TEXT - Fitch rates Ohio (Treasurer of State) bonds
Feb 15 - Fitch Ratings assigns an 'AA' rating to the state of Ohio's (Treasurer of State) $119.48 million capital facilities lease-appropriation bonds, series 2013A and 2013B. They consist of the following issues: --$25 million capital facilities lease-appropriation bonds, series 2013A (mental health facilities improvement fund projects); --$13.845 million capital facilities lease-appropriation refunding bonds, series 2013B (mental health facilities improvement fund projects); --$18 million capital facilities lease-appropriation bonds, series 2013A (cultural and sports facilities building fund projects); --$18.055 million capital facilities lease-appropriation refunding bonds, series 2013B (cultural and sports facilities building fund projects); --$44.58 million capital facilities lease-appropriation refunding bonds, series 2013A (adult correctional building fund projects). The bonds are expected to sell via negotiation the week of Feb. 25, 2013. In addition, Fitch affirms the following ratings: --$8.4 billion outstanding state general obligation (GO) bonds at 'AA+';--$2 billion outstanding appropriations backed bonds of the state at 'AA'. The Rating Outlook is Stable. SECURITY The bonds are a special obligation of the state, payable from payments under separate lease agreements between the Ohio Public Facilities Commission (OPFC) and the following state agencies: the departments of mental health (DMH) and developmental disabilities (DDD); the Ohio cultural facilities commission (CFC); and the department of rehabilitation and correction (DRC). All lease agreements are subject to appropriation from the state's general revenue fund (GRF). KEY RATING DRIVERS APPROPRIATION MECHANISM: The rating on the bonds backed by Ohio's lease appropriation (one notch below the state's GO rating) reflects the state's general credit standing, sound lease structure, and constitutional authorization for these types of bonds. CONSERVATIVE FINANCIAL MANAGEMENT: The state generally has a careful and conservative approach to financial operations. The state has also consistently managed to achieve budgetary balance, inclusive of positive operating results in fiscal 2012 which provided for an addition to the state's rainy day fund. BROAD ECONOMY WITH LARGE MANUFACTURING SECTOR: The state's economy is broad and diverse, although the manufacturing sector continues to represent a disproportionally large segment of the economy. The state economy has evidenced a stronger rebound than the nation as a whole in the current recovery. MODERATE LIABILITY BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed and primarily consists of GOs. On a combined basis, outstanding debt and pension obligations are a manageable and below-average burden on the state. RATING SENSITIVITY The rating is sensitive to changes in the state's 'AA+' GO rating to which this rating is linked. CREDIT PROFILE The series 2013A bonds currently offered are secured by rental payments that are appropriated biennially under separate leases between the OPFC and DMH, DDD, CFC, and DRC (the state agencies) pursuant to respective trust agreements. The debt is authorized by the state's constitution and secured by the state's pledge of legislative appropriation, with the leases renewable biennially until the bonds are repaid. The OPFC is required to submit an estimate of the respective debt service requirement to the state agencies and to the director of budget and management prior to the start of each fiscal year. Debt service must be included in the budgets of the state agencies. The trustee does not have the ability to take possession of or operate the leased projects. The current offering will be applied to refunding outstanding bonds for debt service savings as well as capital projects of the state agencies. The state's 'AA+' GO rating is based on its careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden. Debt burden is supported by an economy that is steadily adding jobs lost in the recession. The recession had a widespread impact on the state's economy, accelerating a longstanding slump in manufacturing and weighing on the slowly growing service sector. The state has recorded consecutive months of year-over-year (y-o-y) job gains since July 2010, largely incorporating gains in the manufacturing sector as well as in the services sectors, offset by continued losses in government employment. Sizable budget gaps forecast for the current biennium, which began July 1, 2011, required broad balancing actions, including sharp reductions in aid to municipalities, debt restructuring for fiscal relief, and the lease of the state's liquor distribution system. Tax revenues increased notably y-o-y in fiscal 2012. The state recorded an operating surplus and deposit to its rainy day fund despite a delay in the lease of its liquor distribution system. STEADY ECONOMIC GROWTH The state steadily added jobs in 2011, evidenced by y-o-y growth in every month from July 2010, and 2012 evidenced a continuation of this positive trend. The state recorded y-o-y employment growth of 1.8% in December 2012 as compared to 1.4% growth for the nation. This was led by large increases in durable goods manufacturing; financial activities; professional business services; and education and health services. This steady growth continues to be tempered by ongoing losses in the government sector; modestly down 0.4% y-o-y in December 2012 but 39,100 jobs (4.8%) down from November 2008. After showing strength in 2011, motor vehicle parts manufacturing employment was consistently down through 2012 (2.8% y-o-y job loss in December) and was joined by uneven motor vehicle manufacturing employment beginning in July 2012 (down 3.8% y-o-y in December 2012). Y-o-y through December 2012, state employment has increased by 94,000 jobs, yet employment remains well below its pre-recession peak that was set in 2006. The pace of the state's y-o-y employment growth in 2012 was consistently more robust than that of the nation as a whole. This resulted in a December 2012 unemployment rate of 6.7% that was below the U.S. average of 7.8%. The current rate is a notable improvement from rates that ranged above the national average in the recent recession, with an annual peak of 122% of the U.S. average in 2007 (compared to 86% for the month of December). State personal