Fitch Rates Ohio Building Authority's $40MM Bonds 'AA'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following:

--$40 million State of Ohio (Ohio Building Authority) state facilities bonds (Adult Correctional Building Fund Projects), 2011 series A.

The bonds are expected to sell via competitive bid on Jan. 20, 2011. Fitch also affirms the 'AA' rating on the state's approximately $2.4 billion outstanding appropriations backed bonds and the 'AA+' rating on approximately $7.5 billion of outstanding general obligation (GO) bonds. The Rating Outlook is Stable.

RATING RATIONALE:

--The rating on bonds backed by Ohio's lease appropriations, one notch below the state's GO rating, reflects the state's general credit standing, sound lease structures, the broad state purposes of financed projects, and constitutional authorization for these types of bonds.

--Despite Ohio's economic breadth and diversity, the disproportionately large manufacturing sector has contributed to broader economic weakness and limited prospects for longer-term growth.

--The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed although the budget included some restructuring for fiscal relief in the current biennium.

--The state generally has a careful and conservative approach to financial operations and has consistently managed to achieve budgetary balance despite revenue declines associated with economic weakness. However, the use of one-time revenues, including debt restructuring, federal stimulus funds, and the draw-down of rainy day funds combined with increased state responsibility for education funding has created a large structural budget gap to be addressed in the coming biennium.

KEY RATING DRIVER:

--Continued commitment to maintaining budget balance and rebuilding the budget stabilization fund.

SECURITY:

The bonds are a special obligation of the state, payable from payments under various lease agreements, subject to appropriation. Source of payment is appropriation from the general revenue fund.

CREDIT SUMMARY:

The bonds now offered are secured by rental payments that are appropriated biennially under a lease between the Ohio Building Authority and the department of rehabilitation and correction. The debt is authorized by Ohio's constitution and secured by the state's pledge of legislative appropriation, with the leases renewable biennially until bonds are repaid. The Building Authority is required to submit an estimate of debt service to the department and to the director of budget and management prior to the start of each fiscal year, and debt service must be included in the budget. The trustee does not have the ability to take possession of or operate the leased projects. The current offering will finance various capital improvements for the department, including various improvements to existing facilities.

The rating is based on Ohio's 'AA+' general obligation rating, which reflects the state's careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden, tempered by a severely weakened economy that remains closely tied to the troubled manufacturing sector. The recent recession had a widespread impact on the state's economy, accelerating a longstanding slump in manufacturing and weighing on the slowly growing service sector. State revenue collections lagged in the downturn, exacerbated by a multiyear tax cut. Revenue weakness required multiple rounds of balancing actions in fiscal year (FY) 2009, including exhausting the $1 billion rainy day fund balance. Although the steps taken in the fiscal 2010-2011 biennial budget and the conservative estimate of revenues resulted in balanced operations in fiscal 2010, the reliance on one-time revenues to achieve balance and the scheduled expansion over several biennia of the state's responsibility for education funding leaves the state with a structural gap to be addressed in its next biennial budget.

State economic performance, already dragged down in this decade by a chronic decline in the manufacturing sector, was disproportionately affected in the recession. Following the recession of 2001-2002, employment increased a total of just 0.3% from 2004 to 2007, compared to U.S. growth of 4.7% over the same period. Job losses were more severe in the recent downturn; the state lost over 289,000 jobs (5.4%) during calendar year 2009. Employment losses continued into 2010 and although the job market appears to have bottomed out, it is struggling to recover. It is notable that there were year-over-year increases in manufacturing jobs in each of the last six months (3.4% in November 2010) as manufacturing losses, particularly those tied to automotive sector weakness, have been particularly severe over the past decade. Personal income gains have been limited in Ohio in this decade at approximately 60% of gains nationally, although declines during the course of the recession were less than the national and regional averages. The slower than average growth has dropped Ohio's ranking, in terms of per capita income, to 34th among the states in 2009, down from 28th in 2005.

The state's financial management is sound, with the state consistently maintaining budgetary balance, including during the downturn. Over the course of the fiscal 2008-2009 biennium, the state grappled with revenue shortfalls totaling approximately $2.7 billion, prompting multiple rounds of spending cuts, transfers and other measures to maintain fiscal balance. Fiscal 2009 tax receipts fell $951 million, or 5.3% below revised estimates, largely due to weaker than expected personal income tax collections. As the state's constitution precludes ending a fiscal year in deficit, spending was reduced further and the rainy day fund, which had been funded at $1 billion at the start of the year, was applied to close the gap. The year ended with a fund balance of $389 million, or 2.3% of tax revenues.

Budget balance in the current fiscal 2010-2011 biennium was achieved through the use of additional one-time and ongoing resources, including $2.4 billion in federal stimulus and $1 billion in transfers or savings, including $272 million from 10 unpaid employee leave days. The budget also assumed revenues from newly authorized video lottery terminals (VLTs) which initially had been expected to contribute $851 million over the biennium. The VLT plan was delayed when the Ohio Supreme Court ruled in favor of a challenge that implementation should be subject to a voter referendum. The challenge was subsequently withdrawn; however, the state is proceeding with court validation of the VLT implementation. A suspension of the final phase of the scheduled income tax rate reduction is being used to close the resulting $851 million gap. The budget forecasts ending the biennium on June 30, 2011 with a $154 million fund balance.

Fiscal 2010 closed with revenue performance largely on target, with state tax receipts coming in just 0.7% below estimate but down 5% year-over-year. Personal income tax (PIT) collections were 3.1% below estimate and down 5% year-over-year. Continued strength in sales and cigarette taxes as well as a number of other smaller taxes offset some of the decline in the PIT. The general fund balance was reduced to just $139 million, or 0.6% of fiscal 2010 revenues, although the cash balance is higher at approximately $510 million, or 2.2% of fiscal 2010 revenues. Through the first five months of fiscal 2011 (through November), tax receipts have increased 7% year-over-year and are 3.3% ahead of estimate. The sales tax is showing some strength, up 8.6% year-over-year as of November and 3.3% over estimate. The state also expects to receive approximately $515 million in additional federal matching funds for Medicaid (FMAP) that were not assumed in the biennial budget.

State debt management is generally conservative although the enacted budget assumed debt restructuring to provide $736 million in savings over the fiscal 2010-2011 biennium. Debt amortization is rapid, with all debt fully retired in 20 years; 72% of GO debt amortizes in 10 years, a high level, but down slightly due to the debt restructuring. Total tax-supported debt of $11.3 billion equals 2.8% of 2009 personal income. 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 in 2007 to 75% funded as of December 2009.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

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