Fitch Ratings assigns an 'AA' rating to the following issue of
the state of Oklahoma:
--$6.075 million Oklahoma Development Finance Authority (ODFA)
Oklahoma state system of higher education master equipment lease
revenue bonds, series 2014B (subject to annual appropriation).
The bonds are expected to sell via negotiation on Aug. 13,
2014.
In addition, Fitch affirms the ratings on the following
outstanding debt:
--$177.53 million Oklahoma general obligation (GO) bonds at
'AA+';
--$1.15 billion appropriation-backed debt of the state issued by
the Oklahoma Capital Improvement Authority at 'AA';
--$736 million appropriation-backed debt of the state issued by
the ODFA at 'AA'.
The Rating Outlook is Stable.
SECURITY
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 (RDF). This has in
turn offset the cyclical collections of severance tax revenue.
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.
RATING SENSITIVITIES
The rating is sensitive to shifts in the state's GO rating to
which it is linked.
CREDIT PROFILE
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 equipment program, and the
master leasing structure on behalf of the State Regents has been
validated by the Oklahoma state supreme court. The terms of the
leases extend through the life of the bonds, with a maximum term of
20 years; lease payments are not abatable. The current offering
will provide for equipment purchases by two higher education
institutions within the state.
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 2015 operating fund appropriation for the State
Regents is $988.5 million, identical to the budget appropriation
for 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%. June 2014 yoy state
employment growth improved to 2.2%, slightly more robust than the
1.9% yoy growth for the nation. The improved growth rate
encompassed fairly widespread sector growth, including 5.8% yoy
growth in leisure and hospitality, 3.3% yoy growth in trade,
transportation, and utilities, and 3.7% yoy growth in manufacturing
employment. Offsetting the growth was a modest 0.7% decline in yoy
mining and natural resources employment and a 3.2% decline in
information sector employment. Oklahoma's unemployment rate has
historically been well below the nation's; June 2014's rate at
4.5%, below the 6.1% 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 both severance
and corporate income tax receipts to the general fund, including in
the recent fiscal year that ended on June 30, 2014.
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 (RDF) at fiscal year-end, bringing the
RDF 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
although the final estimated total revenue growth in the general
revenue fund (GRF) was a more modest 0.9% 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 was still equal
to almost 10% of GRF revenues. The state also maintains a cash flow
reserve fund (CFRF) that is derived from any revenues in excess of
the 95% appropriated and capped at 10% of GRF appropriations.
The enacted $7.1 billion operating budget for fiscal 2014 (not
inclusive of federal funds) was a 4.1% increase from fiscal 2013.
Notable expenditure increases included an additional $90.9 million
to the department of education, $33.9 million increase to higher
education, and $108.1 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. The
state estimates revenue collections in the GRF in fiscal 2014
totaled $5.6 billion, which was just $1.5 million (0.3%) above
collections in fiscal 2013 and $283.8 million (4.8%) below the
official estimate upon which the fiscal 2014 budget was based.
Notable deviations from forecast occurred with the sales tax
(short of forecast by 3.5% but 3.1% growth yoy) and the corporate
income tax (CIT; short of forecast by 36.4% and 32.1% below
collections in fiscal 2013). The personal income tax (PIT) missed
the forecast by a modest 0.9% while declining 1.4% yoy from fiscal
2013. The difference from the PIT forecast is notable as the
forecast benefited from the addition of $51.4 million from the
state's inability to undertake dedicated renovations to the state
capitol (which were to have been drawn from PIT collections before
deposit to the general and education funds). The legislation
permitting this capital expense 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. These
lower than expected results were somewhat offset by strong 50.4%
yoy growth in severance tax receipts that were 22.7% improved from
forecast. As the lower, total revenue collection was within the
state's required 95% appropriation requirement, no budgetary
adjustments were required to maintain balance. The RDF balance
remained at $535 million, equal to 9.6% of fiscal 2014
expenditures.
The enacted $7.1 billion operating fund budget for fiscal 2015
is a 1.4% decrease from the fiscal 2014 budget, incorporating $188
million less certified revenue than in fiscal 2014. Offsetting the
decline in the enacted budget, the 2015 budget agreement provided
for the use of $292.7 million in fund balances in various state
funds, including $101 million from the CFRF available from fiscal
2014 receipts, that can be used for expenditures in fiscal 2015. A
component of the certified revenue forecast, the $5.86 billion GRF
revenue forecast factors in solid 4.5% growth from actual
collections in fiscal 2014, including 2.1% growth in the PIT, 3.8%
growth in sales tax collections, 22.4% growth in the volatile CIT,
offset by a 2.9% expected decline in severance tax revenue.
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, was enacted in the 2014
legislative session, but 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 an
expected $120 million bond for capitol building repairs that was
approved by the 2014 legislature, 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 were 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 (teachers') 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
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
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Fitch RatingsPrimary AnalystMarcy BlockSenior
Director+1-212-908-0239Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystKaren KropSenior
Director+1-212-908-0661orCommittee ChairpersonDouglas
OffermanSenior Director+1-212-908-0889orMedia RelationsElizabeth
Fogerty, New York,
+1-212-908-0526elizabeth.fogerty@fitchratings.com