TEXT - Fitch rates Oregon's $171 mln GOs 'AA+'
Jan 30 - Fitch Ratings assigns an 'AA+' rating to $171.24 million state of Oregon general obligation (GO) bonds consisting of the following: --$20.05 million 2013 series E (tax-exempt); --$60.05 million 2013 series F (tax-exempt refunding); --$86.765 million 2013 series G (tax-exempt refunding); --$4.375 million 2013 series H (federally taxable refunding). The par amounts of the refunding bonds may change. The bonds are expected to sell via negotiation the week of Feb. 11, 2013. Additionally, Fitch affirms the following ratings: --$5.1 billion in outstanding state GO bonds at 'AA+'; --$1.15 billion in outstanding appropriation credits at 'AA'. The Rating Outlook is Stable. SECURITY The bonds are general obligations of the state of Oregon, with the full faith and credit of the state pledged to bond repayment. 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 are only 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. CREDIT PROFILE 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. Notably, voters recently approved the elimination of the corporate income tax kicker, permanently allocating corporate revenue in excess of the revenue forecast to elementary and secondary education. While reserve levels through fiscal 2012 were well below expectations prior to the recession, improved reserves at the close of fiscal 2013 are now anticipated. The state has also forecast increased long-range reserve levels, through fiscal 2021. The assigned 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. RELIANCE ON PERSONAL INCOME TAX FOR OPERATIONS The state is dependent on the personal income tax (PIT), which made up 85% of 2012 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 23% in the 2005-2007 biennium. Income tax receipts for the 2007-2009 biennium were $1.2 billion below original estimates and 8.6% below those of the prior biennium; 2009-2011 PIT receipts were 3.7% above those of the prior biennium, though approximately $1.1 billion below budgeted expectations. Balance in 2009-2011 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 March 2012 economic and revenue forecast revised the PIT projection downward from the close of session forecast to a 13.9% increase from the last biennium. The June 2012 forecast showed improving trends from March although general and lottery revenues continued to run below the close of session forecast in 2011 by 1.5%, but increasing 0.7% from the March forecast. The increase from the March forecast incorporated the allocation of an additional $107 million in one-time monies to the general fund to assist in balancing the biennial budget and allowed the state legislature to restore $165 million of a 3.5% legislative holdback for certain human services and public safety programs while maintaining the hold on $153 million in authorized spending. A revised forecast in September2012 increased general fund revenues by $88 million (0.6%) while lowering lottery revenues by $17 million (1.6%) from the June forecast. In the most recent forecast, in December 2012, general fund revenues are expected to total $13.9 billion for the current biennium in contrast to $13.7 billion in appropriations. The ending balance in the state's reserve funds according to the December forecast are a $220.9 million ending balance in the general fund (up from $35 million in last biennium), $61.8 million in the rainy day fund, and $6.9 million in the education stability fund. The lottery is currently projected to have an $11.3 million fund deficit at the end of the current biennium due to below-budgeted revenue growth from reportedly slow video lottery sales; lottery fund deficits are required to be eliminated through state administrative action prior to the end of the biennium. The governor has recommended a budget for the 2013-2015 biennium that is supported by a forecast of $15.5 billion in general fund revenues; up by 11.1% from the current biennium. The combined general fund and lottery revenues are projected to be $16.374 billion; up 8.9% from the current biennium. The budget proposal incorporates estimated savings of $356 million from proposed program changes to the public employees' retirement system (PERS), including limiting cost of living increases and eliminating a tax benefit for out-of-state retirees. The budget proposal also includes savings related to changes in sentencing requirements for the prison population, a continuation of increases to certain health care provider taxes, and about $119 million in health care delivery savings. Lottery resources are forecast to be down about $28 million from the current biennium; the reduction is expected to be offset by distributions that have been proposed to decline by 37.7% ($411 million), providing for a forecasted $372 million fund balance. With $16.244 billion in proposed expenditures, ending general fund balance is estimated at $130 million. The legislature is expected to review the budget proposal in the 2013 legislative session. CYCLICAL ECONOMY WITH SLOW EMPLOYMENT GAINS 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 and international trade activities. The state's largest exports are computer and electronics products (35.4%) and agricultural products (15.5%) and the largest destination are Mainland China (17.3%), Canada (14.8%), and Malaysia (12.1%). Following 7.6% total job loss in calendar years 2008 through 2010, compared to 5.7% for the nation, the state added jobs in calendar 2011 at a rate of 1% compared to 1.1% for the nation. In December 2012, year-over-year employment growth was 1.3% compared to the 1.4% national average; the largest positive growth sectors by number of employees were trade, transportation, and utilities at 2.2% year-over-year; manufacturing at 3.4%; and professional and business services at 1.8% year-over-year. The December economic forecast estimates annual employment growth of 1.3% in calendar 2012, 1.6% growth in 2013, and 2.5% in 2014. Overall, the state estimates slow but steady recovery of jobs lost in the recession, particularly through 2013, with more robust growth beginning in 2014. State unemployment, typically above the national level, was 9.5% in 2011 against a national rate of 8.9%. For December 2012, the state unemployment rate of 8.4% continued this trend above the national average of 7.8%. In 2011, Oregon's personal income growth of 5.4% was better than the 5.2% U.S. rate of growth, showing improvement from 2010 when the state's 2.9% rate of growth fell short of the 3.8% growth seen nationally. Per capita personal income (PCPI) in 2011 totaled $37,527, representing 90% of the U.S. level and ranking Oregon 32nd among the states. Modest 2.5% growth in PCPI is expected in 2013 with improving 4.1% and 4.3% growth expected in 2014 and 2015, respectively. MODERATE DEBT BURDEN 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, 2012, the state's debt at 5.3% of 2011 personal income is above average but still a moderate burden on resources. Principal amortizes at a just below-average pace that has improved from fiscal 2011. Oregon's PERS, which had a funded ratio of 112.3% at Dec. 31, 2007 declined to 82% as of Dec. 31, 2011, partly reflecting system assets that are marked to the market annually with no smoothing of asset declines; therefore fully reflecting negative financial market performance. The state's share of other-post employment health benefits is funded at 52%, with a 13% funded ratio for the much smaller premium account. The governor has proposed changes to the pension system to provide annual savingsto employers, as noted above, and improve the system's accrued liability position. The PERS board is also expected to soon consider a reduction in the investment return assumption, from 8% to 7.5%, thereby increasing the actuarially accrued liability. The board is also expected to consider an extension of the unfunded pension amortization period from the current 20 years for tiers one and two employees and 16 years for tier three employees. On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals 8% of 2011 personal income, modestly above the median for U.S. states rated by Fitch. The calculations include 22.8% of the liability of PERS that Fitch estimates to be attributable to the state; the state reports their portion to be 84.3% funded as of Dec. 31, 2011.
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