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Fitch Affirms Maine's GOs at 'AA+'; Outlook Revised to Negative
Feb 15, 2012 (Close-Up Media via COMTEX) --
In the course of routine surveillance, Fitch Ratings takes action on the state of Maine's general obligation (GO) bonds.
In a release, Fitch noted details:
--Approximately $500 million GO bonds affirmed at 'AA+'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are GOs of the state to which its full faith, credit, and taxing power are pledged. Constitutional provisions provide for the payment of GO principal and interest from first general fund revenues should the debt service appropriation not be sufficient.
KEY RATING DRIVERS
NEGATIVE CREDIT TREND: The revision of the Outlook to Negative from Stable reflects the state's reduced financial flexibility in the context of a below average economic recovery and challenging demographic profile. Financial margins are narrow and, following reserve depletion in the downturn, the state's current budget would not meaningfully bolster the reserve position.
CONSERVATIVE DEBT POSITION: Debt ratios remain low and amortization of GO bonds is rapid, with all principal maturing within 10 years. Recent changes to the pension system have reduced unfunded liabilities and, accordingly, lowered annual contribution requirements.
RESPONSIVE FINANCIAL MANAGEMENT: Frequent reviews of economic forecasts and financial projections allow the state to adjust to changing conditions. The state's active citizen initiative and referendum environment creates a level of operating and financial uncertainty, although tax-related initiatives over the past five years have not been successful.
SLOWLY GROWING BUT STABLE ECONOMY: While the state's economy has remained relatively stable compared to broader national trends, the recovery that is underway is sluggish as the manufacturing sector struggles to recoup losses.
WHAT COULD TRIGGER A RATING ACTION
Maintenance of the current rating level is dependent upon the state's ability to achieve balanced operations in the current biennium and meaningfully rebuild reserves depleted during the recession.
CREDIT PROFILE
Maine's 'AA+' GO bond rating reflects its low and rapidly amortizing debt burden, relative stability in the overall economy, and history of taking action to maintain budgetary balance. The Outlook revision to Negative from Stable reflects the state's narrow financial margins, difficulty in achieving budgetary balance, the pressures of an aging demographic profile, and an environment of slow emergence from the recession. It is Fitch's expectation that continued prudence in fiscal management will allow the state to maintain narrowly balanced financial operations despite spending pressures in education and health and human services in an environment of tax reductions.
Maine's economy has expanded from its traditional industries of manufacturing, natural resources and tourism, with gains in trade, education, and health services adding considerable stability to the employment base. Maine's economy is generally less volatile than the U.S. economy, even as it tends to grow more slowly. Leading into the recession, Maine's nonfarm employment grew by less than 1 percent per year between 2004 and 2007 compared to national increases between 1.1 percent and 1.8 percent per year. Job losses were more severe than the U.S. during the height of the recession, declining 5 percent in 2009 while U.S. nonfarm employment fell 4.4 percent; however, Maine began to rebound sooner, growing 1.1 percent in 2010 while U.S. nonfarm employment continued to shrink 0.8 percent. Recent performance has been weaker, with December 2011 nonfarm employment flat while the U.S. has continued expanding at 1.3 percent. Maine's unemployment rate typically is comfortably below the U.S. rate and was 82 percent of the U.S. rate in December at 7 percent. Gains and losses in personal income have paralleled the trends in Maine's employment, with modest income gains during the upswing and relative stability during the decline. The state ranked 31st among the states by measure of personal income per capita in 2010, equal to 92 percent of the U.S. level but is among the slowest growing coming out of the recession. Maine's median age is the oldest among the states, 42.2 years compared to 36 years for the U.S., contributing to uncertainty about future workforce growth.
Fiscal operations were challenged by declining revenues through the course of the recession, although frequent reviews of economic forecasts and financial projections allow the state to adjust to changing conditions. Revenue projections for both the fiscal 2008-2009 biennium and the 2010-2011 biennium were revised downward on several occasions, with pressure on sales and income taxes driving the modifications. In order to address the budget gaps resulting from these revenue declines, state officials took swift action to reduce spending, with service cuts, reductions in K-12 and higher education funding, modifications to Medicaid, other government streamlining, and ultimately, use of the state's reserve funds.
Although revenues rebounded in fiscal 2011, the current budget plan includes only limited rebuilding of reserves. The $6.1 billion fiscal 2012-13 biennial budget included $150 million in tax cuts, lower pension payments following pension reform described below, and a continued deferral of a voter initiated requirement for the state to cover 55 percent of the cost of K-12 education. Funding of Medicaid (Mainecare) in the budget has proven inadequate, resulting in $221 million gap to be addressed in the current and next fiscal year. The Governor has proposed extensive reform to close the gap, including, tightening eligibility for the senior prescription plan, lowering income limits for parents (to 133 percent from 200 percent), and eliminating coverage for childless adults. The state appropriations committee has sent to the house floor a supplemental budget that closes a portion of this gap, incorporating some of the changes the governor has proposed, with additional action expected. The administration expects to submit additional supplemental budget adjustments affecting the non-Medicaid portion of the budget.
Maine's debt ratios are low and amortization of GO bonds is rapid, with all principal due within 10 years. Debt is strongly secured by constitutional provisions requiring GO principal and interest to be a first charge on the general fund. Net tax-supported debt totals approximately $1 billion, equal to 2.2 percent of 2010 personal income, a debt ratio considered the low end of moderate. Funding levels for Maine's pension system have declined over the past 10 years to 66 percent as of June 30, 2010; however, recent changes to the pension plan, including a three-year freeze and subsequent cap on COLAs and an increase in the retirement age for new and non-vested employees, have reportedly reduced the unfunded liability by as much as 40 percent, although actuarial reports post-reform have yet to be released.
The initiative process remains active in Maine, especially for tax and expenditure limits. A taxpayer bill of rights initiative (TABOR II) was soundly defeated on the November 2009 ballot, enabling the state's previously enacted legislation to prevail. This legislation set expenditure limits while increasing education funding and property tax relief.
In accordance with Fitch's policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
More information:
fitchratings.com
((Comments on this story may be sent to newsdesk@closeupmedia.com))
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