Fitch Rates Oklahoma's $25MM Lease Revs 'AA'; Outlook Stable

Fitch Rates Oklahoma's $25MM Lease Revs 'AA'; Outlook Stable | Bild: © ad-hoc-news

--$25.18 million, capital improvement revenue bonds (River Parks Authority Projects), series 2012A.

The bonds are expected to sell via negotiation the week of Feb. 14, 2012. In addition, Fitch affirms the following ratings:

--$222.5 million in outstanding State of Oklahoma general obligation (GO) bonds at 'AA+';

--$1.7 billion in outstanding appropriation-backed debt of the state issued by the Oklahoma Development Finance Authority (ODFA) and the OCIA at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a limited obligation of the authority paid under a lease with the Department of Central Services (DCS), subject to annual legislative appropriation. The DCS agrees to budget and request appropriation each fiscal year for payments under the lease agreement.

KEY RATING DRIVERS

--APPROPRIATION MECHANISM: The rating on the bonds backed by Oklahoma's lease appropriation, which is one notch below the state's GO rating, reflects the state's general credit standing, sound lease structure, and statutory authorization for these types of bonds.

--CONSERVATIVE FINANCIAL OPERATIONS: The state's financial operations are conservative, including maintenance of separate rainy day (the constitutional reserve) and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. Strong growth in income and severance tax revenues has contributed to recent improvement in financial operations.

--COMMODITY-BASED ECONOMY: The state's commodity-based economy, linked to oil and gas production as well as various agricultural products, has been quick to emerge from the recent recession, evidenced in low unemployment rates and strong job growth. A large military presence and improving manufacturing sector provide for some economic balance.

--LOW DEBT LEVELS: Oklahoma's debt levels are low, and tax supported debt is amortized relatively quickly. Most new issuance is in the form of lease revenue bonds.

--IMPROVED PENSION FUNDING: Funding for the state's pension systems has recently improved through legislative action to restore system integrity, although unfunded liabilities remain sizable.

WHAT COULD TRIGGER A RATING ACTION

Changes in Oklahoma's 'AA+' GO rating, to which this rating is linked.

CREDIT PROFILE

The rating reflects the payment of lease rentals by DCS to OCIA from state revenues, subject to annual legislative appropriation. The DCS covenants to include a budget request for lease payments sufficient to pay debt service for this program. Bond proceeds will fund improvements in Tulsa County: improving the Zink Dam, streambank stabilization, and construction of two additional low-water dams on the Arkansas River. The improvements will be made by the River Parks Authority (RPA), an Oklahoma public trust organized for the benefit of the city of Tulsa and Tulsa County; RPA is a party to the lease, but has no obligation to make payments thereunder.

OCIA is one of the principal financing agencies of the state as the use of GO bonds is limited. The term of the lease extends through the life of the bonds; lease payments are not abatable. In the aggregate, the state's GO and lease debt service expense is a manageable 4% of fiscal 2011 appropriations. Including the current offering, net tax supported debt totals $2 billion, equal to 1.5% of 2010 personal income. The fiscal 2011 operating fund appropriation for the DCS was $16 million; the appropriation for the fiscal year beginning July 1, 2011 is $17.3 million, an 8.4% increase. The increased appropriation for DCS was in marked contrast to most departmental reductions in the state's budget adopted for fiscal 2012, as the state enacted various gap closing measures.

The state's 'AA+' GO bond rating and Stable Outlook reflect low debt levels and disciplined financial policies, including an appropriation limit of 95% of certified general fund revenues, close monitoring of revenue results, and provisions to maintain separate rainy day (the constitutional reserve fund) and cash reserves. The state continues to demonstrate a willingness and ability to address fiscal challenges including revenue underperformance through the recent recession. Tax revenues are constrained both by an economic base with below-average wealth levels and a supermajority requirement of the legislature or voter referendum to raise taxes.

Outperforming national growth trends, the state increased employment by 2.7% year-over-year in December 2011 compared to 1.3% for the nation. The unemployment rate has hovered around 6.1% since October 2011 and remained markedly below the nation's 8.5% rate as of December. Oklahoma's job growth has been fueled by expansion in its manufacturing sector, most notably in durable goods, which experienced 14.1% year-over-year growth in December 2011. Construction employment and employment related to the state's sizable oil production businesses continue their positive trends, with 4.4% and 13.3% year-over-year growth, respectively. Current growth pattern is a noted improvement from the recent recession when non-farm employment declined 3.2% in 2009 as compared to 4.4% for the nation then exceeded the national contraction in 2010 at 1% compared to 0.8% for the U.S. Based on an analysis conducted by the Oklahoma City University, one in seven jobs in the state is related to the oil and gas industry, and one-third of the state's gross state product is attributable to the drilling, production, and economic multiplier effects of this sector.

