Fitch Rates Ohio's $482MM GO Bonds 'AA+'; Outlook Stable
Fitch Ratings assigns an 'AA+' rating to the following State of Ohio general obligation (GO) bonds:
--$150 million infrastructure improvement GO bonds, series 2013A;
--$69.275 million infrastructure improvement GO refunding bonds, series 2013B;
--$195.06 million common schools GO refunding bonds, series 2013A;
--$66.3 million higher education GO refunding bonds, series 2013A.
The infrastructure improvement bonds (new money and refunding) are expected to sell via competitive bid on Jan. 8, 2013. The common schools and higher education bonds are expected to sell via competitive bid on Jan. 23, 2013. The par amounts of the refunding bonds are subject to change.
In addition, Fitch affirms the following ratings:
--$8.3 billion outstanding state GO bonds at 'AA+';
--$2 billion outstanding appropriations backed bonds of the state at 'AA'.
The Rating Outlook is Stable.
General obligation, full faith and credit of the State of Ohio, excluding net lottery proceeds and highway user receipts.
KEY RATING DRIVERS
CONSERVATIVE FINANCIAL MANAGEMENT: The state generally has a careful and conservative approach to financial operations and has consistently managed to achieve budgetary balance, inclusive of positive operating results in fiscal 2012 which provided for an addition to the state's rainy day fund.
BROAD ECONOMY WITH LARGE MANUFACTURING SECTOR: Despite Ohio's economic breadth and diversity, the manufacturing sector continues to represent a disproportionally large segment of the economy and prospects for longer-term growth in this sector are uncertain. The Ohio economy has evidenced a stronger rebound than the nation as a whole in the current recovery.
MODERATE LIABILITY BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed although restructuring for fiscal relief occurred in the 2010/11 biennium as well as in fiscal 2012. On a combined basis, outstanding debt and pension obligations are a manageable burden on the state.
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, supported by an economy that is steadily adding jobs lost in the recession. 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. The state has recorded consecutive months of year over year job gains since July 2010, largely incorporating gains in the manufacturing sector as well as in the services sectors, offset by continued losses in government employment.
Sizable budget gaps forecast for the current biennium, which began July 1, 2011, required broad balancing actions, including sharp reductions in aid to municipalities, debt restructuring, and the planned lease of the state's liquor distribution system. Tax revenues increased notably year-over-year (y-o-y) in fiscal 2012 and the state recorded an operating surplus and deposit to its rainy day fund despite a delay in the lease of its liquor distribution system.
STEADY ECONOMIC GROWTH
The state steadily added jobs in 2011, evidenced by y-o-y growth in every month from July 2010, and 2012 is likewise evidencing a continuation of this positive, steady trend. The state recorded y-o-y employment growth of 2% in November 2012 as compared to 1.4% growth for the nation, led by large increases in durable goods manufacturing; trade, transportation, and utilities; professional business services; and education and health services. This steady growth continues to be tempered by ongoing losses in the government sector; modestly down 0.3% y-o-y in November 2012 but 35,400 jobs (4.3%) down from November 2008.
Y-o-y through November 2012, state employment has increased by 101,000 jobs, yet employment remains well below its pre-recession peak that was set in 2006. The pace of the state's y-o-y employment growth in 2012 has been more robust than that of the nation as a whole, resulting in a November 2012 unemployment rate of 6.8% that was below the U.S. average of 7.7%. The current rate is a notable improvement from rates that ranged above the national average in the recent recession, with an annual peak of 122% of the U.S. average in 2007 as compared to 88% for the month of November. State personal income per capita of $37,791 has remained steady at just over 90% of the U.S. the past few years after trending downward from almost 98% in 1994.
SOUND FINANCIAL MANAGEMENT
Fitch considers Ohio's financial management to be sound, with the state consistently maintaining budgetary balance, including during the recession. However, Fitch notes that during the downturn the state employed one-time measures for fiscal relief, a pattern that continued into FY 2012. 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 (GRF) by accelerating the phase-out of certain tax reimbursements to school districts and other local governments. One-time measures in FY 2012 were budgeted at $1 billion with a drop to $30 million in FY 2013.
