2008-07-30 23:49:04 -

- Fitch Ratings assigns an 'AA+' rating to $200 million state of North Carolina capital improvement limited obligation bonds, series 2008A. The bonds, expected August 13 via competitive bid, will be due May 1, 2010-2029 and will be subject to optional redemption at par beginning May 1, 2018. Fitch also affirms the 'AA+' rating on $1.2 billion in outstanding state

of North Carolina appropriation-backed debt. The Rating Outlook is Stable.

The 'AA+' rating on debt backed by state of North Carolina appropriation reflects the state of North Carolina's general credit standing, sound structures and centralized oversight of appropriation debt. The security for the bonds will be annual payments made by the state, subject to appropriation. The governor covenants to include debt service payments in the budget. Appropriation debt is legislatively authorized and approved by the council of state, comprising all statewide elected officials, including the treasurer, who oversees debt issuance. A statutory debt affordability planning process encompasses appropriation debt, and by practice the state budgets one line item for general obligation (GO) and appropriation debt service. Proceeds of the sale will be used for higher education, conservation, correctional and other state facilities. The current sale is the first issuance of capital improvement limited obligations, which the state expects to use for appropriation-backed financing going forward.

North Carolina's 'AAA' GO bond rating reflects its moderate debt burden, conservative financial operations and long-term prospects for continued economic expansion and diversification. Tax-supported debt prior to the current sale totals $7.1 billion, 17% of which is appropriation-backed. The state's debt burden remains on the low end of moderate, at 2.3% of 2007 personal income. Amortization is above average with 63% of GO and appropriation debt due in ten years. About $2.3 billion in appropriation debt authorized prior to this sale. The state's major pension system is funded at an exceptionally high level, at 106% as of Dec. 31, 2006.

Financial operations are conservative, with the governor's powers including the ability to unilaterally reduce spending to maintain budget balance, after making provision for debt service. Fiscal 2008 tax revenue growth slowed from the rapid pace of prior years, rising 0.7%, to $18.9 billion, compared to a 9.9% increase in the prior year. Net of rate changes, tax revenues rose 4%. Individual income tax collections rose 3.8% in fiscal 2008, versus 11.8% the prior year; net of tax changes, growth was 5%. Sales tax collections in fiscal 2008 were flat, while base growth was 1.5%. The state estimates that the fiscal year ended with a budgetary reserve fund balance of $960 million, equal to 4.8% of general fund revenues. This includes $787 million in the rainy day fund, which measures 3.8% of prior year spending; the statutory target is 8%.

The mid-biennium budget adjustments for fiscal year 2009, passed in mid July, forecast general fund tax revenues rising 5.2%, to $19.8 billion; growth net of taxes is 3.6%. Individual income tax collections are expected to rise 4.2%, with base growth of 4.1%. Sales tax collections rise 7.7%. However, growth is due to a three-year, phased-in takeover of county Medicaid obligations, offset by a portion of local sales taxes being transferred to the state, which was approved last year as part of the original biennium budget. Net of these changes, sales tax growth is expected to be 3.2%. The mid-biennium adjustments increased appropriations 3.2%, with the bulk of gains for education. Appropriations are balanced with total revenues, at $21.4 billion.

North Carolina's economy has grown significantly in recent years in size and diversity; although the economy is now slowing, growth continues well above national averages. Employment in North Carolina rose 2.6% in 2007 over the prior year, versus 1.1% for the U.S. June 2008 employment has slowed to 0.6% year-over-year, compared to a U.S. decline of 0.1% for the same period. Services continue to lead employment gains, with education and health up 3.3% and professional and business services up 1.1%. Manufacturing is down 3%, with particularly severe losses in textile-related subsectors. The residential housing slowdown appears to be less acute in North Carolina than in many other states. Nonetheless, construction employment is now declining, and financial activities is off 0.7% from last year. Measured by per capita personal income, North Carolina is below average at 87% of the U.S. level, ranking 36th among the states.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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