OREANDA-NEWS. Fitch Ratings assigns an 'F1+' rating to the state of Oregon's $600 million full faith and credit tax anticipation notes (TANs) 2015 series A.

The TANs are expected to sell via negotiation on Sept. 22, 2015.

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, including significant interfund borrowables.

STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: Oregon's long-term 'AA+' general obligation (GO) bond rating reflects an economy that has diversified, moderate debt levels, and the state's prudent financial management. State finances are heavily dependent on the personal income tax (PIT), a volatile revenue source that declined sharply during the recession, and has since shown steady growth. The state's management reviews revenue and economic forecasts quarterly and takes measures as necessary to maintain balance.

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 2016, the first year of the state's fiscal 2015-2017 biennium that began on July 1, 2015. Fitch's rating, at 'F1+', 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 $15 billion in the past two fiscal years, providing 27x coverage for fiscal 2016 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, the state's rainy day fund, as well as the investment of the GF) and the common school fund.

The fiscal 2016 notes, at $600 million, represent 5.3% of forecast cash flows through September 2016, when the notes mature. The current notes are structured with a 12 month maturity and as such, extend beyond the end of the 2016 fiscal year, which is permissible as the state budgets on a biennial basis; the current biennium that began on July 1, 2015 extends until June 30, 2017. Therefore, Fitch's analysis considers cash balances and activity through September 2016, part of fiscal 2017.

The state's cash flow forecast through fiscal 2017 assumes the repayment of the current notes following the issuance of a $600 million fiscal 2017 TAN, expected to occur in July 2016. While Fitch would typically be concerned about overlapping cash flow borrowings, the sizable amount of pledged borrowables, expected to approximate $15.6 billion at note maturity, eliminate that concern. This is the second time in recent history that the state has applied this practice; 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 made up 88% of GF revenues in BY 2015. 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 are expected to be 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 3.9% in fiscal 2016 from fiscal 2015.

Corporate income taxes (CIT) were also above the 2% forecast threshold for BY 2015; however, 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 will allow the state to increase its rainy day (RDF) and education stability (ESF) funds' reserves to a combined estimated balance of $391.2 million; 2.4% of net total biennial revenue or 4.6% of fiscal 2015 net revenue.

The recently released September 2015 economic and revenue forecast includes a 12.6% baseline growth assumption in PIT revenue in the 2015-2017 biennium. Revenue in the September forecast includes accruals that the cash flow forecast does not, leading to some minor differences between the two. Overall, GF biennial revenues in the September forecast are expected to grow 12% from BY 2015 and total almost $18 billion. Per typical expenditure patterns, the state estimates 51% of the enacted budget will be spent in the first year of the biennium and the balance spent in the second year. The state's RDF and ESF reserves are expected to grow through the 2015-2017 biennium, equaling $753.7 million at the end of fiscal 2017; or 8.1% of fiscal 2017 net GF revenue.