October 19, 2011

New Hampshire; General Obligation; General Obligation Equivalent Security
Primary Credit Analyst: Henry Henderson W, Boston (1) 617-530-8314; henry_henderson@standardandpoors.com Secondary Contact: Karl Jacob, Boston (1) 617 530-8134; karl_jacob@standardandpoors.com

Table Of Contents
Rationale Outlook Economy Budgetary Performance Debt And Liability Profile Related Criteria And Research

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Credit Profile
US$100.0 mil GO ser 2011 B due 02/01/2031 Long Term Rating New Hampshire GO Long Term Rating AA/Stable Affirmed AA/Stable New

Rationale
Standard & Poor's Ratings Services assigned its 'AA' long-term rating, with a stable outlook, to New Hampshire's series 2011B general obligation (GO) bonds, and affirmed its 'AA' rating, with a stable outlook, on the state's GO bonds and state-guaranteed New Hampshire Municipal Bond Bank bonds outstanding, and its 'AA/A-1+' ratings on New Hampshire Business Finance Authority's GO debt. The long-term component of the rating on the authority's bonds is based on the New Hampshire GO debt rating. The short-term component of the authority's bonds is based on a bank facility from the Bank of New York Mellon. The ratings reflect our opinion of the state's: • Strong personal and effective buying income levels; • Relatively low unemployment levels; and • Rapid debt amortization. These strengths are somewhat offset, in our view, by New Hampshire 's: • Significant decline in reserves for fiscal 2009 and 2010, which brought the rainy-day fund balance to less than 1% of expenditures; and • Low pension funding level, currently about 58%, which is well below most other states' funding levels. The GO and state-guaranteed bonds are secured by the state's full faith and credit pledge. This current issue will be used for various capital projects in the state. New Hampshire, with an estimated population of 1.32 million, is located in northern New England, bordered by Massachusetts, Vermont , Maine , and Canada . The state's land area is 9,304 square miles and it has 18 miles of coastline on the Atlantic Ocean. The state's 2000-2010 population growth rate was 6.5%, below the 9.7% national rate. Officials estimate that fiscal 2011 ended with a $9.3 million stabilization fund balance and an additional $26.4 million undesignated general fund balance, for a combined position we consider adequate at less than 1% of general and education fund expenditures. However, this combined reserve position is a $39.3 million decline from fiscal 2010, but an improvement from officials' earlier budget projections, primarily due to $25 million of additional underspending compared with the earlier projections. The primary reason for the decrease in the combined reserve position was revenue underperformance; business taxes are the largest revenue source for the state and unaudited

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figures for fiscal 2011 indicate that these were $20 million below fiscal 2010 levels. The 2012-2013 biennial budget became law on June 29, 2011, without the governor's signature. The budget projects an $11.1 million rainy-day balance by the end of the biennium, not including the $26.4 million undesignated general fund balance from the end of fiscal 2011. In addition, the rainy-day balance at the end of fiscal 2011 is $8.8 million higher than the 2012-2013 budget assumed. Total net appropriations for the general and education funds are 1% lower than the unaudited 2010-2011 biennial expenditures. The largest revenue sources for the general and education funds are: business taxes, which are projected to increase by 2.1% from the 2010-2011 biennium; meals and rooms taxes, which are projected to decline by 1.0%; tobacco tax, which is projected to decline by 5.9%; and liquor sales revenues, which are projected to increase by 9.7%. Significant actions taken in the 2012-2013 budget include: • $158 million of State Medicaid enhancement tax revenue is redirected and used to make Medicaid provider payments funded by the state. In August 2011, 13 hospitals sued the state concerning this funding reduction, and the lawsuit is currently ongoing; • $35 million of 529 college savings plan revenue is redirected and used as state support for public higher education operations; • Public higher education funding is reduced by $105 million over the biennium; • 1,156 state positions were eliminated, including 111 layoffs, with additional layoffs possible; • Eliminating the state's share of retirement contributions to local governments for teacher, police, and fire employees, down from the 35% subsidy level in current law. This change is projected to save $171 million over the biennium. A smaller reduction in local subsidies for fiscals 2010-2011 resulted in a lawsuit against the state from local governments that is still outstanding; • An additional savings of $50 million, including $20 million of general fund savings, is required to be achieved through compensation and benefit changes that have not yet been enacted. The governor is required to submit a plan by Dec. 1, 2011 showing how this savings will be achieved; and • The tobacco tax was reduced by 10 cents per pack of cigarettes, which is estimated to reduce revenues by $9.9 million over the biennium. Through the first three months of fiscal 2012, unrestricted revenue for the general and education funds was above the plan for the year by $15.1 million, which was due primarily to business taxes collections, which were $12.7 million above plan. The federal Department of Health and Human Services disallowed $35.3 million of Medicaid disproportionate share hospital payments for fiscal 2004, but the state has requested a reconsideration and this appeal process is still ongoing. The governor will present a budget-adjustment plan if the appeal is not settled in the state's favor. Based on the analytical factors we evaluate for states, on a scale of '1' (strongest) to '4' (weakest), we have assigned a composite score of '2.0'.

