NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following state of Oregon general obligation (GO) bonds (higher education):
--$31.235 million 2016 series A (Article XI-F(1) tax-exempt);
--$5.26 million 2016 series B (Article XI-F(1) federally taxable).
The bonds are expected to sell via negotiation on or about Feb. 23, 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the state of Oregon, with the full faith and credit of the state pledged to bond repayment.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: State finances are heavily dependent on the personal income tax (PIT), a volatile revenue source that declined sharply during the recession, and has since shown steady growth. The state's management reviews revenue and economic forecasts quarterly and takes measures as necessary to maintain balance. State balancing measures in downturns include reserve draws, with the state rebuilding reserves as the economy strengthens.
DIVERSE ECONOMY WITH SELECT CONCENTRATIONS: The computer and manufacturing sectors play an above-average role in Oregon's economy, which is especially influenced by international trade patterns. The state's growing population and labor force has profited from strong recent employment gains in the state.
MODERATE LIABILITY BURDEN: Debt levels are above average for a U.S. state but are only a moderate burden on resources. On a combined basis, the burden of the state's net tax-supported debt and unfunded pension obligations approximates the median for U.S. states. Other post-employment benefit (OPEB) obligations are small.
VOTER INITIATIVES CAN LIMIT FLEXIBILITY: An active voter initiative process has periodically affected state finances.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, including the proactive financial management and commitment to reserve funding.
CREDIT PROFILE
Oregon's 'AA+' GO bond rating reflects a diverse economy with some concentration in computer and electronic manufacturing and agricultural products, moderate debt levels, the state's record of prompt actions to maintain financial flexibility in challenging revenue periods, and the maintenance of financial cushion to provide protection from revenue volatility. Strong financial management is critical to the rating given a revenue structure largely dependent on the cyclical PIT, exposure to voter initiatives that can have negative fiscal impacts, and constitutional 'kicker' provisions that require the return of surplus revenues to taxpayers. There is no statewide sales tax. Corporate revenue in excess of the revenue forecast is now directed to elementary and secondary education per approval of a 2012 voter initiative.
The state's debt level is above average and pensions have been well-funded although a recent court decision to restore cost of living (COLA) increases to retirees and current employees and the adoption of more conservative pension assumptions has lowered funded ratios. Fitch expects these changes to lead to higher, but still manageable contributions in future biennia.
RELIANCE ON PERSONAL INCOME TAX FOR OPERATIONS
Oregon's general fund (GF) is largely dependent on the PIT, which made up 88% of the biennial (BY) 2013-2015 GF revenues. PIT collections are volatile and increases more than 2% above the state's close of session (COS) forecast are subject to 'kicker' requirements, whereby excess revenue is returned to taxpayers. For BY 2015, actual PIT revenue was 3% above the projection for the biennium; requiring the excess to be returned to taxpayers as a PIT credit in tax year 2016 and reducing PIT collections in fiscal 2016 by $402 million. The kicker credit is expected to have only a modest impact on revenues in the next biennium as the state's economic forecast has strengthened; a positive credit factor in Fitch's view.
Corporate income taxes (CIT) were also above the 2% forecast threshold for BY 2015, providing for a $59 million CIT kicker; however, excess CIT collections are now directed to education and have no impact on the state's GF revenues in fiscal 2016. These strong revenue results allowed the state to increase its rainy day (RDF) and education stability (ESF) funds' reserves to a combined balance of $391.2 million, equivalent to 4.6% of fiscal 2015 net revenue.
The enacted budget for the 2015-2017 biennium (BY 2017) included almost $18 billion in GF expenditures, supported by 12% growth in projected revenues at COS to $17.96 billion. The forecast was inclusive of 12.6% expected growth in the PIT over the biennium and a one-time transfer of $120 million from the public employees benefits board stabilization fund to the GF, offset by an expectation of a 1.5% decline in the CIT. An update to the revenue forecast on Feb. 10, 2016 left the state's revenue expectations largely unchanged from COS although the expected decline in the CIT from BY 2015 has now moved to a forecast increase of 1.6%; 3.1% higher than what was forecast in the COS forecast. As the revised forecast exceeds the 2% kicker threshold, CIT receipts could generate a payment to K-12 education in the next biennium.
In support of the revenue projections, the recent forecast estimates annual employment growth of 3.3% occurred in 2015, and projects 2.7% growth in 2016 and 2.6% growth in 2017. The personal income forecast is also for continued strong growth, with growth of 5.8% in both 2015 and 2016 and 6.7% in 2017; all very robust forecasts in Fitch's view. Overall, the state continues to project steady job growth that ranges well above the national growth rate in each year of the forecast.
