Fitch Rates Nevada Real Property Corp.'s LTGO Certificates 'AA'

The bonds are general obligations (GOs) of the state of Nevada, and, although paid from the state's general revenues, benefit from the limited tax pledge that secures all of the state's GO debt. Nevada's rating reflects the state's conservative debt position and historically responsive financial practices, as well as its success in managing economic growth and development. Nevada's debt is only a moderate burden on resources and positive financial operations after the last downturn allowed for the build-up of reserves and general fund surpluses. However, Nevada is among the states hardest hit by the national recession. Over the past year, employment declined almost as rapidly as it had been previously increasing, gaming and related tourist activities have declined, and the state leads the nation in housing value declines and mortgage delinquencies. The economic downturn has had a severe impact on the state's financial operations, with economically sensitive revenues falling dramatically. The state has responded to the financial stress with a significant increase in taxes and made legislative changes to shore up its now depleted rainy day fund.

Nevada's economy remains based on gaming and entertainment, with newer facilities broadening the concept of entertainment and providing some diversification. The economy has been characterized by rapid growth - and a correspondingly steep decline in the current recession - with the population expanding at an extraordinarily rapid rate, over 116% since 1990, compared with 22% for the U.S. This rapid growth had been matched by employment gains, and in particular, a surge in construction employment in the middle of this decade. The nature of the current recession, led by a housing market crash and declines in consumer spending, has had a particularly severe impact on the state. Non-farm employment in Nevada is now declining much faster than the national average, with a 6.1% decline year-over-year in the state versus the national decline of 4.2% in September. The unemployment rate, which had been lower than the national average for most of this decade, is now significantly higher at 13.3% in September; the U.S. rate was 9.8%. Nevada has lost almost 112,000 jobs in this recession, including almost 33,000 construction jobs. The leisure and hospitality sector has lost over 22,000 jobs (down 6.7% year-over-year in September). Visitor volume to Las Vegas decreased 4.4% in 2008 and is down a further 5.8% through August 2009. Occupancy rates are down and gaming revenues, which declined 2.4% in fiscal 2008, were down 14% in fiscal 2009.

There are some signs that, as with the national economy, Nevada's economy is beginning to stabilize. Existing home re-sales are up 52% this year to date as compared to last year; however, prices are down an average of 61%. The median price of new homes, while down 18% year-over-year, has risen for the past two months. The unemployment rate has continued to climb, but initial jobless claims are moderating. Further, the decline in visitor trends appears to be abating. The weak U.S. dollar is helping to attract international visitors. A major Las Vegas strip project, City Center, is slated to open this fall and is expected to provide 12,000 jobs, offsetting to some extent the related loss in construction jobs as this project nears completion. Other projects have largely been halted, delayed, and scaled back, however. The prospects for future growth in the state remain solid; however, there is a great deal of uncertainty in the near term.

The recession quickly weakened the state's financial position; the state faced a $1.5 billion budget gap as it progressed through the fiscal 2008-2009 biennium. The largest revenue source, the sales tax, fell 3.4% in fiscal 2008 and another 12.8% in fiscal 2009. Gaming revenues fell 6% in fiscal 2008 and another 15% in fiscal 2009. Final fiscal 2009 revenues were 22% below the original estimate used to build the budget. To close this gap, agency budgets were cut 4.5% by the Governor and then an additional 3.3% by the legislature; the state shifted from PAYGO capital, drained its rainy day fund and transferred $750 million from a variety of funds to the general fund. The state began the fiscal 2008-2009 biennium with a $138.4 million general fund balance and $267.6 million in its rainy day fund, for a combined 12.9% of fiscal 2007 revenues. It ended the biennium with a $214 million unappropriated general fund balance, or 7.8% of fiscal 2009 revenues.

The state faced an even larger expected gap in the budget for the fiscal 2010-2011 biennium, which began July 1, 2009, with forecast revenues $2.5 billion below what a current services budget would require and $1.3 billion below the $6.8 billion in appropriations bills passed by the legislature. Most revenues sources are expected to continue to decline in fiscal 2010, with the base sales tax projected to decline 5.2% before beginning to recover in fiscal 2011. Casino and gaming related revenues are projected to recover slightly in fiscal 2010. The state took significant action to close the gap with temporary increases in recurring revenues, including raising sales and business taxes, an increase in the lodging tax in as well as in other fees. The expected $318 million increase in sales tax will be directed to the school fund, alleviating some pressure on the general fund. Other budget balancing solutions include implementing one furlough day per month for all employees, transferring excess reserves and contingency accounts to the general fund, reducing general fund support for capital improvement programs, and redirecting a portion of property taxes from Washoe and Clark County to the state.

The bonds are general obligations of the state, and the state's full faith and credit are pledged; however, debt service is expected to be paid from the state's general fund, not the property tax levy for debt service. The property tax levy is statutorily limited to $3.64 per $100 of assessed valuation for all overlapping units of government. With about 30% of state GO debt being self-supporting from program revenues, debt ratios are moderate with net tax-supported debt of approximately $2.5 billion, or 2.3% of 2008 estimated personal income. The state's pension system was 76.2% funded as of June 30, 2008.

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