Fitch Ratings has assigned an 'AAA' rating to $172.715 million in state of Georgia general obligation (GO) bonds, series 2013H. The bonds will sell via competitive bid, on or about Nov. 13, 2013.

Fitch has also affirmed the 'AAA' ratings on $9 billion of outstanding GO ($8.7 billion) and guaranteed revenue bonds of the state (Georgia State Road & Tollway Authority, $359.995 million).

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the state of Georgia, secured by a pledge of the state's full faith and credit.

KEY RATING DRIVERS

LOW LIABILITY BURDEN: The state's long-term liability burden is low and overall debt management is conservative. While Georgia issues bonds regularly for capital needs, amortization of principal is rapid. Additionally, the state fully funds its annual required contributions for pensions keeping the unfunded liability very manageable.

FISCALLY CONSERVATIVE: Georgia has a long history of conservative revenue estimation and balanced operations and has consistently taken timely action to address fiscal weakness. The state has capitalized on recent revenue growth to make substantial progress in rebuilding reserves.

DIVERSIFIED ECONOMY: After a sharp recessionary downturn, the state's diverse economy is showing signs of an accelerating recovery.

RATING SENSITIVITIES

The rating is sensitive to fundamental changes in the credit characteristics of the state including an unexpected failure to respond to changes in the economy that result in budget gaps, or an unexpected change in debt profile.

CREDIT PROFILE

The longstanding 'AAA' rating and Stable Outlook on Georgia's GO bonds reflect its conservative debt management, a proven willingness and ability to support fiscal balance, and a diversified economy. The state took repeated action during the recession to maintain fiscal balance through steep spending cuts, use of federal stimulus, and draws from its rainy day fund, the revenue shortfall reserve (RSR). Since then it has maintained a conservative approach to fiscal management, curbing spending growth and making progress in rebuilding the RSR balance. The state's debt profile is conservative and its debt burden is moderate as a percentage of personal income.

Low Long-Term Liabilities

Most of the state's tax-supported debt is in the form of GO or guaranteed revenue bonds and amortization of principal is rapid, with just over 70% maturing within 10 years. Other outstanding obligations include $1 billion in grant anticipation revenue (GARVEE) bonds and capital leases. Including the current sale, debt ratios remain moderate at 2.8% of 2012 state personal income.

Georgia's major pension systems covering both state employees and teachers have benefitted from consistent full funding of actuarially calculated annual required contributions. As of the June 30, 2012 valuation, systemwide funded ratios for the state employees and teachers plans were reported at 73.1% and 82.3%, respectively. Using Fitch's more conservative 7% discount rate assumption, the state employees' and teachers plans would be funded at 69.3% and 78.0%, respectively, as of June 30, 2012. On a combined basis (and inclusive of the new issuance), the state's net tax-supported debt and Fitch-adjusted unfunded pension liability attributable to the state total 4.8% of 2012 personal income, below the median of 7% for U.S. states rated by Fitch.

Broad and Recovering Economy

While the recession was more severe in the state than the nation overall, Georgia's recovery is showing signs of acceleration. Like all states, Georgia remains vulnerable to significant macroeconomic risks including federal deficit reduction efforts. Statewide employment began year-over-year (YOY) gains in fall 2010, shortly after the nation. While the initial growth rate was tepid and volatile, the growth trend has outpaced national YOY employment gains since December 2012. Unemployment remains elevated though, and the state's overall wealth levels still lag the U.S. As of August 2013, the state's unemployment rate was 8.7% versus the national 7.3% rate. Georgia's per capita personal income ($37,449) ranks 40th among the states at 86.4% of the U.S., and its poverty rate of 19.2% exceeds the national 15.9% rate.

Conservative Financial Management

Georgia has demonstrated its commitment to budgetary balance and maintaining flexibility in the form of RSR balances. Strong revenue performance through fiscal 2007 (year ended June 30) enabled the RSR balance to reach $1.5 billion (8.2% of net revenues) by fiscal 2007. During the recession, the state drew down the RSR to a low of $103.7 million (0.6% of net revenues) in fiscal 2009. Through spending restraint and conservative revenue estimating, Georgia has steadily rebuilt the RSR since then.

The state ended fiscal 2013 with a robust preliminary RSR balance of $682 million, supported by strong revenue growth and expense management. After accounting for the customary mid-year appropriation for education spending (but excluding the benefit of not yet calculated lapsed spending), the preliminary net RSR balance is $499 million (2.7% of fiscal 2013 general fund revenues). Total general fund revenues increased 5.9% from the prior year, ahead of the 4.1% amended budget estimate. As in other states, Georgia reports that personal income tax growth (7.7% YOY) was a major driver, and that a portion of that growth is attributable to a one-time acceleration of income into the 2012 tax year as a result of the recent federal tax increase.

The structurally balanced fiscal 2014 budget assumes moderate economic and revenue growth of 2.7% in the general fund from fiscal 2013 preliminary results. Georgia prudently projects personal income tax growth to slow to 1.4% YOY with the end of the income acceleration effect. Revenue growth rates could be revised upward as part of the state's annual mid-year budget amendment process. Appropriations for fiscal 2014 increase 3.1% from the amended 2013 budget, as the 3.0% average agency reductions held over from the amended 2013 budget are offset, primarily by increases in Medicaid, PeachCare (health insurance for low income children), and education funding.

The state expects to make multiple revisions in the amended budget presented to the legislature in January 2014 to account for fiscal 2013's strong revenue growth, various tax law changes, and an estimate for the 'woodwork' effect of the federal Affordable Care Act (woodwork refers to those individuals currently eligible for Medicaid, but not participating, who are expected to enroll and be funded at the standard federal Medicaid matching rate). Fitch does not anticipate these changes will materially affect the state's ability to maintain stable financial performance and a structurally balanced budget.