OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for the state of Iowa:

--Iowa implied general obligation (GO) rating at 'AAA';
--$80.35 million outstanding Vision Iowa fund bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The 'AAA' rating reflects the general credit quality of the state, as Iowa does not issue GO debt. The Vision Iowa bonds are special, limited obligations of the state of Iowa payable from standing appropriations of gaming revenues, on a subordinate basis to the state's outstanding IJOBS bonds, and to the extent those are insufficient, lottery revenues. Bond security is enhanced by the state's reserve fund deficiency make-up commitment, which is the basis of the rating.

KEY RATING DRIVERS

CONSERVATIVE FISCAL MANAGEMENT: The state has a careful and conservative approach to financial operations and has consistently achieved budgetary balance and maintained sizable reserves.

STABLE ECONOMY: Iowa maintains resilient agricultural, education, health, and finance sectors, and recent economic growth has been more robust than national averages. Employment growth continues at a steady pace, just below the national average, and the unemployment rate remains well below the national rate.

LOW DEBT AND LIABILITY LEVELS: The state's debt burden is very low, primarily reflecting the state's pay-go funding of capital projects and manageable pension liabilities.

SOUND COVERAGE ON SPECIAL OBLIGATION BONDS: Gaming revenues continue to provide satisfactory coverage of required appropriations for debt service on this obligation.

RESERVE FUND REPLENISHMENT: A reserve fund deficiency make-up commitment by the state enhances the security provided on the Vision Iowa fund bonds, resulting in a rating two notches below the state's 'AAA' implied GO rating.

RATING SENSITIVITIES

The implied GO rating is sensitive to the state's continued financial stability, stable economy, and very manageable liabilities. The Vision Iowa bond rating is sensitive to changes in Iowa's implied 'AAA' GO rating, to which it is linked.

CREDIT PROFILE

The state's implied 'AAA' GO rating and Stable Outlook reflect its stable economy, conservatively managed financial operations, and low debt and retirement liability burden. The Vision Iowa bonds benefit from a reserve fund holding an amount equal to maximum annual debt service. Providing additional security and serving as the basis for the 'AA' ratings on the bonds, if the reserve is drawn upon, the state treasurer certifies the deficiency to the governor and the governor shall include a request in the succeeding year's budget for an appropriation for the amount. The state is required to certify the sufficiency of funds in the accounts each Dec. 13th prior to the succeeding calendar year payments. Fitch notes the strength of the state's commitment to replenish the reserve fund as well as the state's financial strength and sufficient notification timing to ensure appropriation, providing a direct link to Iowa's general credit superior to the appropriation pledge of gaming revenue for the bonds.

STABLE ECONOMY WITH AN IMPORTANT AGRICULTURAL SECTOR
Iowa has experienced steady employment growth since 2010; as of November 2015, the state had regained 187% of jobs lost during the recession, compared to 152% for the nation. Year-over-year (yoy) employment growth continues to be solid; 1.7% in November 2015 as compared to 1.9% for the nation, with strongest in construction (up 6.6%), professional and business services (up 3.4%), and education and health services (up 2.1%), offset by declines in information and manufacturing. The unemployment rate, at 3.4% in November 2015, remains well below the national rate of 5%, continuing the historical trend.

Farm income remains more important to Iowa than other states in the region and other agricultural states; approximately 90% of the land area in the state is in farms. In 2014, the state led the nation in the production of pork, corn, and soybeans, and total cash receipts for farm commodities in 2014 totaled $31 billion, up from $30.6 billion in 2013; the second highest in the country. The state is a leading producer of corn-based ethanol, biodiesel, and wind energy; 25% of all electricity generated in the state is from wind turbines. Quarterly personal income gains were slower in 2015 as compared to both the nation and region; 1.3% growth in the third quarter as compared to 4.6% for the nation and 2.9% for the Plains region.

