Fitch Rates Oregon's $600MM Tax Anticipation Notes 'F1+'

NEW YORK--()--Fitch Ratings assigns an 'F1+' rating to the following state of Oregon full faith and credit tax anticipation notes (TANs):

--$600 million 2014 series A.

The notes will be due on June 15, 2015 and are expected to sell via negotiation the week of June 17, 2014.

At the same time, Fitch affirms the outstanding 'F1+' rating on the state's 2013 series A notes that mature on July 31, 2014.

SECURITY

The TANs represent full faith and credit obligations of the state to which the state has pledged all available funds.

KEY RATING DRIVERS

FULL FAITH AND CREDIT PLEDGE: While not general obligations of the state, Oregon has pledged its full faith and credit to the TAN payment.

SIGNIFICANT INTERFUND BORROWABLES AVAILABLE FOR REPAYMENT: The state has pledged all available funds to note payment, including significant interfund borrowables.

STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: Oregon's long-term 'AA+' general obligation (GO) bond rating reflects an economy that has diversified, moderate debt levels, and the state's prudent financial management. State finances are heavily dependent on the personal income tax (PIT), a volatile revenue source which declined sharply during the recent recession. The state's management reviews revenue and economic forecasts quarterly, and has taken measures necessary to maintain balance. State reserve levels that had thinned during the recession are expected to be bolstered by improving economic conditions as well as tax law changes.

RATING SENSITIVITIES

Given the low cash balances in the General Fund (GF), the availability of borrowable funds is central to the maintenance of the assigned rating.

CREDIT SUMMARY

The notes will be used to finance Oregon's GF cash flow needs in fiscal 2015, the second year of the state's fiscal 2013-2015 biennium that began on July 1, 2013. Fitch's rating, at 'F1+', is based on the very large and stable amounts of interfund borrowables, which together with available GF resources are the source of the notes' security. While the state has pledged its full faith and credit to note payment, the notes are not general obligations of Oregon. Not later than one day prior to note maturity, a transfer equal to principal and interest will be made to the debt service account, and amounts in the account are continuously appropriated.

Monthly balances in the borrowable funds have averaged over $17 billion in the past three fiscal years, providing almost 30x coverage for fiscal 2015 note repayment. The consistency and reliability of the balances over time reflect their composition, primarily monies in the short-term fund (state and local investments as well as the investment of the GF), the state accident insurance fund, and the common school fund.

This is Oregon's second external borrowing during the 2013-2015 biennium and the 12th since fiscal 2002. While available interfund borrowables are considerable, interest costs associated with such borrowings are based on a minimum of 2% or cost of funds plus a margin if the resulting charge is higher than 2%. Rates in the tax-exempt market have been lower, making a public sale of notes more cost efficient.

The fiscal 2015 notes, at $600 million, represent 7.1% of fiscal 2015 forecast cash flows. Delivery on the current notes is structured to occur while notes issued in 2013 are still outstanding, and current note proceeds are expected to be utilized to repay the 2013 note, maturing on July 31, 2014. The current note is structured with an 11-month maturity and will mature on June 30, 2015, the close of the state's current fiscal biennium. The state is permitted to issue notes up to a 13-month maturity within a given biennium.

Oregon's GF has a relatively large dependence on the PIT, which made up 87% of 2013 GF revenues. PIT collections have been volatile, rising by 22% in biennial years (BY) 2005-2007 and just modestly at 1.2% during BY 2007-2009. PIT revenues for BY 2009-011 fell by over 6.3%, reflecting the recession and uneven economic recovery, and then rebounded by 15.8% in BY 2011-2013, reflecting both the push forward of income into calendar year 2012 due to uncertainty over federal tax law changes as well as the beginning of a stronger economic recovery in the state.

The recently released May 2014 economic and revenue forecast includes a 14% baseline growth assumption in PIT revenue in the 2013-2015 biennium. PIT revenue in fiscal 2014 is forecast to grow 5.9% from fiscal 2013 and collections to date have tracked closely with the close-of-session forecast used for enacting the 2013-2015 budget. Overall, GF biennial revenues are forecast to grow 11.5% from the 2011-2013 biennium and total $15.8 billion. Per typical expenditure patterns, the state estimates 52% of the enacted budget will be spent in the first year of the biennium and the balance spent in the second year. The state's rainy day and education stability funds' reserves are expected to grow through the biennium, equaling $388.4 million at the end of fiscal 2015; or 2.5% of biennial GF revenues.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 14, 2012;

--'U.S. State Government Tax- Supported Rating Criteria', Aug. 14, 2012;

--'Rating U.S. Public Finance Short-Term Debt', Dec. 9, 2013.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832371

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Contacts

Fitch Ratings
Primary Analyst
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com