Fitch Rates Oregon's $163MM COPs 'AA-'; Outlook Stable    

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an underlying 'AA-' rating to $148.8 million State of Oregon department of administrative services certificates of participation (COPs), 2008 series A, and $14.8 million 2008 series B (federally taxable). The COPs are expected to be offered through negotiation on July 1, 2008. The issue is expected to be insured by FSA, whose insurer financial strength is rated 'AAA' by Fitch. Fitch also affirms the 'AA-' rating for $1.1 billion of outstanding COPs. The Rating Outlook is Stable.

The certificates offered represent ownership in loan payments to be made by the State of Oregon, acting by and through the director of its department of administrative services as the borrower under supplemental loan agreements with the certificate trustee. Although loan payments are subject to appropriation by the state legislature, centralization of the certificate authorization and the issuance and payment process as well as the importance of the leased assets support the credit.

Oregon's 'AA' general obligation bond rating reflects sustained revenue performance and growth in overall reserve levels despite the economic downturn which to date has only moderately affected the state. Combined reserve levels are substantial half-way through the current biennium at nearly $600 million, representing over 9% of annual revenue, and are currently forecast to rise to over $900 million after the biennium's close, providing a significant cushion should revenue performance weaken. Further, the recently revised revenue forecast is based on lowered economic expectations, with pick-up not occurring until mid-calendar year 2009, though risks do remain. Strong reserve levels, including balances in the Education Stability Fund and the formal Rainy Day Fund (RDF) created last year, are a significant credit factor, particularly given the state's revenue structure which is dominated by the cyclical personal income tax. Oregon also benefits from an economy that has diversified, moderate debt levels, and a fully funded pension system. These characteristics are offset by the aforementioned revenue structure, a proclivity for initiatives with negative fiscal impact and constitutional 'kicker' provisions requiring return of the surplus to taxpayers that had previously compromised the building of reserves.

The state is dependent on the personal income tax (PIT), which made up 84% of 2007 GAAP general fund revenues. PIT fell 12% in the 2001-2003 biennium, rising nearly 17% in the 2003-2005 biennium, and another 20% in the 2005-2007 biennium. At the close of the 2005-2007 biennium, the state had a $1.4 billion general fund surplus; however, the state returned about $1.1 billion of surplus personal income taxes to taxpayers via the state's constitutional 'kicker' provisions. Another $319 million was due to corporate taxpayers but was diverted on a one-time basis to the RDF. The RDF is also slated to receive up to 1% of general fund appropriations, if available at the end of a biennium, until the RDF balance equals 7.5% of the prior biennium revenues (15% on an annual basis). At present, combined reserve balances represent approximately 4.6% of current biennial revenues (approximately 9.2% on an annual basis) and are currently expected to reach approximately 7% of current biennial revenues (14% on an annual basis). The State has recently disclosed that Initiative Petition 3 (IP 3) may appear on the November 2008 ballot. IP 3 would amend Oregon statues to reduce the amount of income subject to state personal income taxation, thereby decreasing state personal income tax receipts. If passed by voters, IP 3 would be effective in the Jan. 1, 2010 tax year, first affecting receipts in the next biennium, although the Oregon Legislature would have time to amend, delay or repeal the measure.

Oregon's economy tends to be more cyclical than the nation's, once because of its reliance on agriculture and natural resources, and today because of its large high-tech sector which was significantly affected during the last downturn. To date, the downturn has been moderate, supported by growth in exports and growth in the education and health services sector. Oregon experienced three consecutive years of employment declines between 2001 and 2003, and though employment growth since 2004 has annually exceeded national levels, unemployment levels remain above the national average. May 2008 employment was 0.4% above that of the same month last year, and while slower than year-over-year growth figures recorded earlier this year, this level exceeded the 0.1% growth recorded nationally in May for the same period. Income growth, which was quite strong relative to national levels in 2002, was considerably below national levels in 2004 and 2005, though growth in 2007 and 2007 was more in line with national figures. Unemployment was recorded at 5.6% for May 2008 against a national rate of 5.5% for the same month.

COP proceeds will be applied to a variety of projects, including the replacement of a state hospital in Salem, renovations to the state's capitol building, and funding of a federally mandated wireless interoperability system, among others. A portion of the 2008 series A proceeds will also be used to currently refund outstanding 1997 series B certificates. State debt levels have risen significantly in recent years, in part as a result of deficit and pension borrowings. The state's debt ratios of 4.7% of preliminary 2007 personal income and $1,636 per capita (3.1% of personal income and $1,080 excluding pension bonds) are considered moderate. Principal amortizes at a below-average pace.

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