Fitch Ratings assigns an 'AA+' rating to the following general
obligation (GO) bonds of the State of Montana:
--$9,575,000 GO long-range building program refunding bonds,
series 2015A.
The bonds are expected to sell via negotiated sale on or about
April 7, 2015.
The Rating Outlook is Stable.
SECURITY
General obligations of the state to which the full faith, credit
and taxing power of the state are pledged to the payment of
principal and interest.
KEY RATING DRIVERS
HIGH BALANCES: The state benefits from very high trust fund
balances and a practice of carrying solid ending budgetary fund
balances, helping to offset the cyclicality inherent in its
resource-based economy and tax revenue system.
CONSERVATIVE FISCAL MANAGEMENT: A longstanding conservative
approach to fiscal management and a decade of strong revenue gains
have enabled the state to build balances and simultaneously address
longstanding spending needs, including education and pensions.
Unexpected spending demands, including from litigation, have
affected the state in the past.
GREATER DIVERSIFICATION: Despite the preeminence of energy,
mining and forestry, the state's economy continues to diversify,
particularly into services. Natural resources sectors are subject
to volatility.
LOW DEBT: The state's net tax-supported debt burden is low, and
debt issuance practices are conservative.
PENSION REFORMS: Major pension funded ratios have begun to
improve with extensive state actions to reform benefits and
increase contributions.
RATING SENSITIVITIES
CONTINUED CONSERVATIVE MANAGEMENT: The rating is sensitive to
the state's continued conservative approach to fiscal and debt
management.
CREDIT PROFILE
The state's 'AA+' GO rating is based on its conservative
financial practices, low debt burden and growing economic
diversity. Although Montana's large natural resource sector is
inherently volatile, the sector's relative strength over most of
the last decade helped to cushion the state during the last
recession and has augmented state balances during the recovery.
Broad growth continues despite more recent natural resource
weakness.
Montana's approach to fiscal and debt management is
conservative, and the state has taken prompt action to address
fiscal challenges, including revenue weakness during the last
downturn. Maintenance of high general fund and trust fund balances
is a key credit strength given past volatility and the absence of a
formal rainy day fund mechanism. In the 2013 legislative session
the state adopted extensive reforms to address pension system
weakness, including funding increases and benefit reforms. Although
portions of the reforms have been subject to litigation, the
state's proactive approach in working to address pension challenges
has been a credit strength.
CONSERVATIVE FISCAL MANAGEMENT
Montana fiscal management is generally conservative, with the
state budgeting sizable ending fund balances as a cushion against
unexpected revenue weakness or to address other unexpected needs.
With the exception of fiscal years 2009 and 2010, revenue growth
has been generally strong for a decade. The fiscal 2012-2013
biennium, which ended on June 30, 2013, was originally forecast to
close with a general fund balance of $150.4 million, or 8.1% of
forecast fiscal 2013 revenues at the time. Revenue over-performance
thereafter, particularly in personal and corporate income taxes,
enlarged the final fiscal 2013 ending balance to $537.3 million,
about 25.9% of fiscal 2013 revenues. Total general fund revenues of
nearly $2.1 billion were 11% higher than fiscal 2012.
The enacted budget for the state's fiscal 2014-2015 biennium,
which ends on June 30, 2015, conservatively forecasted much slower
revenue growth during fiscal 2014 and 2015. Fiscal 2014 general
fund revenues were forecasted to fall 1.1%, to $2.06 billion,
reflecting in part the stronger actual fiscal 2013 revenue
performance compared to the forecast in place at the time of budget
adoption. Actual revenues ended slightly stronger, at $2.08
billion, nearly matching actual revenues in fiscal 2013. Excluding
one-time disbursements, fiscal 2014 ended in structural balance,
with a remaining fund balance of $426.9 million, equal to 20.6% of
fiscal 2014 revenues.
Fiscal 2015 general fund revenues in the enacted budget were
forecast to rise 3.9%, to $2.14 billion. As of the governor's
executive budget for the fiscal 2016-2017 biennium, the forecast
remains almost unchanged.
General fund disbursements, which were originally forecast to
fall 1.8%, to $2.17 billion, are now forecast to rise 1.8%, to
$2.23 billion, and the biennium would end with a reserve of $343.3
million, equal to 16% of general fund revenues; at budget adoption,
the state estimated the biennium ending balance at $310 million.
Actual revenue collections year to date appear solid despite the
slowdown in the resource sector; cumulative fiscal 2015 general
fund revenue collections reported by the department of revenue are
8.8% ahead of last year, while cumulative oil and gas production
tax collections are 5.3% ahead of last year.
