NEW YORK - (Business Wire) Fitch Ratings has assigned an 'AA-' rating to the South Dakota Health and Educational Facilities Authority $19,570,000 vocational education program revenue bonds series 2008 expected by negotiation the week of August 25. The bonds are due Aug. 1, 2038. Fitch has also assigned an 'AA-' rating to $19.9 million outstanding parity bonds. The Rating Outlook is Stable.
The 'AA-' rating reflects the payment of debt service from lease rental payments derived from a state subsidy and vocational technical facility fees, subject to legislative appropriation, the agreement by the state to make supplemental appropriations if necessary to pay debt service, the parity nature of the master lease debt, and the long history of collecting pledged revenues and continuing appropriations. These factors mitigate the lack of centralization of lease projects (the request is made by the Board of Education for vocational educational facilities) as well as the debt structure of this particular issue that delays principal amortization in order to achieve overall level debt service.
The South Dakota Health and Educational Facilities Authority (authority) issues debt to finance higher education and health care facilities; the state is constitutionally prohibited from issuing more than $100,000 of debt under its own name. Security derives from lease rental payments made by the Board of Education from facility fee revenues charged by the four participating schools with rates set to equal to 103% of annual debt service and a subsidy from the state (currently $824,000), subject to annual legislative appropriation. All bonds are on parity and are cross collateralized and cross defaulted. The state has a long record of appropriating lease rentals for this program and for the State Building Authority, which issues the bulk of state appropriation debt. The vocational technical program is administered by the state's Board of Education under an $80 million bond cap. In 2007, there were 4,661 students enrolled in the program with campuses in Watertown, Mitchell, Sioux Falls and Rapid City.
Security features provide for the standard covenant to budget subject to appropriation, and lease payments are not subject to abatement or non-payment. There is a debt service reserve fund fully funded in cash equal to maximum annual debt service on vocational educational facilities bonds. These provisions are strengthened by other covenants that provide for supplemental state appropriations in the event that pledged revenues are not sufficient to make rental payments. Additionally, the lease is deemed to be automatically renewed once funds are appropriated. Lease payments are largely derived from facility fees that will be increased through 2011 to provide for rental payments on the new bonds.
The facility fee tuition collection and deposit agreement along with the master lease underpin debt security. While lease payments are due two days prior to the February 1 and August 1 debt service payment dates, state practice is to transfer on July 31 all amounts due for the entire bond year. A total of $19.9 million of parity bonds is outstanding in four series of bonds issued since 1988 under the master lease and resolution. In order to smooth the amortization schedule, principal amortization on these 2008 series of bonds has been delayed until 2025, largely amortizing after the parity 2007 series of bonds. In 2007, total lease rental receipts of $2.7 million included the state subsidy of $824,000 and program revenues of $1.9 million. The program balance in the tuition fee subaccount aggregated $1.4 million after payment of debt service. The account is held by the state treasurer and is pledged and assigned for benefit of bondholders and is not available to transfer to the state's general fund. After this sale, maximum annual debt service is $3.6 million in 2010.
While the state does not issue GOs, it issues lease appropriation debt of other authorities, including the State Building Authority, also under a master lease program. Net tax supported debt as of June 30, 2007 aggregated $333 million, equal to $418 per capita and 1.2% of personal income. Debt service is less than 2% of revenues, placing a very modest burden on state resources. The state's pensions are well funded, 97% in fiscal 2007. The state financial position is sound, with close to 9% of revenues held in reserves, cushioning the revenue base, derived 55% from sales and use tax collections. The state's economy centers on agriculture and financial services with nonagricultural employment gaining above the U.S. rates of gain. Employment rose 2% in 2007 with July 2008 employment up 1.3% from a year ago, well ahead of the 0.1% US decline. The state's unemployment rate in July 2008 was a low 2.8%, less than of the U.S. figure. Personal income gains are also strong, rising 6.9% in 2007, equal to 112% of the U.S. First-quarter 2008 personal income gained 9.3% from a year ago.
The $19.9 million outstanding parity bonds that are also assigned an 'AA-' rating with a Stable Outlook are:
--$2,310,000 Vocational Education Program Series 1998A;
--$5,490,000 Vocational Education Program Series 1999;
--$3,715,000 Vocational Education Program Series 2004;
--$8,390,000 Vocational Education Program Series 2007.
Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').
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.
Fitch Ratings, New York
Janet H. Martin, +1-212-908-0507
Richard J. Raphael, +1-212-908-0506
Media Relations:
Cindy Stoller, +1-212-908-0526
