Fitch Rates Oklahoma DFA's $19.27MM Lease Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following lease revenue bonds of the Oklahoma Development Finance Authority (ODFA):

--$10.705 million Oklahoma State System of Higher Education master real property lease revenue bonds, tax-exempt series 2011B;

-- $8.565 million Oklahoma State System of Higher Education master real property lease revenue bonds, taxable series 2011C.

The bonds are expected to sell via negotiation on July 26, 2011.

In addition, Fitch affirms the following ratings:

--$223 million in outstanding State of Oklahoma general obligation (GO) bonds at 'AA+';

--$1.7 billion in outstanding appropriation-backed debt of ODFA and the Oklahoma Capital Improvement Authority (OCIA) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a limited obligation of the authority paid under a lease with the Regents of the Oklahoma State System of Higher Education from state general fund revenues, subject to annual appropriation. Appropriations to the university system are made by the legislature in one consolidated form and allocated to participating institutions by the regents.

CREDIT SUMMARY

The rating and Outlook reflect the state's conservative financial operations, growing economy, and low debt levels.

KEY RATING DRIVERS

--Conservative Financial Operations: Financial operations are conservative, including maintenance of separate rainy day and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. Fiscal year 2011 revenues were 4.5% above estimates and the state was able to deposit $219 million to the rainy day fund at the end of fiscal year 2011 from the revenue bonus - the largest deposit since fiscal 2005.

--Growing Economy: The state's economy is commodity based with a focus on oil and gas production, as well as various agricultural products. A strong military presence provides a stabilizing factor.

--Low Debt Levels: Debt levels are low and tax supported debt is amortized relatively quickly. Most new issuance is in the form of lease revenue bonds.

--Weak Pension Funding: Funding for the state's pension systems has steadily weakened but recent legislative action to restore system integrity should improve funded ratios.

--Appropriation Mechanism: The state regents receive one appropriation for all budgetary purposes with lease payments transferred monthly from the first dollars allocated by the regents to participating institutions. The state bond advisor tracks lease payments that are appropriated to the board of regents.

WHAT COULD TRIGGER A RATING ACTION

Changes in Oklahoma's GO 'AA+' rating, to which this rating is linked. The state's GO rating will be driven by continued timely action to maintain budgetary balance and rebuild reserves.

CREDIT PROFILE

The rating reflects the payment of lease rentals by the State Regents from state general fund revenues, subject to annual appropriation. Both the state constitution and enabling statutes provide for appropriation of lease payments in support of the master real property and equipment programs. All higher education appropriations to the State Regents are consolidated, with the State Regents authorized to allocate funds first to payment of lease rentals of each participating institution. The State Regents covenant to include a budget request for lease payments sufficient to pay debt service for these programs.

The fiscal 2011 appropriation for the state regents was $1 billion; the appropriation for the fiscal year beginning July 1, 2011 is $945 million, a 5.8% decrease; however, the regents received a supplemental appropriation of $10 million, lowering the overall rate of decrease to 4.8%. ODFA 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, with a maximum term of 30 years; lease payments are not abatable.

The state's 'AA+' GO bond rating and Stable Outlook reflect low debt levels (debt burden of 1.5%) 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. Debt levels are low but rising.

As is the case with many states, the funding for Oklahoma's pension systems has declined, with the largest system, PERS, declining from a 73% reported funded ratio in 2008 to 66% reported funded as of June 30, 2010. Using Fitch's more conservative 7% discount rate assumption (instead of the 7.5% rate assumed by PERS), PERS would have a 62.8% funded ratio. The funding for the teacher's retirement fund (TRF) has also declined; from 52.5% reported funded in 2008 to 47.9% as of June 30, 2010. Using Fitch's 7% discount rate, the funded ratio drops to a minimal 42.8% (see Fitch's report dated Feb. 17, 2011, 'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' available on Fitch's web site at 'www.fitchratings.com'). Notably, only once out of the past 15 years has the state made the annually required contribution (ARC) for the TRF; it has not made the ARC for PERS since 1999.

In the 2010 legislative session, the state made adjustments to the contribution rates and benefit calculation factors for PERS, designed to improve the funded ratio; the TRS contribution rates were adjusted during the 2007 legislative session. Several pension reform measures were adopted in the fiscal 2011 legislative session to address the funding gaps in these 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 ARC; as well as other actions to restore system integrity.

Strong receipts, particularly in income, sales, and oil severance taxes, in fiscal 2011 have resulted in the state depositing $219 million to the constitutional reserve fund at fiscal year-end, triple the $71 million earlier forecast in February 2011, and helping to offset the $273 million appropriated from that fund for operations. The constitutional reserve fund had been fully funded at 10% of the prior year appropriation since fiscal year 2001 until drawn upon to close a budget gap in fiscal 2010. The state ended fiscal 2010 with $373 million remaining in the constitutional reserve fund, having utilized $223 million in fiscal 2010, and the cash flow reserve remained funded at $464 million. The cash flow reserve is maintained at 10% of general fund appropriations and is derived from any revenues in excess of the 95% appropriated, as noted above. It is typically reduced during the fiscal year and replenished as revenues are received late in the fiscal year.

The fiscal 2011 results are a distinct improvement from financial operations that were notably affected by the recent recession. The weakened economy resulted in fiscal 2009 general fund revenues that were approximately 6.8% less than expected and 7.3% below the prior year. The enacted fiscal 2010 budget required 7% across-the-board reductions in agency spending and, when first-quarter revenues were realized, 26% below estimate; another 5% reduction was implemented, later revised to 3.4% as federal stimulus funds became available to backfill expenditure reductions. The fiscal 2010 budget was balanced with approximately $1.2 billion in federal stimulus funds and a partial drawdown of the rainy day fund, as noted above. With revenues expected to remain weak in fiscal 2011, the enacted budget achieved balance with a further reduction in appropriations of 3.5%, use of remaining federal stimulus funds, and depletion of the rainy day fund.

Revenue collections in fiscal 2011 have markedly rebounded, with general fund revenues up 10.5% year-over-year; 4.5% above estimate. Sales tax revenues have increased 10.1% and were 5.3% above estimate while personal income tax collections were 7.3% higher than expected with positive growth of 7.2% year-over-year. Oil and natural gas production remain important to the state's financial condition; increases in oil prices have fueled 37.8% year-over-year growth in oil production tax revenue, offsetting a 4.9% year-over-year decline in natural gas tax revenue for a 9.9% year-over-year production tax growth. However, the falloff in natural gas tax revenue resulted in total production tax revenue falling 5.9% short of estimate.

The enacted, $6.5 billion fiscal 2012 budget addresses a $500 million forecast operating gap through a variety of expenditure reductions, including a 4.7% cut to education, inclusive of a 5.8% cut to higher education, contributing to an overall reduction in state spending of 3.2% as compared to fiscal 2011. One-time measures include 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.

The state's economy is diversifying and growing. Oklahoma continued to grow while the nation as a whole entered the recession, but the state contracted as well in 2009 with non-farm employment declining 3.2%, comparing favorably to the national decline of 4.4%. Oklahoma lost a greater percentage of employment in 2010 compared to the nation; 1% compared to 0.8%, but state employment was up 1.3% year over year in May 2011, trending above the national growth rate of 0.7%. As of May 2011, unemployment has decreased and remains well below the national rate at 5.3%, versus 9.1% for the nation. Personal income, at 89.7% of the national average in 2010, experienced significant year-over-year first quarter 2011 growth; up 6.9% compared to 4.6% for the nation and 5.9% for the region.

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.

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

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.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

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