Fitch Rates Ohio (Treasurer of State) $118MM Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA' rating to $117.77 million State of Ohio (Treasurer of State) bonds consisting of the following:

--$32.7 million capital facilities lease-appropriation bonds, series 2012A (administrative building fund projects);

--$7.705 million capital facilities lease-appropriation refunding bonds, series 2012A (cultural and sports facilities improvement fund projects);

--$23.97 million capital facilities lease-appropriation refunding bonds, series 2012A (mental health facilities improvement fund projects);

--$7.48 million capital facilities lease-appropriation refunding bonds, series 2012A (parks and recreation improvement fund projects);

--$17.74 million capital facilities lease-appropriation refunding bonds, series 2012A (adult correctional building fund projects);

--$28.175 million capital facilities lease-appropriation refunding bonds, series 2012B (administrative building fund projects).

The bonds are expected to sell through negotiation on or about Feb. 27, 2012. In addition, Fitch affirms the following ratings:

--$7.9 billion outstanding state general obligation (GO) bonds at 'AA+';

--$2.2 billion outstanding appropriations backed bonds of the state at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a special obligation of the state, payable from payments under various lease agreements, subject to appropriation from the general revenue fund.

KEY RATING DRIVERS

APPROPRIATION MECHANISM: The rating on the bonds backed by Ohio's lease appropriations, one notch below the state's GO rating, reflects the state's general credit standing, sound lease structures, the broad state purposes of financed projects, and constitutional authorization for these types of bonds.

STABILIZING ECONOMY: Ohio's economy is broad and diverse. Employment has stabilized from the recession's large-scale losses. The state remains exposed to a disproportionately large manufacturing sector.

MODERATE DEBT BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed, although the state has repeatedly refunded debt to push off debt service as part of its budget balancing measures.

CONSERVATIVE FISCAL MANAGEMENT: The state generally has a careful and conservative approach to financial operations and has consistently managed to achieve budgetary balance despite revenue declines associated with economic weakness. However, the use of one-time revenues in the downturn required extensive actions to address a large structural budget gap in the current biennial budget.

WHAT COULD TRIGGER A RATING ACTION

Changes in Ohio's 'AA+' GO rating to which this rating is linked.

CREDIT PROFILE

The series 2012A and 2012B bonds currently offered are secured by rental payments that are appropriated biennially under separate leases between the Ohio Public Facilities Commission (OPFC) and each of the following departments; department of administrative services (DAS), Ohio cultural facilities commission, department of mental health, department of developmental disabilities, department of alcohol and drug addiction services, department of natural resources, and the department of rehabilitation and correction (collectively, 'the departments'). The debt is authorized by Ohio's constitution and secured by the state's pledge of legislative appropriation, with each lease renewable biennially until the bonds are repaid. The OPFC is required to submit an estimate of debt service to the departments and to the director of budget and management prior to the start of each fiscal year, and the respective debt service must be included in the budgets of each department. The trustee does not have the ability to take possession of or operate the leased projects. The current offerings will fund $32.7 million in capital improvements for the DAS with the remaining $85.07 million of proceeds being used for refunding purposes for debt service savings.

Ohio's 'AA+' GO rating is based on the state's careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden, tempered by an economy that is slowly adding jobs lost in the recession midst slow national economic growth. The recession had a widespread impact on the state's economy, accelerating a longstanding slump in manufacturing and weighing on the slowly growing service sector. Steps taken in the fiscal 2010 - 2011 biennial budget, including significant non-recurring resources, and improving revenue in fiscal 2011 enabled the state to maintain balanced operations. However, sizable budget gaps for the biennium that began on July 1 required broad balancing actions.

The state steadily added jobs in 2011, evidenced by year-over-year (yoy) growth in every month since July 2010. Notable improvements in yoy durable goods manufacturing, construction, and professional and business services employment have been tempered by losses in the government sector, leisure and hospitality, and non-durable goods manufacturing. Motor vehicle manufacturing yoy employment growth, after improving earlier in 2011, slowed for the balance; the yoy decline in December 2011 was 5.3%.

Yoy through December 2011, state employment has increased by 72,800 jobs, but remains 343,800 below the pre-recession peak that was set in June 2006. Growth prospects in 2012 remain positive, albeit modest. Positively, gains resulted in a December 2011 unemployment rate of 8.1% that was below the U.S. average of 8.5%. Overall, the pace of the state's yoy employment growth has kept pace with that of the nation; 1.4% compared to 1.3% in December. The state's monthly unemployment rates in 2011 generally fell at or below those of the nation; an improvement from past rates that generally ranged above the national average.

Fitch considers Ohio's financial management to be sound, with the state consistently maintaining budgetary balance, including during the downturn. However, Fitch notes that during the downturn the state employed one-time measures for fiscal relief, a pattern that continued with debt restructuring and planned asset sales included as balancing measures in the enacted budget for fiscal 2012.

