BRADENTON, Fla. — Standard & Poor’s last week revised its outlook on Tennessee’s AA-plus general obligation bond rating to positive from stable, citing an economic recovery that could result in a third gilt-edged rating.
The action affects $1.85 billion of outstanding GOs.
The outlook change is based on the rebound of key tax revenues, adequate reserves, cost-containment measures, a low debt burden, and new jobs in the auto sector, according to analyst Theodore Chapman.
The state’s financial position should strengthen as the economic recovery gains momentum, analysts said.
“Tennessee’s economy, in our opinion, has the potential to remain resilient despite still-soft U.S. economic conditions,” Chapman said. “Should the state be successful in meeting its forecast, all other things equal, we believe a AAA rating would be achievable.”
Economists expect the state’s unemployment rate, which was 9.5% in March, to slowly drop this year and fall sharply in 2012 and beyond, he said.
Tennessee is one of a few states that do not have a personal income tax supporting their budgets, and the state suffered from declining key sales, franchise, and excise taxes that led to budget shortfalls and use of rainy-day reserves during the recession.
State officials responded by implementing base budget reductions, cutting thousands of state jobs, using federal stimulus funds, and planning to replenish reserves.
“The state, however, at no time had cash-flow problems that led to cash-flow borrowing, deferral of payments to local governments, or other alternative strategies,” Chapman said. “The long-term financial plan in the fiscal 2012 budget proposes to rebuild reserves to more healthy levels while still demonstrating active cost-containment measures.”
Tennessee’s real estate market generally has been more resilient than many other states, Chapman said, with rates of distressed mortgages and foreclosures remaining at or below half of U.S. averages.
In addition to strong financial management practices, the state has funded 100% of its annual required pension contribution for more than 30 years.
The consolidated retirement system’s pension obligation was just over 90% funded.
According to the latest actuarial study in 2009, the state had $2.72 billion in unfunded actuarial accrued pension liabilities along with $1.3 billion in unfunded accrued other post-employment benefits liabilities.
Tennessee’s GO bonds are rated Aaa by Moody’s Investors Service and AAA by Fitch Ratings.