Fitch Rates Oregon's $593MM Tax Anticipation Notes 'F1+'

NEW YORK--()--Fitch Ratings assigns an 'F1+' rating to the state of Oregon's $593.415 million full faith and credit tax anticipation notes (TANs) 2016 series A.

The TANs are expected to sell via negotiation on July 13, 2016.

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, scheduled to occur in June 2017, including significant interfund borrowables.

STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: Oregon's 'AA+' Issuer Default Rating reflects 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 personal income tax (PIT), exposure to voter initiatives that can have negative fiscal impacts, and constitutional 'kicker' provisions that require the return of surplus revenues to taxpayers. The state's operating performance is sustained by a diverse economy with strong growth prospects.

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 PROFILE

The notes will be used to finance Oregon's GF cash flow needs in fiscal 2017, the second year of the state's fiscal 2015-2017 biennium that began on July 1, 2015. Fitch's 'F1+' rating for the notes 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. 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. While the state has pledged its full faith and credit to note payment, the notes are not general obligations of Oregon.

Monthly balances in the borrowable funds have averaged over $13 billion in the past two fiscal years, providing 25x coverage for fiscal 2017 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 and the state's rainy day fund, as well as the investment of the GF) and the common school fund.

The fiscal 2017 notes, at $600 million, represent 6.3% of forecast cash flows through June 2017, when the notes mature. The current notes will overlap with an outstanding $600 million note issued in November 2015 that matures in September 2016. While Fitch would typically be concerned about overlapping cash flow borrowings, the sizable amount of pledged borrowables, expected to approximate $14.1 billion at the 2016 note maturity, eliminate that concern. This is the second time in recent history that the state has applied this practice; the most recent overlap in notes occurred in the biennium that ended on June 30, 2015 (BY 2015), reportedly due to the cost effectiveness of rates in the tax-exempt market compared to borrowing internally at a minimum 2% rate.

Oregon's GF has a relatively large dependence on the PIT, which makes up 90% of GF revenues in BY 2017. 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 credit in tax year 2016. PIT collections in fiscal 2016 were reduced by the estimated $402 million kicker payment. Incorporating the kicker payment, PIT collections in the state's cash flow are expected to increase by 3.6% in fiscal 2016 from fiscal 2015. A further increase of 5.7% is expected in fiscal 2017.

Corporate income taxes (CIT) were also above the 2% forecast threshold for BY 2015, but 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 are expected to allow the state to increase its rainy day (RDF) and education stability (ESF) funds' reserves to a combined estimated balance of $769.2 million (4.3% of net total biennial revenue or 8.3% of fiscal 2017 net revenue).

The recently released June 2016 economic and revenue forecast includes a 12.5% baseline growth assumption in PIT revenue in the 2015-2017 biennium. Revenue in the June forecast includes accruals that the cash flow forecast does not, leading to some minor differences between the two. Overall, GF biennial revenues in the June forecast are expected to grow 12.2% from BY 2015 and total almost $18 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.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008272

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008272

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com