The recent economic improvement has bolstered the state's economically sensitive revenue sources in the current fiscal year. Personal income tax (PIT) receipts through January 2012 increased 7.6% yoy and sales tax receipts continue to be strong with 5.5% yoy growth. Overall, tax receipts through January 2012 are up 9.2% yoy, however, this increase includes the state's redirection to the general fund of tax receipts previously allocated to localities as part of its solution to closing the budget gap for the current biennium.

As compared to estimate, tax receipts are running just above estimate by 1.4%, however, when including other revenue sources, total receipts are below estimate by 3.6%, incorporating several factors. Proceeds from both the state's lease of its liquor distribution system to JobsOhio ($500 million) and the lease of a state prison ($50 million) were estimated to be received in January, and are now anticipated to be received later in the fiscal year. Additionally, federal government receipts are running about $170 million below estimate (3.7%), but this partly incorporates public assistance and Medicaid expenses that are currently $372 million (4.6%) below estimate, year to date. The state reports that spending across nearly all categories of service is below initial estimates; however, this may reflect some distortion due to the implementation of a new Medicaid information technology system in August 2011.

The state expects to meet its revenue target for the current fiscal year, which Fitch believes to be reasonable based on results year-to-date. Overall, the state is currently estimating an ending general fund cash balance for fiscal 2012 of $152.7 million, down from $844.5 million ending fiscal 2011 but in line with budget targets.

The enacted budget for the 2012 - 2013 biennium cut spending and instituted Medicaid reforms while directing the refunding of outstanding debt for current-year debt service savings, the sale of state prisons for operational savings, the leasing of the state's liquor enterprise system, and the redirection of revenue to the state general revenue fund by accelerating the phase-out of certain tax reimbursements to school districts and other local governments.

Although the enacted budget contains one-time measures to achieve balance, these measures are concentrated in the first year of the biennium, and some of the measures may provide recurring resources. One-time measures in fiscal 2012 are budgeted at $1 billion and included: $440 million in combined savings from the now completed debt restructurings; $256 million from the lease, through bond financing, of the state's liquor enterprise to a not for profit corporation; and $75 million from the sale of five state prisons. The state is moving on the sale of one state prison and privatization of two others for an estimated $55 million in net revenue after accounting for the outstanding debt on the facility. One-time measures are budgeted to drop to $30 million in fiscal year 2013.

The lease of the state's liquor enterprise system through an associated bond financing continues to be the subject of litigation, placing approximately $250 million in funding at risk to the biennial financial plan, but the state is moving ahead with obtaining the necessary state board approvals. A judicial ruling in favor of the state, to date, leads to the expectation of this lease transaction, and related bond financing, occurring prior to the end of fiscal 2012.

The budget did not contain any revenue raising measures and instead instituted the final phase of a previously suspended PIT rate reduction, effective Jan. 1, 2011, reducing revenues by an estimated $440 million in fiscal 2012. Total general fund revenues in fiscal 2012, inclusive of federal revenues, are projected to decline by 2.2%, reflecting the falloff of federal stimulus aid and the PIT rate reduction, offset by moderate growth in non-auto sales tax receipts and the acceleration of the phase-out of certain state tax reimbursements to local governments. Baseline revenue sources in fiscal 2013, which include expected economic growth, are forecast to increase by 7.1% from fiscal 2012 and include a 6.1% forecast increase in state tax receipts, supported by a projected 5.9% increase in PIT revenue and an approximate 7% increase in sales tax revenue. Fitch believes downside risk remains to the revenue forecast given the current economic climate.

The state ended fiscal 2011 with an $844.5 million cash balance, equal to 3% of general fund (GF) revenue, and a $430.7 million unencumbered GF balance (1.6% of GF revenue, cash basis), allowing for a $45 million transfer for disaster and emergency funds and a $246.9 million deposit to the budget stabilization fund. The fiscal 2011 audited financial statements record a $606.9 million GF operating surplus and a fund balance, now incorporating the provisions of GASB 54, of $2.2 billion or 7.2% of GF revenues.

State debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 73% of general revenue fund-backed debt amortized in 10 years. Total tax-supported debt of $11.8 billion is equivalent to a manageable 2.8% of 2010 personal income.

As is the case with many states, funding for Ohio's pension systems has declined significantly, with the largest system, PERS, declining from a strong 96% funded ratio as of Dec. 31, 2007 to 76% funded as of Dec. 31, 2010. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 68.6% funded ratio.

Additional information is available at 'www.fitchratings.com.' The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's 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. 15, 2011);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'Ohio State and Local Government Credit Profiles Unaffected by SB5 Repeal' (Nov. 10, 2011);

--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' (Feb. 17, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

Enhancing the Analysis of U.S. State and Local Government Pension Obligations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604785

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