The state estimates actual GRF revenues in fiscal 2012 grew 3.1% from fiscal 2011, surpassing the forecast of a 2.2% decline which was partly driven by a steep drop-off in federal stimulus funds. These results produced a $129 million net increase in the GRF's cash balance to $973.4 million, after a $235.1 million transfer to the state's budget stabilization fund (BSF). The BSF, intended to carry a balance up to 5% of the prior year GRF revenues, is now equal to $482 million, about 1.8% of fiscal 2012 GRF revenue. The state's unencumbered ending fund balance in FY 2012 was $371 million.
Continued economic improvement bolstered the state's economically sensitive revenue sources, contributing to the positive results in FY 2012, and offsetting a $500 million revenue loss from the inability to complete the planned lease of the state's liquor distribution system to JobsOhio due to ongoing litigation. PIT receipts in FY 2012 increased 3.8% y-o-y, and sales tax receipts were strong at 6.7% y-o-y growth. Overall, tax receipts in FY 2012 were up 7.3% y-o-y; however, these results included the state's redirection to the GRF of tax receipts previously allocated to localities, such as the commercial activity tax and public utility tax.
Revenue sources in fiscal 2013, which include expected economic growth, are forecast to increase about 6% from actual receipts in fiscal 2012 and include a 7% forecast increase in state tax receipts. Achieving these results requires a 6.4% increase in PIT revenue and a 4.2% increase in sales tax revenue. Year to date through November 2012, state tax receipts are running 9.8% higher y-o-y and are 0.7% above the forecast, although there is some weakness within the components. Included in this total are PIT receipts which were disappointing in November, falling 1.6% below the monthly estimate due to weakness in the withholding component, yet remaining 0.5% above-estimate year-to-date. Year-to-date non-auto sales tax receipts are running 1% below the estimate and the commercial activity tax (CAT) is 3.8% below estimate, but these negative variances have been offset by above-estimate results in the corporate franchise tax and estate tax.
The revenue forecast does not include the expected receipt of proceeds related to the JobsOhio transaction as litigation regarding the transfer of the liquor distribution system remains ongoing. Going forward, the receipt of CAT in the GRF will be impacted by litigation that was not settled in favor of the state in regard to taxation of motor vehicle fuels. A court ruling on December 10, 2012 shifts the collection of these revenues to the state's highway fund. The loss of revenue to the state's GRF will only have a partial year impact in fiscal 2013; the full year impact of this shift is estimated at $140 million. Currently, the state expects to end the fiscal year with an overall positive revenue variance despite these noted revenue variances due to offsetting positive performance in other revenue areas and expenditures that are currently running 2.7% below the estimate.
CONSERVATIVE DEBT MANAGEMENT
Ohio's debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 75% of general revenue fund-backed debt amortized in 10 years. Total tax-supported debt of $12 billion is equivalent to a manageable 2.8% of 2011 personal income. The $1.74 billion capital improvement plan for FY 2013 and 2014 will be largely funded by $1.36 billion of general fund-backed debt. The largest beneficiaries of the plan are higher education, primary and secondary education, and local infrastructure projects. Debt ratios are expected to continue to approximate current averages as over $1.5 billion in GRF principal is scheduled to roll off in the next two years and personal income is expected to continue to grow.
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 77.4% funded as of Dec. 31, 2011. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 71.2% funded ratio. In September 2012, the governor signed several pieces of pension reform legislation targeted to improve the financial condition of all five Ohio pension systems. Reform measures affected employee contributions, number of years of service credit, minimum retirement age, cost of living calculations, and final average salary calculation.
On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals 4.2% of 2011 preliminary personal income, a about a third below the median for U.S. states rated by Fitch. The calculations include 45% of the liability of PERS that Fitch estimates to be attributable to the state and a small apportionment of the teachers' retirement system (TRS) UAAL for which the state is responsible.
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. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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