Fitch Affirms Tennessee's AAA GO Rating

BRADENTON, Fla. - Fitch Ratings affirmed Tennessee's AAA general obligation bond rating citing the state's conservative debt profile, strong security provisions, and its full funding of its pension contributions over four decades.

The rating applies to $1.9 billion of outstanding GO bonds. The outlook is stable.

Tennessee's financial operations are conservative and consistently balanced, said the agency in a Dec. 10 report, though the state budget is largely reliant on sales taxes. Nine states do not have personal income taxes, including Tennessee, which only taxes dividend and interest income.

"The state retains considerable operating flexibility, including large and growing reserve balances," said Fitch analyst Douglas Offerman. "The state has a large manufacturing sector, which was a vulnerability in the last downturn, although the economy has returned to steady growth and continues to diversify."

Fitch also praised Tennessee for maintaining low debt levels, which are among the lowest of any state, and for the state's "ongoing commitment" to structural balance.

"Conservative fiscal management has been in evidence repeatedly over the last decade, including in its proactive approach to maintaining fiscal balance and preserving flexibility in the form of budget reserves," Offerman said. "The economy has registered generally steady growth through the recovery with sales tax revenue, the state's largest source of revenue, following suit."

The state repeatedly lowered base spending during the downturn while relying on one-time resources, including federal stimulus and state reserve balances, to maintain budgetary equilibrium, he said.

"Despite reserve draws, including recent draws to cover unanticipated Medicaid-related program costs, balances have continued to grow," he said.

Tennessee's vulnerabilities include its dependence on sales taxes, which make up 60% of revenue, as well prior year's expense growth in TennCare, the state's Medicaid program. Recent growth in the program has been well below national averages, according to Fitch.

The combined balance of the rainy day and TennCare reserves was $670.6 million as of as of June 30. The fiscal 2014 budget includes an additional $100 million deposit in the rainy day fund. TennCare and rainy day reserves are expected to be $770.6 million at year's end.

The state has met the full actuarially required employer contribution to its pension system each year since 1972. The Tennessee Consolidated Retirement System had a reported funded ratio of 92.1% system-wide as of July 1, 2011, the most recent actuarial valuation date, Fitch said.

Tennessee's GO bonds are rated Aaa by Moody's Investors Service and AA-plus by Standard & Poor's.

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