DALLAS -- South Dakota won a second triple-A rating as Fitch Ratings upgraded the state's issuer default rating one notch to AAA citing ample reserve balances and history of maintaining budgetary balance.
In connection, Fitch upgraded to AA-plus from AA $134 million of bonds issued for the vocational education program under the South Dakota Health and Educational Facilities Authority as well as $4.5 million of South Dakota Building Authority revenue bonds. Fitch's move comes after S&P Global Ratings raised its issuer credit rating to AAA in May 2015.
Moody's Investors Service, which doesn't have an issuer rating on South Dakota, upgraded its lease-revenue debt one notch to Aa1 in February.
Fitch attributed this week's upgrade to South Dakota's "consistently conservative fiscal operations" and noted South Dakota's tax structure saying "revenues in South Dakota have generally exhibited less sensitivity to broader national economic cycles than those of other U.S. states."
The rating agency highlighted the state's recent record of low debt and a healthy pension system. The main pension system covering state and participating local employees is fully funded and the state carries no other post-employment benefit obligations.
"These types of upgrades demonstrate our state's exceptional credit worthiness to financial markets," Gov. Dennis Daugaard said in a statement. "We've worked hard to place our state on a firm financial footing, and that stewardship is paying dividends."
Fitch says South Dakota's willingness to make cuts to spending in order to maintain structural balance and recent financial practice improvements added to the state's strengths.
A broad-based sales tax is South Dakota's dominant tax revenue source. As of fiscal 2017, when the rate rises to 4.5%, from 4%, about two-thirds of general fund receipts will come from sales taxes.
South Dakota's primary expenditure commitments are for education and health and human services, including Medicaid. Support for K-12 schools is the bulk of education spending, including both direct aid as well as funds for property tax relief. The state's support for schools will rise further beginning in fiscal 2017 with planned teacher salary increases funded from the sales tax rate increase.
The state's budget reserve fund receives unobligated general fund cash and held a balance of $99 million as of May 2016, equal to 6.7% of forecasted fiscal 2016 general fund revenues. Additionally, a general revenue replacement fund is also available to cover year-end revenue shortfalls. Its balance stands at $44 million, equal to 2.9% of general fund revenues.
