Bond Rating Agencies raise red flags, but keep NH rating high

By Grant Bosse on July 13, 2010
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(CONCORD) The nation’s three largest bond rating agencies have held New Hampshire’s rating steady, while raising warning flags about the state’s deteriorating budget situation and unfunded pension obligations. As New Hampshire prepares to borrow $44 million to make this year’s debt payments, Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings all maintained the state’s above average ratings, both for this bond issue and the state’s long-term outlook.

Standard & Poor’s affirmed the state’s AA/Stable rating based on “the state’s strong income levels and relatively low unemployment, and low debt burden. Moody’s maintained a Aa1 rating because of New Hampshire’s “fundamentally strong state economy that has outperformed the nation during the current downturn” and its “wealthy demographic profile.” Fitch’s rating of AA+ reflected “New Hampshire’s economic strength and resiliency and conservative debt position.”

Warning Signs
But all three agencies included stark warning about the continued use of one-time budget fixes and reliance on speculative sources of money. Standard and Poor’s didn’t like the state’s decision to wipe out the Rainy Day Fund.

“These strengths are somewhat offset in our view by New Hampshire’s:

  • Significant decline in reserves for fiscal 2009, which brought the unreserved general fund balance to less than 1% of expenditures; and
  • Low pension funding level, which, while currently at 58%, is well below most other states’ pension funding.”

Moody’s summed up New Hampshire’s “Credit Challenges”.

“-Gap closing plan for biennium (2010-2011) includes significant one-time solutions that may be difficult to realize. Failure to realize these windfalls would cause currently projected gap to widen.
-Significant reliance on non-recurring solutions to solve budget gap may result in future fiscal strain, especially if economic recovery is delayed or weaker than expected.
-Pension funding levels are declining and below average.
-An adverse court decision reversed a New Hampshire Medical Malpractice Joint Underwriting Association (JUA) fund transfer, causing the spending down of nearly all of the state’s reserves in 2009 and projected depletion of reserves in 2010.
-Limited flexibility to reduce expenditures given high degree of fixed costs.”

Mixed Reviews of Budget Fix
Standard and Poor’s was skeptical about the $295 million budget fix approved by the Legislature in a Special Session last month.

“The plan includes a drawdown of the state’s rainy-day fund to $0 at the end of fiscal 2010 before rebuilding it to $14.6 million at the end of fiscal 2011, which we consider relatively thin.”

It also questioned the use of revenues that may or may not materialize to balance the budget, including $48 million from the Federal Medicaid Assistance Program which has already been voted down in the House and Senate.

“We believe this assumption introduces some risk if the extension is not authorized, and while we believe the state will adjust in a timely manner if it is not authorized, doing so will require making difficult decisions.”

Moody’s highlighted the loss of federal stimulus money, counting on $60 million from the sale of as-yet-unidentified state assets, and the questionable FMAP funds.

“Failure to realize these one-time windfalls would reopen a sizeable gap in the coming fiscal year, which could be exacerbated pending the outcome of a court challenge to the state’s reduction of its share of local pension costs. Moody’s Aa1 rating and stable outlook incorporate our expectation that projected gaps will not grow beyond current projections, and that management will take steps to begin to restore structurally balanced operations. Widening of projected gaps for fiscal 2011 and/or failure to reduce reliance on one-time budget solutions may cause credit quality to decline.” (Emphasis added)

Fitch also took notice of the questionable assumptions that made up the $295 budget package.

“Some uncertainty remains in the budget as the gap closing measures also included an assumption that the enhanced federal match for Medicaid (FMAP) will be extended as well as $60 million in as yet unidentified asset sales.”

Signs of Strength
New Hampshire’s strong economy, relative to New England and the nation, and its traditionally conservative approach to borrowing, drew praise from Standard and Poor’s.

“In our opinion, the state’s debt burden is low. The new general fund debt is less than $1,000 per capita and less than 1% of true value.”

Moody’s also praised the Granite State’s conservative debt policies.

“In 2009, net-tax supported debt equaled 1.3% of total personal income, ranking 41st among the 50 states and remaining below Moody’s state median of 2.5%. Debt per capita of $525 was also below the Moody’s state median of $865.”

Moody’s emphasized economic strength outside of government policy.

“New Hampshire’s economy benefits from high education levels, a low tax burden, and close proximity to the Boston area economy. Additionally, the state has a large health care and education sector, including large employers Dartmouth College (rated Aa1 by Moody’s) and Dartmouth Hitchcock Medical Center. High technology industries have a strong presence in New Hampshire, particularly in the southern portion of the state.”

Fitch echoes New Hampshire’s fundamental economic strengths.

“New Hampshire is a prosperous state that has shifted rapidly from manufacturing to services, as its economy has become more like the nation’s. The state’s population and job growth have generally outpaced New England’s since 1980, benefiting from the expansion of the Boston suburbs into New Hampshire and growth in the trade, transportation, and utilities and other services sectors.”

Unfunded Pensions
All three agencies saved their loudest alarms for the state’s underfunded pension system.  Standard and Poor’s notes that nearly half of New Hampshire pension liability is unfunded.

“As of June 2009, the unfunded pension liability was $3.54 billion, a funded ratio of 58.3%. This funded ratio is low compared to other states’ ratios, and represents a large long-term fixed cost that will likely pressure the operating budget.”

Moody’s calculates that other post-employment benefits, which are not included in the state’s official pension liability, are also a cause of long-term concern.

“The state reports a June 30, 2008 other post-employment benefits (OPEB) unfunded actuarial accrued liability of $2.5 billion, high for a small state such as New Hampshire. The liability is entirely unfunded and the state had not created a trust to fund the liability.”

Fitch notes the rapid deterioration of the state pension system in recent years.

“Funding of the state’s pension system has declined significantly over the past decade. As of June 30, 2009 the state pension system funded ratio was 58.3%, down from 89.9% in 2000.”

New Hampshire’s $44.3 million bond goes to market tomorrow.
S&P Rating Writeup July 2010

Moody’s July 2010

Fitch Restructure Final Rating Press Release

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