CONSERVATIVELY MANAGED FINANCIAL OPERATIONS
Fitch considers the state's finances to be conservatively managed and sizable reserves are maintained. The General Fund (GF) budget is supported by a mix of revenues; personal income taxes (PIT) account for 54% of revenues; sales and use taxes account for 34%, and corporate income taxes (CIT) account for 6%. The state annually adds to its reserve funds, achieving its maximum statutory goals. The state maintains two statutory reserve funds; a Cash Reserve Fund (CRF) and the Economic Emergency Fund (EEF). The CRF is limited to 7.5% of GF appropriable revenues and the EEF is limited to 2.5%. The CRF is filled prior to the EEF and excess monies beyond these limits are available for appropriation in the next fiscal year although the state has also deposited money to other reserve funds. At the end of fiscal 2015, the balance in the CRF totaled $523.3 million while the balance in the EEF totaled $174.5 million; both at their statutory maximums.

For fiscal 2015, slower 5.1% growth in net GF revenues as compared to significant 9% growth in appropriations resulted in more tightly balanced financial operations. Combined reserve funds totaled $697.8 million, remaining equal to the maximum 10% of appropriable revenues. For fiscal 2016, 2.6% growth in GF appropriations is expected to be supported by 3.3% growth in net GF revenues, as recently updated by the state's revenue estimating conference (REC).

The REC forecasts fiscal 2016 tax receipts to be up 3.9% from fiscal 2015 based on receipts through December 2015. PIT growth is forecast to be 7%; sales tax growth is forecast at 3.1%; offset by the CIT, which is expected to decline by 13.2%. The governor's recently proposed $7.4 billion fiscal 2017 budget builds upon the revenue forecast with proposals including an increase of 5% for school foundation education and a 1.5% increase in the health and human services budget. After transfers and other accruals, the ending balance is forecast to be $112 million that would be transferred to designated reserves, including fully funding the CRF and EEF. The legislature will consider these proposals during the current session.

VERY MANAGEABLE DEBT AND LIABILITY POSITION
The state's debt management is very conservative and outstanding debt obligations are modest. Total tax-supported debt of $886.8 million is equivalent to a manageable 0.6% of 2014 personal income. On a combined basis, the burden of the state's net tax-supported debt and unfunded pension (UAAL) obligations for IPERS, adjusted by Fitch to reflect a 7% return assumption, equals 1.6% of 2014 personal income; well below the median of 5.8% for U.S. states. Based on the new GASB pension standards, IPERS reports system-wide assets equaling 85.2% of liabilities. Approximately 17% of IPERS' net pension liability is allocated to the state.

The Vision Iowa bonds are payable from a standing appropriation of gaming revenues, and, if necessary, lottery revenues. The flow of gaming revenue requires $55 million to be transferred first to fund requirements of the senior IJOBS bond issue of the state, $3.75 million allocated to fund any debt service requirements on taxable subsidy bonds if subsidy payments have not been received by the treasurer and then $15 million is deposited to the Vision Iowa Fund. Debt service on the Vision Iowa bonds was structured to be paid from the annual $15 million allocation and up to $1 million from investment income on funds of the program that are held by the debt service reserve fund. To date, the state has applied this investment income to pay debt service.

Gaming revenues are primarily derived from a number of racetrack and riverboat casinos located in 14 counties. Riverboat gaming has been allowed since 1989 and games at racetracks since 1994. Revenues grew steadily, reaching $280.7 million in fiscal 2008, up from $191 million in fiscal 2001, before declining in fiscal years 2009 through 2011 as a result of the recession, and have fluctuated annually since 2011. Revenues were up 1.8% in fiscal 2015, to $277.9 million, providing 4x coverage of combined IJOBS and Vision Iowa Fund debt service requirements. The secondary source of security, lottery transfers, available for the Vision Iowa bonds, provided revenues of $72.4 million in fiscal 2015 to meet the $15 million allocation requirement.

The sound coverage on the bond issue is partially offset by the uncertainty presented by discretionary activities, the unsteady revenue trend, the state's ability to reallocate pledged revenues, and the application of interest income to fund the Vision Iowa bonds' debt service requirements. Positively, the requirement that referenda be held every eight years in each county to re-authorize casino gaming was modified by the 2011 legislative session, and re-authorization referenda is now only required for new casino gaming operations; the existing facilities are exempt. Also positively, lottery revenues have remained a growing source of additional security should they need to be called upon.