Fitch Ratings assigns an 'AA+' rating to the following state of Oregon general obligation (GO) bonds:
--$62.795 million GO bonds (Various Projects), 2012 series H;
--$55.48 million GO bonds (ODOT Project), 2012 series I;
--$12.68 million GO bonds (ODOT Project), 2012 series J (Taxable);
--$70.53 million GO refunding bonds, 2012 series K;
--152.615 million GO refunding bonds, 2012 series L;
--$3.44 million GO refunding bonds, 2012 series M (Taxable).
Further, Fitch assigns an 'AA' rating to the state's following certificates of participation (COPs):
--$34.085 million refunding COPs, 2012 series A.
Additionally, Fitch affirms the following ratings:
--$4.95 billion in outstanding state GO bonds at 'AA+';
--$1.37 billion in outstanding COPs at 'AA'.
The Rating Outlook is Stable.
The bonds and COPs noted above are expected to sell via negotiation on March 20, 2012.
The GO bonds are general obligations of the state of Oregon, with the full faith and credit of the state pledged.
The COPs, which represent undivided proportionate interests in loan payments to be made by the State of Oregon pursuant to loan agreements, are special limited obligations payable solely from monies appropriated by the state's legislature.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: State finances are heavily dependent on the personal income tax, a volatile revenue source which declined sharply during the recent recession. The state's management reviews revenue and economic forecasts quarterly, and has taken measures necessary to maintain balance. State reserve levels have been drawn upon among balancing measures, but a thin level of cushion remains.
DIVERSIFIED ECONOMY: Oregon's economy, historically based on its natural resources, has diversified toward the computer and service sectors.
MODERATE DEBT BURDEN: Debt levels are above average for a U.S. state but a moderate burden on resources, despite having risen significantly in recent years. Fitch expects the state's debt burden to remain moderate. Pension funding is sound.
COPs REPRESENT A STATE APPROPRIATION OBLIGATION: Debt service payments on the COPs must be appropriated by the state's Legislature, resulting in a rating one notch below the state GO. Oregon's COP program is well established and centralized within the state's department of administrative services.
Oregon's 'AA+' GO bond rating reflects an economy that has diversified, moderate debt levels, and the state's prompt actions to maintain financial flexibility in a challenging revenue environment. Strong financial management is critical to the rating given a revenue structure largely dependent on the cyclical personal income tax, exposure to voter initiatives with negative fiscal impact, and constitutional 'kicker' provisions requiring return of surplus revenues to taxpayers. While anticipated reserve levels are now well below expectations prior to the recession, a thin level of cushion remains. The 'AA+' rating and Stable Outlook reflect Fitch's expectation that the state will continue to promptly address budgetary gaps as they arise and maintain such cushion against revenue volatility.
The state is dependent on the personal income tax (PIT), which made up 85% of 2011 general fund revenues. PIT collections have been volatile, falling 12% in the 2001 - 2003 biennium and rising by nearly 17% in the 2003 - 2005 biennium and 22% in the 2005 - 2007 biennium. Income tax receipts for the 2007 - 2009 biennium were $1.2 billion below original estimates and 8.5% below those of the prior biennium. A mix of spending cuts, federal stimulus dollars, and the use of available balances, including a full drawdown of the then-available balance in the Education Stability Fund, were employed to maintain balance.
For the 2009 - 2011 biennium, which ended June 30, 2011, PIT revenues, adjusted for kicker payments remitted and reflecting a tax increase upheld by voters in January 2010, were 3.7% above those of the prior biennium, though approximately $1.1 billion below budgeted expectations. Balance was maintained through exhausting the originally budgeted ending balance, implementing across-the-board spending reductions of approximately $550 million, utilizing $241 million in additional stimulus monies, and applying emergency board monies and other available funds. The ending general fund balance for the biennium of $35 million was deposited into the state's rainy day fund. An additional $15 million in resources between the rainy day and Education Stability funds was available at the close of the biennium.
Oregon passed a balanced budget for the 2011 - 2013 biennium that did not raise revenue though it does in part rely on reserve draws. PIT projections in the adopted budget for the biennium reflected the expectation of recovery, with 16% growth projected over the two-year period. The legislature held back 3.5% of agency spending to protect against revenue underperformance, leaving a projected ending balance of $446 million at the time of budget passage.
As of the most recent economic forecast, released Feb. 8, 2012, PIT revenue expectations have been reduced by $224 million, forecast corporate tax revenues have been reduced by $82 million, and the projected ending balance is now $141 million, assuming no release of held-back monies noted earlier. The state legislature, which came back into session last month, is currently finalizing revisions to the biennial budget which buy back approximately $165 million in held back spending and address approximately $42 million in identified additional spending needs. To offset these adjustments, the state will utilize $80 million in one-time revenues generated through a legal settlement and fund sweeps, $48 million in additional human service spending restrictions, and $28 million in savings effected through employment reductions and other targeted cuts. As a result of these actions, inclusive of monies available in the state's emergency fund, rainy day fund, and Education Stability Fund, the state currently projects ending the 2011-2013 biennium with approximately $280 million in reserves which total 2% of biennial general fund revenues.
Oregon's economy tends to be more cyclical than the nation's, due historically to its reliance on agriculture and natural resources and today because of its large high-tech sector. While the state had seen modest job growth through mid-2008, the deepening recession resulted in an acceleration of job losses, particularly in the manufacturing sector, and annual employment losses of 0.7% and 6.2% for 2008 and 2009, respectively. The 2009 decline was significantly deeper than that nationally. Employment growth returned in the fourth quarter of 2010, and for the year the state recorded a loss of 0.8%, on par with the national rate of decline. Based on preliminary numbers for December 2011, statewide employment was 1.1% above December 2010 levels, just below the national growth rate of 1.3% for the same period.
As reflected in its February economic forecast, the state is estimating annual employment growth of 1.1% in calendar 2012 and 2.4% growth in calendar 2012. State unemployment, typically above the national level, was recorded at 9% for December 2011 against a national rate of 8.5% for the same month. In 2009, Oregon's personal income decline of 3.9% was better than the 4.3% U.S. rate of loss, though Oregon's 2010 growth of 3.2% fell short of the 3.7% growth seen nationally. Per capita personal income in 2010 totaled $36,427, representing 91% of the U.S. level and ranking Oregon 32nd among the states.
Portions of the GO bonds currently offered will finance various capital projects while the balance will refinance certain outstanding COPs for debt service savings. The COPs now offered will refinance outstanding COPs for debt service savings. State debt levels had risen significantly in the last decade, in part as a result of deficit financing in the prior downturn and pension borrowings. The state did not undertake any deficit borrowing in the recent recession. As of June 30, 2011, the state's debt at 5.7% of 2010 personal income is above average but still a moderate burden on resources. Principal amortizes at a below-average pace.
Oregon's public employees' retirement system, which had a funded ratio of 112.3% at Dec. 31, 2007, was funded at a still sound 87% as of Dec. 31, 2010. The significant swing in the funded ratio is due to the fact that system assets are marked to the market annually with no smoothing of asset declines and fully reflect negative financial market performance in 2008. As of Dec. 31, 2010, the state's portion of system liabilities was 89.5% funded.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria