Fitch Ratings has assigned a 'AA+' rating to $85 million general obligation (GO) bonds, series 2022-B.
The bonds are expected to sell Oct. 26, 2022 by competitive bid. Bond proceeds will fund capital improvements of the Alabama Department of Conservation and Natural Resources, the Alabama Historical Commission, and the Alabama Forestry Commission.
The Rating Outlook is Stable.
SECURITY
GO bonds are full faith and credit obligations of the state of Alabama.
ANALYTICAL CONCLUSION
Alabama's 'AA+' GO rating and Issuer Default Rating reflect the state's high level of resilience to changes in the economic cycle, derived from strong spending controls that contribute to balanced operations and maintenance of significant reserves in the Alabama Trust Fund (ATF). The state is benefitting from a longer-term trend toward a more diversified economy even with continued reliance on manufacturing, and has low long-term liabilities.
Economic Resource Base
Alabama's economy was historically dominated by agriculture, natural resource extraction, and manufacturing, including textiles and iron and steel production. Today, the state still depends more heavily on manufacturing relative to the national average, but manufacturing has shifted away from textiles and apparel to the automotive sector. Aerospace manufacturing is also growing in the state. Service sector employment, a pre-pandemic source of growth nationally, is significantly underrepresented in Alabama.
Alabama's demographic profile is relatively weak with population growth that is two-thirds that of the U.S. since 2010 and wealth indicators that have typically been well below national averages. Personal income per capita is just 77% of the U.S. average, ranking it 48 among the states. The poverty level is still among the highest of the states.
KEY RATING DRIVERS
Revenue Framework: 'aa'
Alabama maintains unlimited legal ability to raise operating revenues. Its revenue base is diverse, including broad based income and sales taxes. Fitch anticipates long-term growth prospects for revenues to be in line with historical performance at approximately the rate of long-term inflation.
Expenditure Framework: 'aaa'
Strong spending controls include a statutory requirement to make across-the-board appropriation reductions to maintain budgetary balance. Carrying costs for debt service and retiree benefits are low but above the median for U.S. states.
Long-Term Liability Burden: 'aaa'
Long-term liabilities are low but above the median for the states. With constitutional limits on issuance of GO bonds, the state typically issues debt through a variety of authorities, the largest of which is the Public Schools and College Authority. The ratio of pension system assets to liabilities remains comparatively weak but the net pension liability does not represent a significant constraint on the overall assessment.
Operating Performance: 'aaa'
Alabama has ample ability to address economic downturns through expenditure controls and access to extensive reserves. Despite slowly growing revenues and the need to take continued budget balancing actions during the expansion that preceded the pandemic, the state has rebuilt flexibility by restoring reserves and eliminating the use of non-recurring budget solutions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stronger economic growth consistently above the historical trend that contributes to increased long-term growth prospects for revenues.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material deviation from historically prudent financial practices or a change in policy or statute that would permit expanded use of the ATF such that operating resilience is reduced.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
CURRENT DEVELOPMENTS
Alabama fared slightly better than the U.S. as a whole at the start of pandemic. Nonfarm payrolls declined by about 12% (from February to April 2020), below the states median decline of 15%. Alabama has recovered 100% of lost jobs through August 2022, slightly below the national rate of 102%.
Alabama's official monthly unemployment rate was 2.6% in August 2022, below the national rate (3.7%). Fitch also considers the employment to population ratio (EPOP) when evaluating the health of labor markets. Alabama's EPOP of 55.8% in August, while similar to its pre-pandemic rate is weaker than the national rate of 60.1%, indicating a potentially slower economic growth trajectory than other states due to lower labor force utilization
Alabama Budget Update
Alabama emerged from the pandemic-related disruption with revenues rebounding in both of its two operating funds, the general fund and the education trust fund (ETF). Fiscal 2021 revenues, which had been forecast to remain relatively flat as compared to fiscal 2020, increased 11% yoy to $2.6 billion in the general fund, and 16% yoy to $8.6 billion in the ETF, the latter of which benefitted from strong performance in personal income tax.
Positive performance continued into fiscal 2022 (FYE September 30). Although the budget assumed relatively flat revenues in the general fund and a decline in the ETF, estimated YE revenues were well ahead of estimate and increased yoy. General fund revenues increased 7% yoy and were 16% above estimate, led by strong growth in sales and use taxes. ETF revenues increased 17% yoy and were 31% ahead of estimate, led by continued strong performance in the personal income tax.
This revenue outperformance has allowed the state to fund budget reserves separate from and in addition to the fully funded rainy day funds, which in Alabama take the form of access to borrowing from the $3.9 billion ATF (market value as of fiscal 2021). The general fund budget reserve balance totals $364 million, 13.3% of fiscal 2022 revenues and it has access to borrowing $291 million from the ATF. The ETF budget reserve balance totals $560 million, 5.6% of fiscal 2022 ETF revenues, and it has access to borrowing $585 million from the ATF.
Given the strong revenue growth, the enacted fiscal 2023 budgets for both the ETF and the general fund include significant spending increases that the state considers to be sustainable even in anticipation of revenue growth returning to a more normal, slower trajectory. The $8.6 billion fiscal 2023 ETF budget provided increases for both higher and K-12 education, including sizeable pay raises for teachers and a one-time bonus for retirees, expansion of pre-K and literacy programs, and incentives for math and science education.
The general fund budget at $2.74 billion incorporates a 4% pay increase for state employees, a one-time bonus for retirees, and funding increases for most state agencies, including a 3.4% increase for the department of corrections.
Alabama is receiving $2.1 billion in ARPA funds, with an additional $1.7 billion directed to local governments. In addition to using $400 million to finance a portion of its needed prison replacement program, permitted by identifying an equivalent amount as revenue lost due to the pandemic, the state has allocated funds for broadband expansion, water and sewer infrastructure projects, support for hospitals and nursing homes, restoration of the balance in the unemployment compensation trust fund, and a variety of other relatively small projects.
Date of Relevant Committee
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RESOURCE BASE LIMITED 
