Fitch Rates $417MM Ohio GO Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to $416.75 million state of Ohio general obligation (GO) bonds as follows:

--$184.28 million common schools GO refunding bonds, series 2011A;

--$108.145 million higher education GO refunding bonds, series 2011A;

--$98.86 million infrastructure improvement GO refunding bonds, series 2011B;

--$25.465 million natural resources GO refunding bonds, series P.

The bonds are expected to sell via negotiation on or about July 18, 2011.

In addition, Fitch affirms the 'AA+' rating on approximately $7.6 billion outstanding GO bonds of the state and the 'AA' rating on $2.4 billion of appropriations-backed bonds of the state.

The Rating Outlook is Stable.

RATING RATIONALE:

--Ohio's economy is broad and diverse and has recently stabilized from the recession's large-scale employment losses. The state remains exposed to a disproportionately large manufacturing sector.

--The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed, although the state continues to employ debt restructuring, and includes asset sales in fiscal 2012, as part of its budget balancing measures.

--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 in the downturn required extensive actions to address a large structural budget gap in the current biennial budget.

KEY RATING DRIVER:

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

SECURITY: General obligation, full faith and credit of the state of Ohio, excluding net lottery proceeds and highway user receipts.

CREDIT SUMMARY:

Ohio's 'AA+' GO rating reflects the state's careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden, tempered by an economy that is still struggling to regain jobs lost in the recession despite recent signs of stabilization. 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. Steps taken in the fiscal 2010-2011 biennial budget, and the conservative estimate of revenues in fiscal 2010 and significant overperformance of revenues in fiscal 2011 resulted in balanced operations, but the reliance on one-time revenues to achieve balance resulted in a sizable budget gap for the subsequent biennium that began on July 1.

After a long slump, economic momentum has been building in the state and 2011 is recording notable improvements, particularly in durable goods manufacturing, which recorded a year-over-year 11,900-job increase in May 2011. Other notable job gains occurred in education and health services (30,500), professional business services (20,900) and leisure and hospitality (10,600), adding to a net total year-over-year job increase of 60,000. This growth follows only modest job additions following the 2001-2002 recession and the recent downturn, which saw the state losing jobs beginning in 2007 and, as the rate of decline accelerated, losing over 289,000 jobs (5.4%) during calendar year 2009. Employment losses continued into 2010 and the job market bottomed out in January, although year-over-year job growth was not sustained until July 2010. This uneven progress resulted in 2010 recording an additional 42,100 jobs (0.8%) lost from 2009.

Overall, state employment increased 1.2% year-over-year in May 2011 as compared to the national rate of increase of 0.7%. These gains resulted in a May 2011 unemployment rate that has fallen below the U.S. average, of 8.6% compared to 9.1% for the nation, after trending significantly above the average from 2004 to 2010, peaking at 122% of the nation in 2007. The increased employment has also improved personal income indices; Ohioans' first quarter 2011 personal income growth of 4.8% nudged just ahead of the U.S. average of 4.7%, although the region had a stronger gain of 5.1%. Generally, personal income gains have been limited in Ohio in the last decade and the slower than average growth has resulted in Ohio's per capita income standing at 90% of the national average.

Fitch considers Ohio's financial management to be sound, with the state consistently maintaining budgetary balance, including during the downturn. However, Fitch notes that during the downturn the state developed a reliance on one-time measures for fiscal relief that continues with the debt restructuring and asset sales included in the enacted budget balancing measures for fiscal 2012.

To address a large forecast deficit, the enacted budget for the 2012-2013 biennium cuts spending, institutes Medicaid reforms, restructures outstanding debt, reduces state distributions to local governments and school districts, sells state prisons for operational savings, leases the state's liquor enterprise system, and redirects revenue to the state general revenue fund by accelerating the phase-out of certain tax reimbursements to school districts and other local governments. As part of the 2011 legislative session, collective bargaining reforms were also enacted as a means of providing tools to local governments to reduce labor costs, potentially offsetting some of the local aid cuts. These reforms, however, are being challenged and will be voted on in a statewide referendum this November.

Although the enacted budget contains one-time measures to achieve balance, these measures are concentrated in the first year of the biennium. One-time measures in fiscal 2012 total $1 billion and include: $440 million in combined savings from the current debt restructuring and one proposed for August, and $258.5 million from a lease, through bond financing, of the state's liquor enterprise to a not-for-profit corporation; the state believes there is a potential for $205 million of these measures to be recurring. One-time measures drop to $30 million in fiscal year 2013 and the state also believes there is potential for these measures to be recurring. The budget does not contain any revenue raising measures and instead institutes the final phase of a previously suspended personal income tax (PIT) reduction, effective Jan. 1, 2011, reducing revenues by an estimated $440 million in fiscal 2012.

General fund revenues in fiscal 2012 are projected to decline by 2.2%, reflecting the falloff of federal stimulus aid, the PIT rate reduction, moderate growth in non-auto sales tax receipts, and the acceleration of the phase-out of certain state tax reimbursements to local governments. Baseline revenue sources in fiscal 2013, which include expected economic growth and the PIT rate cut, are forecast to increase by 7.1% from fiscal 2012 and include a 6.1% forecast increase in state tax receipts, supported by a projected 5.9% increase in PIT revenue and an approximate 7% increase in sales tax revenue. Fitch believes there is potential downside risk to this out-year revenue forecast.

The recent economic improvement has bolstered the state's economically sensitive revenue sources. Tax receipts for fiscal 2011 increased 9.1% from fiscal 2010 and were 5.8%, $973 million, ahead of estimate. The sales tax showed renewed strength, up 7.1% from fiscal 2010 and 4.3% over estimate, and PIT receipts are also much improved, up 12% from fiscal 2010 and 7.3% ahead of estimate. The state reports that it allocated the bulk of the revenue in excess of estimates to meet obligations that, pursuant to the last biennial budget, had been scheduled to be deferred to fiscal 2012 in order to balance fiscal 2011, such as the June 2011 Medicaid managed care payment as well as the final fiscal 2011 state share of instruction subsidy payment to higher education. The current state forecast estimates that the state ended the biennium on June 30, 2011 with an $844.5 million cash balance, equal to 3% of general fund revenue, and a $430.7 million unencumbered general fund balance (1.6% of general fund revenue), allowing for a $45 million transfer for disaster and emergency funds and a $246.9 million deposit to the budget stabilization fund.

These results represent significant improvement from financial operations that were considerably strained in the downturn from lagging state revenue collections and implementation of a multiyear tax cut. Revenue weakness required multiple rounds of balancing actions in fiscal 2009, including exhausting the $1 billion rainy-day fund balance. Budget balance in the fiscal 2010-2011 biennium was achieved through the use of one-time and ongoing resources, including $4.2 billion in federal stimulus and $1 billion in transfers or savings, including $272 million from 10 unpaid employee leave days.

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. 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 was higher at approximately $510 million, or 2.2% of fiscal 2010 revenues.

State debt management is generally conservative although the fiscal 2010-2011 biennial budget included debt restructuring to provide $736 million in savings and the current biennial budget also contains debt restructuring to provide $440 million in savings in the first year. Debt amortization is rapid, with all debt fully retired in 20 years; 69% of GO debt amortizes in 10 years, a high level, but is down slightly due to the debt restructuring. Total tax-supported debt of $12.1 billion is equivalent to a manageable 2.9% of 2010 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. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 67.8% funded ratio.

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

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;

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

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

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

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.