Outlook
The stable outlook reflects Standard & Poor's expectation that the New Hampshire's fiscal 2012-2013 results will be in line with the budget projections. Declines in excess of the budget could result in a downgrade; the state's

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pension and postemployment funding needs could also put downward pressure on the rating. Additional downside risk for the rating includes our view of the potential for significant reductions in federal funding that currently flows to the state. Standard & Poor's will continue to monitor the federal consolidation efforts stemming from the Budget Control Act and, once these are identified, will evaluate their effect on the state's finances and the response to these revenue reductions. We don't expect the rating to increase in the two-year timeframe of the outlook due to the state's financial projection of little growth in the reserve position.

Economy
New Hampshire's unemployment rate remains significantly better than the national and New England levels at 5.2% in August 2011 (not seasonally adjusted) and 6.1% for 2010, according to the U.S. Bureau of Labor Statistics. The state's income levels are above national levels. The state's per capita personal income is 108% of the national level. New Hampshire's employment composition is largely in line with that of the U.S. The 2010 per capita gross state product (GSP) was 97% of the national level, and the GSP growth has been in line with the national rate. According to IHS Global Insight, Inc., through March 2011, the state's private sector added jobs for seven consecutive months, with the service sector being the key driver of this growth. The firm's 2011 projections are for 2.7% real personal income growth and 2.6% gross state product growth. IHS projects payroll growth for 2011-2016 to be 1.6% per year, which would be 31st in the nation but best in the New England region. It projects the two primary growth sectors to be professional and business services and healthcare. The firm projects pre-recession peak employment to be reached in the second half of 2013. On a scale of '1' (strongest) to '4' (weakest), we have assigned a '1.6' to New Hampshire 's economy.

Budgetary Performance
The state maintains a revenue stabilization fund, which is capped at 10% of unrestricted general fund revenue for the prior fiscal year. Any surplus at the end of a biennium shall be transferred to the stabilization fund, although the maximum transfer in any fiscal year is half of the maximum balance allowed for the fund. The stabilization fund is available in the event of a projected biennium-end deficit. The state has used interfund borrowing for its general fund cash flow needs. New Hampshire interfund-borrowed a total of $75 million from its state revolving fund in January and February 2010, and repaid these loans in June 2010. Officials authorized up to $200 million of revenue anticipation notes (RANs), including the $75 million borrowed from the revolving fund, but no external RANs were issued during the year. The state did not issue any RANs or interfund-borrow in fiscal 2011. The state's reserve position has declined significantly in recent years from the level at the end of fiscal 2007, when the combined general fund undesignated and stabilization balances were $150.7 million.

Fiscal 2010
Fiscal 2010 ended with a $9.3 million stabilization fund balance and the undesignated surplus increased to $65.7 million. The state law does not permit an increase or decrease to the stabilization fund balance until the close of a biennium. In June 2010, New Hampshire approved legislation that was designed to close an estimated $295 million budget gap

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for the fiscal 2010-2011 biennium (equal to 6.8% of combined general and education fund revenue), with the gap due primarily due to a $198.2 million revenue shortfall per the April 2010 revenue estimate. The plan included a drawdown of the state's rainy-day fund to $0 at the end of fiscal 2010 and an intention to rebuild it to $14.6 million at the end of fiscal 2011, although fiscal 2010 closed without a draw on the rainy-day fund. The $295 million gap-closing plan contained a number of one-time savings or revenue items, including: • The acceleration of $80 million in American Recovery and Reinvestment Act education stabilization funds to 2010 from fiscal 2011, which would reduce the 2010 deficit but worsen the 2011 projected deficit; • $60 million from selling, or otherwise monetizing, state assets; • A $48 million revenue increase from a projected extension of the Federal Medicaid Assistance Program beyond its current end date of Dec. 31, 2010. Officials now project that this revenue will be closer to $30 million, but that negative variance would be more than offset by a projected $41 million in State Fiscal Stabilization Funds that were not factored into this gap-closing plan; • The transfer of $20.2 million in dedicated fund balances; and • $40 million of general fund budgetary savings from a recent debt restructuring. In addition to these nonrecurring items, the plan also included $57 million of reductions over the biennium to local aid and other state services. In July 2010, the state restructured debt outstanding for an estimated $40 million of general fund budgetary savings in fiscal 2011, as part of its plan to eliminate the fiscal 2011 budget gap. That restructuring was estimated to result in a net present value loss of $1.2 million over the issue's 10-year life. On a scale of '1' (strongest) to '4' (weakest), we have assigned a '2.3' to New Hampshire 's budgetary performance.