The positive economic momentum translated into strong receipts for fiscal 2011, particularly in income, sales, and oil severance taxes, resulting in the state depositing $249 million to the constitutional reserve fund at fiscal year-end, helping to offset the $273 million appropriated from that fund for operations in the adopted budget for the year. The fund had been lowered to $373 million in fiscal 2010, reduced from full funding at 10% of prior year appropriations ($596 million) in fiscal 2009, to close a budget gap in fiscal 2010 that resulted from the weakened economy. The cash flow reserve, derived from any revenues in excess of the 95% appropriated and maintained at 10% of general fund appropriations, was fully funded in fiscal 2011 at $464 million. The cash flow reserve is typically reduced during the fiscal year and replenished as revenues are received late in the fiscal year.

The enacted $6.5 billion fiscal 2012 budget addressed a $500 million forecast operating gap through a variety of expenditure reductions, including a 4.7% cut to education. One-time measures included a $100 million cash transfer from the transportation department, offset with state approval for $70 million in bonding authority; $120 million from the cash flow reserve fund; $100 million from the rainy day fund that had been appropriated in fiscal 2011 for this purpose; and the appropriation of $99 million of remaining federal stimulus funds.

Revenues through December have been performing well and revenues to the general revenue fund (GRF) were up 14.1% yoy and 9.7% ahead of estimate, supported by 13.4% yoy growth in the personal income tax (PIT). Corporate income tax results have notably improved and were up 37.3% yoy through December and 64.7% ahead of estimate. The sales tax also showed positive results, with 7.7% yoy growth that is 1.8% ahead of estimate. These positive results have translated into a revised GRF forecast for fiscal 2012 of $5.46 billion; a 4.3% increase from the official estimate in June 2011. Further, the constitutional reserve fund is forecast to increase to $472.7 million in June 2012.

In December 2011, the State Board of Equalization (SBE) forecast fiscal 2013 GRF sources to grow to $5.54 billion; 1.5% more than the December forecast for fiscal 2012 revenue. Since the December forecast, gas prices per thousand cubic feet (MCF) have fallen from $4 per MCF to about $2.50 per MCF, with the fall expected to have an undetermined impact on the revenue forecast. Gross production taxes on oil and natural gas generated $68.8 million in January, a decrease of $5.5 million or 7.4% from January 2011. Compared to December 2011, gross production taxes are down 3.7%. The SBE is scheduled to meet again in February to update the revenue forecast tied to the fiscal 2013 budget adoption.

The governor has proposed a $6.6 billion operating budget for fiscal 2013 that is a 1.9% increase from fiscal 2012. While most departmental spending is proposed to remain flat, with some reallocated spending between the department of mental health and the state's health care authority (Medicaid provider), the budget includes a $99.7 million (93.4%) increase in state GRF funding to the Department of Transportation (DOT). The budget increase, funded by an increased allocation of income tax revenue from the GRF to the DOT's ROADS fund, as well as an increased allocation of motor vehicle revenue, would fund capital improvements to many of the state's bridges.

As part of the budget proposal, the governor has proposed a major revamping of the personal income tax (PIT) structure that would collapse the seven income tax brackets to three while lowering the effective tax rates. The estimated loss of $104 million in PIT revenue in fiscal 2013 includes some offsets by the elimination of some income tax deductions, credits, and exemptions. The budget also includes a proposal for a new two-year vehicle registration system for non-commercial vehicles estimated to bring in $105 million. The governor's budget was released this week, and it is too early to predict the outcome of these proposals.

Several pension reform measures were adopted in the fiscal 2011 legislative session to address funding gaps in the state's pension systems. Unfunded cost of living adjustments were eliminated, reducing all seven state systems' unfunded liabilities by one third; the minimum age for retirement was raised for all new employees; a portion of all future surplus revenue and one-time funds will be dedicated to the fiscal restoration of the systems; employer and employee contribution rates will be set to meet the annual actuarially required contribution (ARC); and other actions will be taken to restore system integrity.

The outcome of these pension reforms has been a significant improvement to these systems' funded ratios. For fiscal 2011, OPERS (state's largest system) funded ratio increased to 80.7% from 66% and TRF's (teacher's) funded ratio increased to 56.7% from 47.9%. Using Fitch's more conservative 7% discount rate assumption (instead of the 7.5% rate assumed by PERS), PERS would have a 76.5% funded ratio, while TRF's funded ratio changes to 51.1%. The state historically has had difficulty in meeting the ARC for the TRF and PERS; subsequent to the noted pension reform, these systems are expected to meet their ARC requirements in the future, which Fitch believes will be manageable for the state.

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 report '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);

--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' (Feb. 17, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

Enhancing the Analysis of U.S. State and Local Government Pension Obligations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604785

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