The state expects to make additional deposits to the RDF and ESF in BY 2017 of $168.6 million and $191.9 million, respectively. The reserve balances are expected to total $762.2 million at the end of fiscal 2017, or 8.3% of fiscal 2017 GF revenues, up substantially from the $391.2 million in fiscal 2015.
CYCLICAL ECONOMY WITH STEADY EMPLOYMENT GAINS
Oregon's economy tends to be more cyclical than the nation's due historically to its reliance on agriculture and natural resources and today because of its large high-tech sector and international trade activities that expose the state to global economic cycles. The state's largest exports are computer and electronics products (36%) and agricultural products (13%) and the largest destinations are China (18%), Canada (17%), and Malaysia (10%).
Following 7.6% total job loss in 2008 through 2010 as compared to 5.6% for the nation, the state has recovered 141% of the jobs that were lost at the trough of the recession (January 2010 for Oregon) as compared to a current 156% recovery rate for the nation. The state reports that employment in five major industries; education, health care, food manufacturing, professional and business services, and leisure and hospitality, which together account for 40% of statewide jobs, are currently at all-time highs. As of December 2015, state employment is up 2.7% year-over-year (yoy) as compared to the nation at 1.9% yoy. The unemployment rate has also declined to 5.4% (down from 6.7% recorded in December 2014) compared to the national average of 5%.
In 2014, Oregon's personal income (PI) growth of 5.7% was better than the 4.4% U.S. rate of growth, and recent quarterly trends have been robust: 5.7% yoy growth in the third quarter of 2015 as compared to 4.6% for the U.S. and 6.3% for the region. Per capita personal income (PCPI) in 2014 represented 89.5% of the U.S. level and ranked Oregon 32nd among the states.
MODERATE DEBT BURDEN
As of June 30, 2015, the state's debt at 4.8% of 2014 PI is above average but still a moderate burden on resources. Principal amortizes at an improved 57% pace in 10 years from a prior slower trend. In contrast to the prior downturn, the state did not undertake any deficit borrowing in the most recent recession.
Two rounds of pension reform occurred in 2013, intended to reduce the system's liability, provide for sizable system savings for all employers, and reduce employer contribution rates. These reforms included: limiting COLAs, eliminating a benefit increase for out-of-state retirees based on the Oregon income tax, redefining salaries used in calculating benefits, and reducing legislators' participation in PERS.
A legal challenge to the benefit changes was partly upheld by the state's Supreme Court, restoring the 2% COLA for service performed before the reform law; the court permitted the COLA reduction for service performed after the reform law, as well as all other reforms. The impact of the ruling, when combined with the adoption of more conservative actuarial assumptions by the PERS board, increased the system UAAL from $2.6 billion as of Dec. 31, 2013 to $12.1 billion as of Dec. 31, 2014. The increase in the UAAL lowered the system funded ratio to 84% in 2014 from 96% in 2013. The state portion of the PERS system saw its funded ratio drop to 85% from 97% over the same time period. Beginning in fiscal 2014, the state's pension systems issued financial statements under new GASB statement 67 reporting standards. Based on the new standards, OPERS reports assets equaling 91.9% of liabilities as of Dec. 31, 2015.
On a funding basis, the state expects a further decline when the Dec. 31, 2015 valuation report is completed due to that year's low 2.1% investment earnings compared to the 7.5% assumed rate of return. The state estimates the system UAAL could increase by as much as 33%, lowering funded ratios by 4% to 5%. The updated valuation report is expected in July 2016.
Fitch expects employer contributions to increase to address the higher UAAL, but remain manageable.
Prior to the most recent valuation report that incorporated the litigation loss and assumption changes, Fitch calculated the burden of the state's net tax-supported debt and adjusted UAAL obligations at 5.7% of 2014 PI. The calculations included $1.46 billion of the adjusted liability of OPERS that Fitch estimated to be attributable to the state. Fitch expects the burden to have grown given recent developments but remain manageable for the state.
The state's share of other-post employment health benefits is small and funded at 75%, with a 9% funded ratio for the much smaller premium account, which provides monthly subsidies to pre-Medicare-age state retirees.
Additional information is available at 'www.fitchratings.com'.
Date of Relevant Rating Committee: Oct. 26, 2015.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999462
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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