OREANDA-NEWS.  Fitch Ratings has affirmed the 'AA+' rating on the following State of Nevada unemployment compensation fund special revenue bonds:

--$410.31 million series 2013.

The Rating Outlook is Stable.

SECURITY
The bonds are a special limited obligation of the state paid solely from a first lien on special bond contributions assessed on all covered employers in the state.

KEY RATING DRIVERS

BROAD PLEDGED TAX WITH STRONG COLLECTION HISTORY: The source of bond repayment is an assessment levied on most Nevada employers. The state's unemployment tax collection mechanisms are strong and well-established, with a collection rate over 98%. The assessment is collected in the same manner, and subject to the same penalties, as other employment related assessments.

ANNUAL RATE SETTING PROVIDES SOLID COVERAGE: The rate is established at least annually while bonds are outstanding to provide a minimum of 1.5 times (x) coverage of debt service in the following year, plus administrative costs. There is no limit on the rate, and there is a 'true-up' mechanism to ensure coverage on the due date. The annual coverage requirement for principal permits use of excess coverage generated in prior years and held in reserve. The interest coverage component will be funded from proceeds.

STRONG LEGAL FRAMEWORK: The credit structure is strong, with a closed loop and an unlimited pledged tax subject to rate adjustment once per year or more frequently if needed. Additional bonds may be issued with rating confirmation; there is no additional bonds test.

LOW SEASONALITY IN COLLECTIONS: Because of the high taxable wage base used by Nevada, unemployment tax revenues are collected fairly regularly though the year, providing more consistent collections to cover debt service requirements than is typically the case with similar transactions.

RATING SENSITIVITIES
The rating is sensitive to changes in the Nevada economy and outlook that significantly affect collections of special bond assessments.

CREDIT PROFILE
The 'AA+' rating reflects the very strong security provided by employer payroll assessments as well as numerous structural protections. Bond proceeds refunded Nevada's $520 million borrowing from the federal unemployment program, incurred when the state's unemployment fund resources proved insufficient to cover benefits in the recession.

STRUCTURE ENSURES SOLID COVERAGE
The special bond contribution is a separate levy, authorized by the state legislature solely for the purpose of repaying the bonds, and charged to contributing Nevada employers at the same time and in the same manner as the state's other, longstanding unemployment assessments. The administrator of the Employment Security Division of the Department of Employment, Training, and Rehabilitation (DETR) is required to assess special bond contributions on or before Oct. 1 of each year for assessments to be received in the twelve month period beginning each May 1st and ending April 30. There is a 'true-up' provision that requires the administrator to levy a supplemental special bond contribution if there are any projected insufficiencies in the principal or interest accounts 75 days prior to a payment date. Although not pledged, balances in the state's unemployment trust fund may also be drawn upon if there is a deficiency in the principal payment fund.

The special bond contribution must be set in an amount that ensures 1.5x coverage of annual principal and interest payments, plus administrative costs. The administrator may use retained balances in calculating projected coverage, which for principal, is derived from excess collections in the first year and for interest, was funded from bond proceeds. With reserves now funded, the assessment is sized to provide 1x coverage of principal and interest. The DETR administrator has adopted an assessment regulation establishing the procedure and methodology for determining and assessing special bond contributions.

Other legal provisions are solid, including covenants to not impair bondholders and to not repay federal advances within sixty days of any debt service payment. The state may issue additional bonds with rating confirmation.

BROAD ASSESSMENT BASE
Unemployment taxes, including the special bond contribution, are paid by employers and generated from a contribution rate levied against a taxable wage base. In the case of Nevada, the wage base is set at two-thirds of average annual wages and can fluctuate with changes in the economy. The wage base declined slightly during the recession before bottoming out in 2012. It has increased annually since, from $26,900 in 2013 to $28,200 in 2016, Contribution rates reflect each employer's history of unemployment claims and range from 0.25% to 5.4%.

Nevada's wage base is higher than what Fitch has seen in other states with similarly structured securities. With a higher taxable wage base, the tax is collected for each employee for a greater number of pay periods rather than being concentrated in the beginning of the year. As a result, the seasonality of collections that often results in the need for special liquidity measures is less of a concern in this case. However, since collections are higher in the second and third quarters of the calendar year, reflecting first and second quarter employment, the first debt service payment of each year, scheduled for June 1, is sized at a higher level than the second, scheduled for Dec. 1. Retention of excess coverage in the bond funds and the requirement to levy supplemental assessments in the case of a shortfall ensures coverage of the latter payment.

The obligation assessment bonds benefit from the well-established nature of the state's unemployment assessment system. Contributing Nevada employers pay levies to the state's unemployment trust fund, from which state benefits are paid, with components based on their benefit experience, the status of the state fund, and whether the state has federal advances outstanding. Historical collection experience is very strong, with an almost 98% collection rate over the past five years.

ECONOMY RETURNING TO GROWTH

Growth in the state's economy is accelerating with employment growth across a broad range of sectors, positive trends in tourism and gaming, and some improvement in the housing market. Concentrated in the Las Vegas/Clark County area, the state economy remains largely based on gaming and entertainment although economic development efforts at diversifying are having some success.