income per capita of $37,836 (91% of the U.S.) has remained steady the past few years after trending downward from almost 98% in 1994. SOUND FINANCIAL MANAGEMENT Fitch considers the state's financial management to be sound, with the state consistently maintaining budgetary balance, including during the recession. The state's fiscal position is substantially improved from the downturn, when the state employed one-time measures for fiscal relief, a pattern that continued into the current biennium. The enacted budget for the 2012-2013 biennium cut spending and instituted Medicaid reforms. This while directing the refunding of outstanding debt for current-year debt service savings in the first year of the biennium, the sale of state prisons for operational savings, the leasing of the state's liquor enterprise system, and the redirection of revenue to the state GRF by accelerating the phase-out of certain tax reimbursements to school districts and other local governments. One-time measures in FY 2012 were budgeted at $1 billion with a drop to $30 million in FY 2013. The state estimates actual GRF revenues in fiscal 2012 grew 3.1% from fiscal 2011, surpassing the forecast of a 2.2% decline. This was partly driven by a steep drop-off in federal stimulus funds. These results produced a $129 million net increase in the GRF's cash balance to $973.4 million, after a $235.1 million transfer to the state's budget stabilization fund (BSF). The BSF, intended to carry a balance up to 5% of the prior year GRF revenues, is now equal to $482 million (about 1.8% of fiscal 2012 GRF revenue). The state's unencumbered ending fund balance in FY 2012 was $371 million. Revenue sources in fiscal 2013, including expected economic growth, are forecast to increase about 6% from actual receipts in fiscal 2012 and include a 7% forecast increase in state tax receipts. Achieving these results requires a 6.4% increase in PIT revenue and a 4.2% increase in sales tax revenue. Year to date through January 2013, state tax receipts are running 9.9% higher y-o-y and are 2.4% above the forecast. The robust results incorporate PIT revenue received in January 2013 that was 20.2% above forecast. The state attributes the performance to the strong receipt of estimated quarterly payments. The January estimated payment was the last quarterly payment for tax year 2012. The strong showing is thought to reflect the push-forward of income into 2012 due to uncertainty regarding federal tax law changes. An updated fiscal 2013 revenue forecast included with the governor's recently proposed biennial budget for 2014-2015 includes the receipt of proceeds related to the JobsOhio lease. Despite continuing litigation regarding the transfer of the liquor distribution system, the state decided to proceed with the transfer of the system and JobsOhio issued bonds secured by net liquor profits. The transaction defeased the outstanding debt secured by the same revenues and funded a $500 million transfer to the state and provided for economic development programs and working capital. The $500 million transfer to the state is expected to flow through the state's GRF; in combination with the beginning $973 million cash balance and anticipated positive operating results. This is expected to boost the end of year fund balance to a forecast $1.7 billion. After end of year transfers and the targeted set-aside of one half of one percent of GRF revenues, the state's BSF is expected to receive the balance of the excess revenue. This stands to provide for the balance to increase to its statutory maximum of $1.46 billion. Excess revenue beyond this statutory maximum, estimated at almost $416 million, would be statutorily required to be returned to PIT taxpayers through an adjustment of PIT rates in 2013. The governor's recently released executive budget for the 2014-2015 biennium proposes GRF expenditures of $30.6 billion in fiscal 2014 and $32.7 billion in fiscal 2015. The fiscal 2014 budget proposal is a 10% increase from expected disbursements in fiscal 2013. The budget proposal contains initiatives for state tax reform including: reducing PIT rates, reducing the rate and broadening the base of the sales tax, and reforming the state's oil and gas severance tax system. Expenditure proposals include a new funding formula for the distribution of state aid to elementary and secondary schools and an extension of eligibility for Medicaid coverage. There are no one-time revenue measures included in the budget. The legislature is expected to review the budget proposal during the current session. CONSERVATIVE DEBT MANAGEMENT The state's debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 75% of general revenue fund-backed debt amortized in 10 years. Total tax-supported debt of almost $11.4 billion is equivalent to a manageable 2.6% of 2011 personal income. The $1.74 billion capital improvement plan for FYs 2013 and 2014 will be largely funded by $1.36 billion of general fund-backed debt. The largest beneficiaries of the plan are higher education, primary and secondary education, and local infrastructure projects. Debt ratios are expected to continue to approximate current averages as over $1.5 billion in GRF principal is scheduled to roll off in the next two years. Personal income is also expected to continue to grow. As is the case with many states, funding for Ohio's pension systems has declined significantly, with the largest system, PERS, declining from a strong 96% funded ratio as of Dec. 31, 2007 to 77.4% funded as of Dec. 31, 2011. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 71.2% funded ratio. In September 2012, the governor signed several pieces of pension reform legislation targeted to improve the financial condition of all five Ohio pension systems. Reform measures affected employee contributions, number of years of service credit, minimum retirement age, cost of living calculations, and final average salary calculation. On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals 4.2% of 2011 preliminary personal income. This is roughly one-third below the median for U.S. states rated by Fitch. The calculations include 45% of the liability of PERS that Fitch estimates to be attributable to the state and a small apportionment of the teachers' retirement system (TRS) UAAL for which the state is responsible.
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