Debt And Liability Profile
As of June 30, 2010, New Hampshire's tax-supported debt was about 1.4% of personal income and $590 per capita. The fiscal 2010 tax-supported debt service was 2.8% of general governmental expenditures. In July 2010, the state restructured GO debt outstanding for $40 million of general fund budgetary savings in fiscal 2011 as part of its plan to eliminate the fiscal 2011 budget gap. Officials estimate that the restructuring resulted in a net present value loss of $1.2 million over the issue's 10-year life. Amortization of general fund debt is rapid in our view, with about 70% of debt retired in the next 10 years. New Hampshire 's GO debt portfolio is entirely fixed-rate except for its commercial paper (CP) program, which currently has no debt outstanding. The CP program has an authorization of $50 million, and officials project issuing CP later in calendar 2012. General obligation debt service can be paid without an appropriation, but there is no other legal priority for payment of debt before other general state expenditures.

Pension and OPEB

The state maintains one defined benefit pension plan, administered by the New Hampshire Retirement System (NHRS) for effectively all state and local government employees; state employees comprise 25% of the covered employees. As of June 30, 2010, the unfunded pension liability was $3.72 billion, a funded ratio of 58.5%, which is among the lowest funded levels among the states. The unfunded liability represents a large long-term fixed cost that will likely pressure future operating budgets. The pension board recently reduced the assumed investment rate to

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7.75% from the current rate of 8.5% and the wage growth to 3.75% and these changes will increase the state's pension contributions beginning in fiscal 2014. The pension plan's actuary recommended that the assumed investment rate be reduced to between 7.5% and 8.0%. Using the new assumption of 7.75% investment earnings and 3.75% wage growth, the funded ratio drops to 57.5% from 58.5%. New Hampshire's contribution was 100% of the pension and medical subsidy plan annual required contributions (ARCs) in fiscal 2010 and was budgeted at 100% for fiscal 2011, and officials project future budgets will maintain 100% pension ARC funding. The state's constitution requires the state and its local subdivisions to pay 100% of pension ARCs; the state underpaid the pension ARC in 2008 and 2009 due to an unexpected change in the contribution from its medical subsidy plan, but this situation was corrected in fiscal 2010. The medical subsidy plan was established to fund or partially fund additional pension benefits, such as cost of living adjustments, for a closed group of employees. New Hampshire's last other postemployment benefits (OPEB) actuarial valuation for its single employer state Retiree Benefit Risk Management Fund was Dec. 31, 2010, when an unfunded OPEB liability of $2.26 billion was disclosed under the state's single employer Retiree Benefit Risk Management Fund. In addition, there was an unfunded OPEB liability of $976 million, net of $58 million in OPEB trust fund assets, under the multiple-employer New Hampshire Retirement System's medical premium subsidy program for a closed group of retirees (of which the state paid 43% of contributions for state and local employees in 2010). The state estimates its portion of the unfunded accrued actuarial liability for the medical subsidy at $85 million. The actuarial annual OPEB cost for the Benefits Health Fund was $208 million in fiscal 2010, with $53 million of contributions made, for an annual contribution rate of 25%. The actuarial annual cost for the medical premium subsidy is not available. The state's 2012-2013 biennium budget eliminates the state's contribution to local governments for local government pensions and the medical subsidy premium and will reduce state costs by approximately $97.8 million in fiscal 2012 and $107.8 million in fiscal 2013; these state reductions are offset by increased required member contributions. In recent years, the state has also imposed a monthly fee for the Risk Management Fund health care OPEB liability for employees under the age of 65. The state has made multiple changes to reduce the pension and OPEB liability in recent years, including changes during the 2011 legislative session. On a scale of '1' (strongest) to '4' (weakest), we have assigned a '2.5' to New Hampshire's debt and liability profile.

Related Criteria And Research
USPF Criteria: State Ratings Methodology, Jan. 3, 2011 Ratings Detail (As Of October 19, 2011)
New Hampshire GO Unenhanced Rating New Hampshire Bus Fin Auth, New Hampshire New Hampshire New Hampshire Bus Fin Auth (New Hampshire) GO VRDBs 2002B Long Term Rating New Hampshire Bus Fin Auth (New Hampshire) GO VRDBs 2002 A AA/A-1+/Stable Affirmed AA(SPUR)/Stable Affirmed

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Ratings Detail (As Of October 19, 2011) (cont.)
Long Term Rating New Hampshire Mun Bnd Bank, New Hampshire New Hampshire New Hampshire Municipal Bond Bank (New Hampshire) State Gtd Long Term Rating
Many issues are enhanced by bond insurance.

AA/A-1+/Stable

Affirmed

AA/Stable

Affirmed

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