|[June 26, 2014]
Fitch Rates $554.52MM Alabama Public School and College Authority Bonds 'AA+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'AA+' rating to the following bonds of the
Alabama Public School and College Authority (the Authority):
--$554.52 million capital improvement pool refunding bonds, series
The bonds are expected to sell via competitive bid on or about July 1,
2014. Fitch also affirms the 'AA+' rating on $1.26 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 2014-B 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 maximum 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 from this
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 PSCA rating.
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 $2.3 billion of debt outstanding (as of Sept. 30,
2013), 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 isues; once
issued, the 2014-B 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
While the authority bonds are not general obligations of the 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 has a minor role in state operations and only a modest amount of
debt issued against it. State GO bonds are rated 'AA+' by Fitch based on
the state's longer term trend toward a more diversified economy despite
a severe recessionary downturn in manufacturing, strong spending
controls which contribute to balanced operations, and manageable debt
AMPLE DEBT SERVICE COVERAGE
Pledged revenues provide ample coverage of debt service requirements
both on an annual and maximum annual basis. Fiscal year 2013 revenues of
$2.1 billion provide 7.5x coverage of maximum annual debt service.
Pledged revenue declined 3.4% in fiscal 2013 as anticipated, reflecting
modest growth in revenues offset by a new school voucher related tax
credit associated with the Alabama Accountability Act. The state
forecasts modest revenue growth for fiscal year 2014 (ends Sept. 30).
The series 2014-B bonds are being issued to refund outstanding debt for
present value savings. 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 2.2% of 2013 personal
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, called '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,
particularly through the most recent recession. The state generated a
sizeable surplus in the ETF in fiscal 2013, allowing it to make a $260
million repayment to the rainy day fund at the end of the year. It 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. Motor vehicle
manufacturing employment expanded over 10% per month between July 2012
and July 2013, although recent growth has been slightly slower. Further,
auto supplier activity continues to grow as anticipated, as assembly
plants open near the Georgia border. Employment in this sector has
almost doubled since June 2010.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the report
'Tax-Supported Rating Criteria', this action was additionally informed
by information from IHS (News - Alert) Global Insight.
Applicable Criteria and Related Research:
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
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