Fitch Rates Oklahoma's $39MM OCIA Bonds 'AA'; Outlook Stable
The bonds are expected to sell via negotiation on or about Aug. 11, 2015.
The Rating Outlook is Stable.
SECURITY
The bonds are limited special obligations of the OCIA secured by annual appropriations from the state of Oklahoma. The intended source of repayment on the bonds is payments received from several Oklahoma state agencies from their annual budget allocations. These agencies include the department of agriculture, food and forestry; department of mental health and substance abuse services; the Oklahoma Supreme Court; and the state bureau of investigation.
KEY RATING DRIVERS
APPROPRIATION MECHANISM: The rating on the OCIA bonds, backed by Oklahoma's annual legislative appropriation pledge, is one notch below the state's 'AA+' general obligation (GO) bond rating. This reflects the state's general credit standing, sound lease structure, and statutory authorization for this type of bond.
CONSERVATIVE FINANCIAL MECHANISMS: The state's financial operations benefit from the maintenance of separate rainy day (RDF; the constitutional reserve) and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. The limited appropriation of revenues provides a cushion for the variability in the state's revenue sources, particularly the cyclical collections of severance tax revenue.
CONCENTRATED ECONOMIC BASE: Growth in the state's commodity-based economy, based on oil and natural gas production as well as various agricultural products, has slowed as a result of the current low oil price environment. While unemployment rates through May 2015 remained low and below national averages, the rate over the past several months has escalated and payrolls have declined as the natural resources slowdown has been incorporated.
MANAGEABLE LIABILITY POSITION: Debt levels are low, and tax-supported debt is amortized relatively quickly. Most new debt issuance is in the form of lease revenue bonds. Several rounds of pension reform have improved the state's long-term liability position.
RATING SENSITIVITIES
The rating is sensitive to shifts in the state's GO rating to which it is linked.
CREDIT PROFILE
The OCIA bonds currently offered are secured by annual state legislative appropriations, funded by lease rental payments from the state agencies noted above. OCIA is one of the principal financing agencies of Oklahoma. Both the state constitution and enabling statutes provide for appropriation of lease payments and this type of bond issuance has been validated by the Oklahoma state supreme court.
The terms of the leases extend through the ten-year life of the bonds; lease payments are not abatable. The bonds will refund several series of outstanding bonds issued by the OCIA for debt service savings.
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 RDF and cash reserve funds. The state expects to use a portion of the RDF to fund budgetary expenditures in fiscal 2016 in addition to other one-time actions, including fund sweeps. Despite these actions, Fitch believes financial operations continue to benefit from disciplined financial policies. Tax rate adjustments are limited by a supermajority requirement of the legislature or voter referendum to raise tax rates.
CONCENTRATED ECONOMIC BASE AFFECTED BY LOW OIL PRICES
After consecutively outperforming national growth trends coming out of the recession, the state's year-over-year (yoy) employment growth slowed beginning in 2013. The state recorded 1.3% and 1.1% yoy employment growth in 2013 and 2014 as compared to more robust national employment growth of 1.7% and 1.9%, respectively, although the state's recovery of jobs from the trough of the recession stands at a robust 152% as of May 2015 as compared to a national average of 138%.
Slower employment growth is continuing in 2015 as June 2015 yoy employment growth was 0.7% as compared with 2.1% yoy for the nation. Positive trends were seen in most state employment sectors through June although an 8.7% three-month moving average decline in mining reflects employment losses corresponding with low prices for both crude oil and natural gas. Positively, Oklahoma's unemployment rate continues to be well below the nation; June's rate was 4.5%, inclusive of 4.8% growth in the state's labor force, compared to a 5.3% unemployment rate for the nation that has had much slower labor force growth. However, Fitch believes the labor impact of the decline in mining is captured in initial unemployment claims for the first week in January 2015 through July 4, 2015; those are up 22% yoy compared to the same period in 2014.
One-third of the state's gross state product is attributable to the drilling, production, and economic multiplier effects of the oil and natural gas sectors. Baker Hughes, a large oilfield service company, has reported July 2015 average rotary rigs in the state have dropped by almost 50% yoy, from 203 to 106, incorporating actions by domestic oil companies to pull back on new well drilling and reduce their workforces as profit margins have shrunk.
The price declines have also contributed to declines in the state's collection of severance tax revenue, down 36% yoy for fiscal 2015 and 34% below forecast. The yoy decline is largely attributable to a fall in oil production tax revenue while the below-forecast results are largely stemming from lower than expected natural gas prices. These results contributed to the state's forecast revenue gap in fiscal 2016 of \\$611 million.
The state remains focused on diversifying its economic base, and recent expansions in aerospace manufacturing, as well as in professional and business services, point to some success. Fitch believes that growth in other economic sectors will help to support the state's overall economic stability.
CONSERVATIVE FINANCIAL MECHANISMS
Financial operations are supported by conservative financial policies 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 revenue fund (GRF), including in the most recent fiscal year ended on June 30, 2015 as well as in fiscal 2014.
The enacted \\$7.1 billion operating fund budget for fiscal 2015 was a 1.4% decrease from the enacted fiscal 2014 budget, incorporating \\$188 million less certified revenue for operating fund expenditures than in fiscal 2014 but a 0.1% increase from actual fiscal 2014 appropriations. Offsetting the decline in the forecast revenues, the 2015 budget agreement provided for the use of \\$292.7 million in fund balances in various state funds, including \\$101 million from the state's cash flow reserve fund (CFRF) available from fiscal 2014 receipts that could be used for expenditures in fiscal 2015. The RDF balance was budgeted at \\$535 million, equal to 9.5% of fiscal 2014 GRF revenues.
The forecast for the GRF alone in fiscal 2015 of \\$5.86 billion factored in solid 4% expected growth from actual revenue collections in fiscal 2014. Actual, estimated growth in fiscal 2015 was just 1.8%, largely due to corporate income taxes (CIT) that came in 19.1% below forecast and severance tax revenue that was 34% below forecast. The PIT exhibited 6.4% yoy growth from fiscal 2014; 4.2% ahead of the estimate at the time the budget was enacted, although the state believes some of the growth can be attributed to separation payments to dismissed oil industry workers. Sales tax collections were up 3.1% yoy but were just below forecast by 0.7%. Overall, the state's GRF revenues were 2.2% below forecast but as the shortfall was within the state's required 95% appropriation limit, no budgetary adjustments were required to maintain balance.
A February 2015 GRF revenue forecast for fiscal 2016 projected GRF revenues of \\$5.65 billion; this was down from \\$5.96 billion estimated in December 2014, incorporating a lower forecast price of oil/bbl of \\$57.55, down from \\$59.97/bbl forecast in December. The forecasts also included the implementation of lower PIT rates for the state's highest taxpayers; from 5.25% to 5%, as the state's board of equalization (BOE) determined in December 2014 that expected revenue growth in fiscal 2016 was sufficient for the implementation of a PIT rate reduction, effective Jan. 1, 2016. The lower oil price forecast contributed to the expectation of declines in severance tax receipts as well as lower expected revenues from the PIT and sales tax from spillover economic effects. Overall, total GRF revenue was forecast to decline by 2.3%, contributing to an expected budget gap for fiscal 2016 of \\$611 million.
The BOE updated its revenue forecast for fiscal 2016 in June 2015 and improved its revenue expectations for fiscal 2016 by \\$91.5 million; 1.6%. GRF revenue in fiscal 2016 is now projected to total \\$5.7 billion; a modest 0.3% increase from fiscal 2015. The forecast incorporates a final, expected 6.4% decline in the PIT from fiscal 2015 owing to the lowered PIT rates and natural resource softening and a 17.7% decline in the CIT. The declines are expected to be offset by an almost doubling in natural gas severance tax revenue from the completion of deferred tax rebate payments to producers that reduced revenue the past three fiscal years, offset by severance taxes from oil production that are expected to decline by 22% from fiscal 2015. Growth of 5.7% in sales tax revenue is also projected from fiscal 2015.
The state enacted a \\$7.18 billion budget (0.5% lower than expected expenditures in fiscal 2015) for fiscal 2016 that solves for the previously identified \\$611 million budget gap through a mix of expenditure reductions, \\$225 million in various fund sweeps, a \\$121 million application of monies from the CFRF, and \\$150 million from the RDF. The budget includes targeted reductions to the departments of education, general government, transportation, natural resources and judiciary. This is the second consecutive year in which the state has applied one-time fund sweeps to solve for its revenue shortfalls, diverging from its more typical conservative practices. Fitch believes the RDF, expected to equal 6.8% of revenue in fiscal 2016, continues to be maintained at a level that provides cushion for variability in the state's revenue sources. Fitch does not currently expect the RDF to be tapped in fiscal 2017.
A second PIT tax cut, to 4.85%, will take effect no earlier than two years after the enactment of the first rate cut under the same trigger guidelines. The state estimates the revenue loss from the 0.25% rate cut to be approximately \\$57 million in fiscal 2016 and \\$147 million in fiscal 2017.
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 1.1% of 2014 personal income. Debt amortization is relatively rapid, with 65.6% of outstanding principal repaid in 10 years; current GO debt, which totals only \\$152 million, is fully repaid in five years. There are fairly limited plans for additional borrowing and the state has a manageable capital improvement plan.
Oklahoma's combined burden of debt and unfunded pension obligations, adjusted by Fitch to reflect a 7% return assumption, was slightly above the 6.1% median for U.S. states as of 2013. The state has taken significant steps to address pension underfunding, which had been a credit issue, including overfunding its required contributions to the systems in recent years. 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.
Passed in the 2014 legislative session, HB 2630 closed OPERS' (the state's largest pension system) defined benefit system to most new participants as of Nov. 1, 2015, with new employees able to enroll in a new defined contribution pension plan as of that effective date. This reform contributed to OPERS improving its funded ratio under the prior GASB standards to a reported 88.6% in fiscal 2014 from 81.6% in fiscal 2013. TRS' (teachers) funded ratio improved from 57.2% in fiscal 2013 to 63.2% in fiscal 2014. A lawsuit was filed in October 2014 regarding the closure of the defined benefit plan, challenging the passage of HB 2630 on several grounds, including procedural violations in its passage. Fitch will monitor the progress of this lawsuit, which the state believes would have a minimal impact on OPERS and the state should it not prevail.
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 97.9% of liabilities, while TRS reports the same figure at 72.4%; the higher ratios under the new standards primarily reflect the full recognition of solid asset gains in recent years.
Комментарии