Fitch Rates New Hampshire's $89.7MM Bonds 'AA'; Stable Outlook

Business Wire, March 10, 2008

NEW YORK -- Fitch Ratings has assigned an 'AA' rating to the State of New Hampshire's approximately $59.7 million general obligation (GO) refunding bonds, 2008 series A, and $30 million GO capital improvement bonds, 2008 series B. The bonds will sell competitively on Mar. 12. Fitch also affirms the 'AA' rating on New Hampshire's approximately $730 million outstanding GO bonds. The Rating Outlook is Stable.

The 'AA' reflects New Hampshire's economic strength and resiliency and excellent debt position. These strengths are offset partly by the state's dependence on volatile taxes. After a relatively brief downturn earlier this decade, job and healthier income growth returned and, after several years of operating deficits earlier in the decade, New Hampshire's fund balances have been increasing since fiscal 2003. The state's financial position could be pressured ultimately as the state continues to respond to a State Supreme Court decision on primary and secondary education funding and as the state, similar to the nation, faces a weakening economic environment.

New Hampshire has an excellent debt position, with debt amortizing quickly and either GO or guaranteed, except for turnpike revenue bonds. Following this issue, net tax-supported debt equates to approximately $730 million or only 1.4% of 2006 personal income, which reflects somewhat the historically limited role of state government. As of June 30, 2007 the state's pension system was only 63.4% funded and improving its actuarial position presents a spending pressure. To that end, the 2008 legislature is currently considering the report of a special commission charged with recommending ways to ensure the system's long-term viability.

New Hampshire's tax structure, specifically its lack of an income or general sales tax, differentiates it from all other states, except Alaska, and is a key influencer to its economy. The state relies on business, real estate, and excise taxes, as well as a statewide property tax, which replaced some local taxes and is dedicated solely to education. This unique tax structure is volatile, especially taxes on business profits, which are vulnerable to swings in the business cycle, and on real estate transfers, which are sensitive to housing market conditions. The recessions of the early 1990s and then the first few years of this decade led to operating deficits; however, the state rebounded to post moderate budgetary surpluses. Revenue collections for the fiscal 2004-2005 biennium were led by strong business and real estate transfer tax collections and the state ended with combined fund balances of nearly $100 million or 4.6% of revenues. Business tax collections continued the trend throughout the fiscal 2006-2007 biennium, yet the real estate transfer tax weakened notably, particularly in fiscal 2007, as receipts were 13.4% below prior year collections. Nevertheless, with an austere budget - expenditures for the fiscal 2006-2007 biennium grew less than 1% - the state ended the biennium with combined fund balances of $150.7 million or 6.6% of fiscal 2007 revenues.

The adopted fiscal 2008-2009 budget positioned the state to end on June 30, 2009, with combined fund balances of $129.3 million or 5.2% of fiscal 2009 anticipated revenues. The budget, which contained a tobacco tax increase, relied on total fiscal 2008 and 2009 general and education fund revenues to increase 5.4% and 3.2%, respectively. Reflective in part of the state meeting employee salary and benefit requirements, as well as rising retiree costs, the general and education fund biennial appropriations rise 11.4% from the fiscal 2006-2007 budget. More recently, the state forecasted a $50 million revenue shortfall for fiscal 2008, as the real estate transfer tax and the business enterprise tax, among other sources, were 13.5% and 11.4%, respectively below estimate through February 2008. Total revenues were $11.7 million or 3.8% below estimate through the same period. Recognizing weakening revenue collections, the governor ordered budget reductions and spending freezes to offset the shortfall. A revenue shortfall is projected for fiscal 2009, but the total amount and the state's response are preliminary.

The state continues to address State Supreme Court decisions regarding primary and secondary education funding. The 2007 legislature defined an adequate education and charged a special legislative committee to determine the cost. The committee has since reported and its recommendations, in the form of legislation, are now being considered by the 2008 legislature. In 1997 the court placed the responsibility for adequate education on the state. The state responded with the statewide property tax, increases in various taxes, including cigarette and real estate, and a new car rental tax, among other revenue enhancements.

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, as the economy continues to benefit from the expansion of Boston suburbs into New Hampshire and growth in the trade, transportation, and utilities and services sectors. The state experienced modest overall job growth of 1.4% and 0.5% in 2005 and 2006, respectively, and gains continued throughout 2007, with employment up 0.9% in December 2007 compared to December 2006, matching the national rate of expansion. Per capita income for 2006 was 108% of the nation's, ranking New Hampshire seventh among the states.