TEXT - Fitch rates Oregon's $171 mln GOs 'AA+'

Wed Jan 30, 2013 1:46pm EST

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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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