NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following state facilities refunding revenue bonds of the Oklahoma Capital Improvement Authority (OCIA):
--$25 million (tax-exempt) series 2013A;
--$275,000 (federally taxable) series 2013B.
The bonds are expected to sell via negotiation on March 14, 2013. In addition, Fitch affirms the following ratings:
--$203.7 million in outstanding State of Oklahoma general obligation (GO) bonds at 'AA+';
--$1.85 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.
The bonds are a limited obligation of the authority payable through separate leases with various state agencies, subject to annual legislative appropriation. The agencies agree to budget and request appropriation each fiscal year for payments under the lease agreements.
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 bolstered financial operations and allowed for consecutive deposits to the rainy day fund.
--CONCENTRATED ECONOMIC BASE: The state's commodity-based economy, based on oil and gas production as well as various agricultural products, has strongly rebounded from the recession, evidenced in low unemployment rates and job growth that is exceeding national averages.
--MANAGEABLE DEBT POSITION: Debt levels are low and tax supported debt is amortized relatively quickly. Most new issuance is in the form of lease revenue bonds. The unfunded pension liability for state employees has improved following significant pension reform.
Changes in Oklahoma's 'AA+' GO rating, to which this rating is linked.
The bonds currently offered are secured by separate lease rental payments to OCIA from state revenues subject to annual legislative appropriation, from the following state agencies: Redlands Community College, state office of attorney general, department of commerce, department of mental health and substance abuse services, the state historical society, and the J.D. McCarty Center for Children with Developmental Disabilities (collectively, 'the agencies'.) OCIA is one of the principal financing agencies of the state as the use of GO bonds is limited. The leases are renewable annually until the bonds are paid and the agencies covenant to include a budget request for lease payments sufficient to pay debt service for this obligation. Lease terms match amortization of the 2013 bonds for the portion that each state agency is accountable; the lease with the state historical society extends until the 2013 bonds mature and lease payments are not abatable. The current offering will be applied to refunding outstanding bonds for debt service savings.
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 has demonstrated a willingness and ability to address fiscal challenges including revenue underperformance through the recent recession. Tax revenues are constrained by a supermajority requirement of the legislature or voter referendum to raise taxes.
Significantly outperforming national growth trends, the state increased employment by 2.2% year-over-year (YOY) in December 2012 compared to 1.7% for the nation; ranking Oklahoma seventh for state YOY employment growth in December 2012. Unemployment rates, which are historically well below the nation, notably decreased YOY in December and are now 5.1% compared to 7.8% for the nation; this rate is sixth lowest among the states. Oklahoma's durable goods manufacturing sector experienced 6.2% YOY growth in December 2012, modestly exceeded by leisure and hospitality at 6.3%. Growth continues to be sustained by the state's large natural resources base; an analysis conducted by the Oklahoma City University found that one in six 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 2012, particularly in income, sales, and oil severance taxes, resulting in the state depositing $328 million to the constitutional reserve fund at fiscal year-end, bringing the reserve to $577.5 million; the second highest balance on record. 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 2012 at $532 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 $6.8 billion fiscal 2013 all funds budget was a 5.1% increase from fiscal 2012 appropriations. Education spending grew by 2.2% and public health spending by 5.3%. Although the forecast of revenue to the general revenue fund (GRF) was expected to be lower than fiscal 2012 due to expected weakness in natural gas tax collections, actual revenues through January 2013 have been performing well. Through January, GRF revenues were essentially flat to the same period in fiscal 2012 and 3.1% ahead of estimate, supported by 6% YOY growth in the personal income tax (PIT) and 6.8% YOY growth in sales taxes. Corporate income tax results continue a strong growth trend and were up 45.2% YOY through January and 60% ahead of estimate. These positive results are offset by gross production tax revenue that were down by 83.2% YOY and 64.4% below the estimate. The state expects to add an estimated $77 million deposit to the rainy day fund at fiscal year-end, bringing the balance to over $640 million.
In February 2013, the State Board of Equalization (SBE) forecast fiscal 2014 GRF sources to grow by 4.6% from the revised fiscal 2013 $5.68 billion estimate. The governor has proposed a $6.9 billion all funds operating budget for fiscal 2014 that is a 1.8% increase from fiscal 2013. Notable proposed expenditure increases include an additional $13.5 million to the department of education, $40 million to Medicaid to cover the cost of currently eligible Medicaid enrollees joining the system with the implementation of federal health care reform requirements, and a $40 million increase to state child welfare funding. The state is not expanding Medicaid. As part of the budget proposal, the governor has proposed a lowering of the rate on the top PIT bracket, from 5.25% to 5%, for an estimated direct revenue impact in fiscal 2014 of $40.7 million. The legislature is expected to review the budget proposal during the current session.
The state's debt management is conservative and the state's GO and lease debt service expense is a manageable 4.4% of fiscal 2013 appropriations. Debt amortization is rapid, with 65.5% of outstanding principal repaid in 10 years. Including the current offering, net tax supported debt totals $1.9 billion, equal to 1.3% of 2011 personal income. There are fairly limited plans for additional borrowing and the state has a manageable capital improvement plan.
The state has taken significant steps to address pension underfunding, which had been a credit issue. 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 was dedicated to the fiscal restoration of the systems; employer and employee contribution rates are now set to meet the annual actuarially calculated required contribution (ARC); and other actions were taken to restore system integrity.
For fiscal 2012, OPERS (state's largest system) funded ratio was a solid 80.2% and TRF's (teacher's) funded ratio was a weaker 54.8%. Using Fitch's more conservative 7% discount rate assumption (instead of the 7.5% rate assumed by OPERS), OPERS would have a 76% funded ratio, while TRF's funded ratio changes to 49.4%. The state overfunded its required contribution to the systems in fiscal 2012.
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. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria