NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA' rating to the following issue of the state
--$15.825 millionOklahoma Development Finance Authority (ODFA) Oklahoma
state system of higher education master real property lease revenue
bonds, series 2014D (subject to annual appropriation).
The bonds are expected to sell via negotiation the week of July 9, 2014.
In addition, Fitch affirms the ratings on the following outstanding debt:
--$177.53 millionOklahoma general obligation (GO) bonds at 'AA+';
--$1.161 billion appropriation-backed debt of the state issued by the
Oklahoma Capital Improvement Authority at 'AA';
--$749.8 million appropriation-backed debt of the state issued by the
ODFA at 'AA'.
The Rating Outlook is Stable.
The bonds are limited special obligations of the ODFA secured by annual
appropriations of the state of Oklahoma. The intended source of
repayment on the bonds is the state board of regents for higher
education on behalf of certain Oklahoma colleges and universities from
their annual budget allocations.
KEY RATING DRIVERS
APPROPRIATION MECHANISM: The rating on the ODFA bonds, backed by
Oklahoma's annual legislative appropriation pledge, is one notch below
the state's 'AA+' GO bond rating. This 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
conservatively managed, including maintenance of separate rainy day (the
constitutional reserve) and cash flow reserve funds and a policy of
appropriating only 95% of expected revenues. Growth in personal and
corporate income taxes as well as sales tax revenues has bolstered
financial operations and allowed for consecutive deposits to the rainy
day fund. This has in turn offset the cyclical collections of severance
CONCENTRATED ECONOMIC BASE: The state's commodity-based economy, based
on oil and gas production as well as various agricultural products,
strongly rebounded from the recession although recent economic growth
has been more subdued.
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.
The rating is sensitive to shifts in the state's GO rating to which it
The ODFA bonds currently offered are secured by lease rental payments by
the State Regents from state general fund revenues, subject to annual
legislative appropriation. ODFA is one of the principal financing
agencies of the state. Both the state constitution and enabling statutes
provide for appropriation of lease payments in support of the master
real property program, and the master leasing structure on behalf of the
State Regents was recently validated by the Oklahoma state supreme
court. The terms of the leases extend through the life of the bonds,
with a maximum term of 30 years; lease payments are not abatable. The
current offering will be applied to construction or renovation of
student housing facilities for two higher education institutions within
All higher education appropriations to the State Regents are
consolidated, with the State Regents authorized to allocate funds first
to payment of lease rentals of each participating institution. The State
Regents covenant to include a budget request for lease payments
sufficient to pay debt service for program bonds. The fiscal 2014
operating fund appropriation for the State Regents is $988.5 million,
which is an increase in appropriation of 3.5% from fiscal 2013. The
enacted budget for fiscal 2015 provides for a flat budget appropriation
from fiscal 2014. The stable appropriation is a positive for the State
Regents as most other state agencies' appropriations were decreased by
5.5% in fiscal 2015, incorporating a reduced level of expected revenues
for that year.
The state's 'AA+' GO bond rating and Stable Outlook reflect low debt
levels and disciplined financial policies. This includes 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
rate adjustments are limited by a supermajority requirement of the
legislature or voter referendum to raise tax rates.
SLOW GROWTH IN STATE'S CONCENTRATED ECONOMIC BASE
After consecutively outperforming national growth trends coming out of
the recent recession, the state's year-over-year (YOY) employment growth
slowed in 2013. The state recorded 1.2% YOY employment growth in
calendar year (CY) 2013 as compared to a more robust national employment
growth rate of 1.7%. April 2014 YOY state employment growth improved to
1.7%, equal to 1.7% YOY growth for the nation. The improved growth rate
encompassed a meaningful 4% YOY growth in construction, 5.2% YOY growth
in leisure and hospitality, and 2.6% YOY growth in trade,
transportation, and utilities employment. Offsetting the growth was a
modest 1.5% decline in YOY mining and natural resources employment and a
0.3% decline in government employment. Oklahoma's unemployment rate has
historically been well below the nation's; April 2014's rate at 4.6%,
below the 6.3% rate for the nation, continues this trend.
The economy continues to be supported 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. Additionally, one-third of the state's gross state product is
attributable to the drilling, production, and economic multiplier
effects of this sector. The state remains focused on diversifying its
economic base and recent expansions in aerospace manufacturing, as well
as professional and business services, point to some success in this
endeavor. Growth in other economic sectors remains key to the state
maintaining overall economic stability.
CONSERVATIVELY MANAGED FINANCIAL OPERATIONS
Financial operations are conservatively managed with the state permitted
to enact appropriations for only 95% of anticipated revenues in the
forthcoming fiscal year. This conservative budgeting is important given
wide fluctuations in severance tax receipts to the general fund.
Positive economic momentum coming out of the recession translated into
strong receipts for the fiscal year ending June 30, 2012, particularly
in income, sales, and oil severance taxes, resulting in the state
depositing $328 million to the constitutional reserve fund (rainy day
fund or RDF) at fiscal year-end, bringing the reserve to $577.5 million,
the second highest balance on record.
The enacted $6.8 billion fiscal 2013 operating budget (not inclusive of
federal aid) was a 5.1% increase from fiscal 2012 appropriations. A
decline in severance tax receipts in fiscal 2013, down 48.5% from fiscal
2012, incorporated the impact of temporary tax reductions and rebates
for producers and offset gains in other tax revenue sources and
contributed to the modest 0.9% estimated total revenue growth in the
general revenue fund (GRF) between the fiscal years.
The state legislature appropriated $45 million from the RDF prior to the
close of fiscal 2013 to finance costs associated with the severe weather
events in the Oklahoma City area in May 2013. The draw lowered the RDF
balance to $535 million, which is still equal to almost 10% of GRF
revenues. The cash flow reserve, derived from any revenues in excess of
the 95% appropriated and maintained at 10% of general fund
appropriations, received a $27.4 million addition in fiscal 2013. This
brings the balance to $559.5 million; combined, both reserves were equal
to 19.5% of GRF revenues in fiscal 2013.
The enacted $7.1 billion operating budget for fiscal 2014 (inclusive of
federal funds) was a 5.1% increase from fiscal 2013. Notable expenditure
increases included an additional $31.6 million to the department of
education, $70.1 million increase to higher education, and $145.2
million to health and human services to cover the cost of currently
eligible Medicaid enrollees joining the system with the implementation
of federal health care reform requirements and increases to human
services agency funding.
A companion bill to the operating budget included a two-step lowering of
the top personal income tax (PIT) rate. However, following the passage
of the bill, the legislation was ruled by the state Supreme Court to be
unconstitutional, due to the prohibition on multiple subjects being
included in a single piece of legislation. The rate reduction from 5.25%
to 5% was to be effective Jan. 1, 2015, and a further reduction was
scheduled to be effective Jan. 1, 2016, if total revenue growth met or
exceeded the fiscal impact from the second planned tax reduction. The
combined loss in PIT revenues was estimated at $237 million per year.
The second piece of the disallowed legislation appropriated $60 million
in PIT revenue for repairs to the state capitol building in fiscal 2014
from current revenue collections; that dedication was prohibited by the
The June 2013 estimate from the State Board of Equalization (SBE)
forecast fiscal 2014 GRF sources to grow by 5.1% to almost $5.9 billion
from the estimated ending fiscal 2013 revenues. A decline in the PIT was
forecast at 0.5% while the corporate income tax (CIT) was expected to
grow by a robust 6.7% from fiscal 2013. Other major revenue sources,
such as the sales tax, were forecast to grow 6.8% and severance tax
receipts were expected to show renewed growth of 22.5% from fiscal 2013.
The forecast was officially updated in December 2013 and expected
revenues in the GRF were lowered by 2.3% to $5.75 billion. Adjustments
included an addition of $51.4 million to the PIT forecast from the
inability to undertake the dedicated renovations to the state capitol
(which were to have been drawn from collections before deposit to the
general and education funds) offset by year-to-date declines in
collections. This provided for a 0.9% ($19.3 million) positive revision
in the PIT, a net increase of 17% ($46.4 million) in production tax
revenue, a negative revision to the sales tax of 3.7% ($75.9 million),
and a 22.1% ($106.3 million) negative revision to the CIT.
The SBE forecast was again updated in February 2014 and expected GRF
revenue in fiscal 2014 was again lowered (to $5.71 billion). Notable
adjustments from the December 2013 forecast included a $68 million
decrease in expected CIT revenue offset by a $20.1 million increase in
production tax revenue. Year to date through May 2014, GRF revenue is
running 0.2% below collections through May 2013 and is 4.8% below
forecast. As the lower revenue collection continues to provide cushion
within the state's required 95% appropriation requirement, the state is
not recommending budgetary adjustments at this time.
Through May 2014, collections from the volatile CIT are down 35.5% YOY
and are running 38% below the original budget forecast. PIT revenue is
1.6% below forecast and down 3% YOY largely due to greater than expected
refunds and the use of outstanding PIT credits in May 2014. Sales tax
receipts have exhibited 3% YOY growth, but are 3.5% below forecast.
Somewhat offsetting these disappointing results are severance tax
receipts, which are up over 54.9% from fiscal 2013 and are 18.9% above
the budget forecast. The state anticipates fairly stable revenue
receipts through the close of the fiscal year on June 30 and the RDF is
expected to remain at the current level.
The enacted $7.1 billion operating budget for fiscal 2015 is a 1.4%
decrease from the fiscal 2014 budget, incorporating $188 million less
revenue than in fiscal 2014. Notable measures in the budget include $150
million in additional spending for seven state agencies while 52 state
agencies experienced a 5.5% appropriation reduction. The legislature
also authorized a $120 million bond issue for renovations to the state
capitol building; the bond will be issued as a state lease obligation. A
PIT rate reduction for the state's highest taxpayers from 5.25% to 5%,
contingent on increases in GRF tax revenue compensating for the foregone
PIT revenue, that was enacted earlier in the legislative session does
not take effect until Jan. 1, 2016 and therefore does not impact the
revenue forecast for fiscal 2015. A second tax cut, to 4.85%, is
scheduled to take effect on Jan. 1, 2017 under the same guidelines. When
fully enacted, the full-year impact of the two rate cuts is estimated to
be approximately $200 million.
CONSERVATIVE DEBT MANAGEMENT
The state's debt management is conservative and net tax-supported debt
of $1.9 billion is equal to a very manageable 1.3% of 2013 personal
income. Debt amortization is relatively rapid, with 65.6% of outstanding
principal repaid in 10 years; current GO debt is fully repaid in five
years. Aside from the expected $120 million bond for capitol building
repairs, 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 reform measures were adopted in
the fiscal 2011 legislative session to address funding gaps. Unfunded
cost of living adjustments were eliminated, reducing all seven state
systems' unfunded liabilities by a combined 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 2013 on a reported basis, OPERS' (state's largest system)
funded ratio was a solid 81.6% and TRF's (teacher's) funded ratio was a
weaker 57.2%. Using Fitch's more conservative 7% discount rate
assumption (instead of the 7.5% rate assumed by OPERS and 8% for TRF),
the funded ratio for OPERS would be 77.3%, while for TRF it would be
51.6%. The state overfunded its required contribution to the systems in
fiscal years 2012 and 2013. On a combined basis, the state's debt and
unfunded pension liabilities as a percentage of personal income at 7% is
slightly above the median for U.S. states of 6.1%.
Additional information is available at 'www.fitchratings.com'.
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. Local Government Tax-Supported Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
33 Whitehall Street
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings