide ample coverage of
debt service requirements both on an annual and max annual basis.
SPENDING CONTROLS: Balanced financial operations reflect the statutory
requirement to balance the budget with across-the-board appropriation
reductions if revenues fall short; debt service is excluded.
SLOW GROWTH IN ECONOMY: The trend in Alabama's economy is toward more
diversification although it retains a sizeable manufacturing base. There
is an on-going positive shift from low paying textile and apparel jobs
to higher paying durable subsectors including automobile and aerospace
CHANGE IN STATE GO RATING: Although not specifically linked to the GO
bond rating, a change in the overall credit environment in the state
would likely lead to a change in the authority's ratings.
REDUCTION IN DEBT SERVICE COVERAGE: The rating is sensitive to changes
in debt service coverage, either due to significant fluctuation in
pledged revenues, excessive leveraging of the pledged revenues, or
statutory changes that reduce pledged revenues.
The rating reflects ample coverage of debt service by pledged revenues,
the strength of the pledged revenues, which include major state revenue
sources, and the core nature of the activities being financed - K-12 and
higher education, as well as the strong budget controls exhibited by the
state and its overall strong credit quality.
The authority provides capital financing for public education in
Alabama, and, with $2.4 billion of debt outstanding, is the most active
debt issuer of the several authorities that issue debt in the state. The
authority members are the governor, the state superintendent of
education, and the director of finance, indicating the importance of
this financing mechanism and the role of the state in education.
BROAD BASED TAXES ARE PLEDGED
The bonds are a limited obligation of the authority payable from pledged
revenues, which include statewide sales, use, lease, utility gross
receipts and utility service use taxes. Pledged revenues not needed for
debt service are deposited into the state Treasury to the credit of the
Education Trust Fund (ETF), a special fund of the state that is the
largest operating fund into which taxes and revenues are deposited. The
ETF funds K-12 and higher education as well as smaller education,
health, library and other programs. Each bond series has its own
separate lien on pledged revenues subordinate to prior issues; once
issued, the 2013 C & D bonds will occupy a 14th lien position respecting
the pledged revenues. Given the ample coverage of debt service by
pledged revenues, discussed further below, the subordinate status is not
a rating factor.
While the authority bonds are not general obligations of th state, the
rating does reflect the state's general credit quality as pledged
revenues include major state revenue sources and finance a central state
responsibility. Alabama has extensive earmarking of taxes and uses
special obligations for nearly all of its capital needs. The general
fund is minor in state operations as is debt issued against it. State
general obligation bonds are rated 'AA+' by Fitch based on the state's
longer term trend toward a more diversified economy despite a severe
downturn in manufacturing, strong spending controls which contribute to
balanced operations, and manageable debt levels.
AMPLE DEBT SERVICE COVERAGE
Pledged revenues provide ample coverage of debt service requirements
both on an annual and maximum annual basis. Fiscal year 2012 revenues of
$2.2 billion provide 7.7 times (x) coverage of maximum annual debt
service. Revenue growth was modest year-over-year at 2.7% in fiscal
2012. Revenue growth is expected to be relatively flat in fiscal year
2013 (ends Sept. 30). Future revenues will be marginally reduced
following passage of the Alabama Accountability Act in March 2013 that
created income tax credits for a school choice program that will be
credited against the sales tax that flows to the ETF.
The series 2013-C & D bonds are being issued to finance school
renovations in areas damaged by tornadoes in 2011 and 2012, equipment
for local boards of education, and loans to local boards of education.
The authority issues bonds to provide loans to local school boards for
capital projects under a pooled approach that allows capital funds of
the state to be leveraged rather than being limited to support pay as
you go financing. The authority also issues capital outlay bonds for
capital improvements to public schools and institutions of higher
education with proceeds considered grants to recipients. Overall debt
levels in the state are at the low end of the moderate range, with tax
supported debt equal to 2.3% of 2012 personal income.
STRONG FINANCIAL CONTROLS
State financial operations, including the ETF, benefit from strong
spending controls, with a constitutional requirement to make
across-the-board appropriation reductions (proration) when a deficit is
projected in one of several funds. Debt service is not subject to
proration. This device has been implemented several times, including in
fiscal year 2009, when weak revenue performance necessitated a 17.9%
reduction in education appropriations, in fiscal year 2010, when a 9.5%
proration was declared, and then again in fiscal year 2011 with a 3%
proration. By depleting its education rainy day fund, the state was able
to limit the fiscal 2009 reduction to 11%. The state is projecting a
sizeable surplus in the ETF for fiscal 2013. It expects to make a $245
million repayment to the rainy day fund and is on schedule to repay the
draw on the rainy day fund by fiscal 2015.
In an attempt to minimize the unpredictability of mid-year reductions in
education funding, in 2011, the state enacted legislation to create a
new budget stabilization fund for education that will be used to offset
future proration. The legislation limits future education appropriations
to the 15-year rolling average of ETF revenues and deposits any excess
revenues into a new ETF budget stabilization fund, after first repaying
the fiscal 2009 draw on the rainy day fund.
MANUFACTURING BASED ECONOMY
Alabama's economy was historically dominated by agriculture, natural
resource extraction, and manufacturing, including textiles and iron and
steel production. Today, the state still depends more heavily on
manufacturing relative to the national average, but manufacturing has
shifted away from textiles and apparel, particularly to the automotive
sector. This sector was hard hit in the recent recession, but the
foreign-owned automakers in the state, including Honda (News - Alert), Hyundai, and
Daimler AG, continue to invest and produce in Alabama and there recent
employment growth in the sector is strong (greater than 10% growth in 11
of the past 12 months, +5.6% year-over-year growth as of July 2013).
Further, auto supplier activity is expected to grow as assembly plants
open near the Georgia border.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report
'Tax-Supported Rating Criteria', this action was additionally informed
by information from IHS (News - Alert) Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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