The budget for the fiscal 2016-2017 biennium is currently under
deliberation in the state's legislature. The governor's executive
proposal, released late last year, forecasts general fund revenues
rising 7% in fiscal 2016 and 6.1% in fiscal 2017, to $2.29 billion
and $2.43 billion, respectively. Proposed disbursements would rise
5.6% in fiscal 2016 and 2.8% in fiscal 2017, to $2.35 billion and
$2.42 billion, respectively. The proposal forecasts sizable ending
fund balances, at $285.4 million in fiscal 2016 and $300 million in
fiscal 2017, equal to 12.4% and 12.3% of general fund revenues in
fiscal 2016 and 2017, respectively.
SIZABLE TRUST FUND BALANCES
In addition to the state's practice of budgeting sizable ending
fund balances, several sizable trust funds are maintained by the
state, which Fitch believes enhance the state's fiscal stability in
the absence of a formal rainy day fund mechanism. The trusts
support spending that would otherwise fall to other general fund
resources, and could provide flexibility in an extreme emergency.
The largest fund, the coal severance tax trust, held just over $1
billion at fiscal year-end 2014. The fund receives one-half of coal
extraction taxes, and the corpus cannot be used without approval by
three-quarters of the state's legislature. A portion of the
interest on the fund flows to the state's general fund. Three other
trusts totaled a combined $935 million at fiscal year-end 2014,
with funds dedicated to various purposes including health care
services and natural resources.
Additionally, a fiscal 2013 supplemental budget established a
fire suppression fund, which although not a formal trust fund, is
viewed by Fitch as reducing a longstanding financial risk to the
state. Following deposits in 2013 and 2014, the fund's current
balance is $42.5 million; it has a statutory cap of $100
million.
ECONOMIC GROWTH SLOW BUT CONTINUING
Montana's economy has been gradually diversifying although it
maintains large and important resource-related sectors that are
prone to sharper cyclicality tied to global resource trends. Since
the recession, the economy has generally maintained a growth
posture, although employment declines in the resource sector
through 2014 and in some other key service sectors in the second
half of calendar 2014 has slowed the state's overall growth.
In 2012 and 2013, employment in the state rose 2.1% and 1.9%,
respectively, ahead of the 1.7% growth recorded nationally in both
years. Employment in 2014 rose only 0.1%, compared to 1.9%
nationally, and February 2015 employment is up 0.3% on a
preliminary basis.
Mining and logging recorded a decline of 2.1% in 2014 and 1.1%
in February 2015. Services overall continue to grow, with declines
in government and in education and health partly offsetting growth
in professional and business services. Unemployment continues to
trend well under national rates, most recently at 4.3% in February
2015, compared to 5.5% nationally. The state is less wealthy than
average, with 2014 preliminary personal income per capita at 88% of
the U.S. level, ranked 36th among the states.
CONSERVATIVE APPROACH TO DEBT AND PENSIONS
The state's approach to liabilities is conservative. It carries
a low burden of tax-supported debt, at 0.6% of 2014 personal
income, amortization is rapid, and the state has a history of
limiting debt issuance. Fitch calculates net tax supported debt at
approximately $259.8 million as of February 2015, of which about
43% is GO bonds. Through two state entities, the Montana Board of
Investments and the Montana Facilities Finance Authority, the state
maintains debt programs for local government and health facility
loans that are well managed and have not needed to draw on state
resources available as a back-up security. As of Fitch's 2014 state
pension report, net tax-supported debt and unfunded liabilities
attributable to the state equaled 4.9% of personal income, below
the 6.1% median for the states.
The state has taken action through several rounds of pension
reforms in recent years to improve the funded condition of its two
largest pension systems, covering public employees and teachers.
The 2013 legislature passed extensive pension reforms adjusting
benefits and increasing contributions to improve the plans'
actuarial sustainability going forward; the net effect of all the
reforms was to bring the plans' amortization periods to 14.5 years
for public employees and 20 years for teachers. Changes in the COLA
provisions have been challenged in court, with the state expecting
plaintiffs to prevail; other reforms have not been subject to
litigation.
As of their 2014 actuarial valuations (June 30 for public
employees and July 1 for teachers), their reported actuarial funded
ratios were 74.4% and 65.5%, respectively. These figures exclude
reforms subject to the litigation noted above; despite excluding a
portion of reforms, both plans are currently expected to amortize
their unfunded liabilities within 30 years. Using Fitch's more
conservative investment return assumption (7%, compared to 7.75%
used by the plans), the two systems would be funded at 68.7% and
60.5%, respectively.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', Aug.
14, 2012;
--'Pension Pressures Continue, 2014 State Pension Report', May
14, 2014.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Pension Pressures Continue (2014 State Pension Update)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747605
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982132
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Fitch RatingsPrimary AnalystDouglas OffermanSenior
Director+1-212-908-0889Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystMarcy BlockSenior
Director+1-212-908-0239orCommittee ChairpersonKaren KropSenior
Director+1-212-908-0661orMedia Relations:Elizabeth Fogerty,
+1-212-908-0526elizabeth.fogerty@fitchratings.com