Fitch Ratings has assigned an 'AA' rating to the following state of
Oklahoma, Oklahoma Development Finance Authority (ODFA), Oklahoma state
system of higher education master real property lease revenue bonds
(subject to annual appropriation):
--$10.13 million tax-exempt series 2015E;
--$7.78 million federally taxable series 2015F.
The bonds are expected to sell via negotiation on or about Oct. 6, 2015.
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 obligations 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+' 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 fund (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 July 2015 remain low
and below national averages, they have escalated over the past several
months 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 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
real property program. Additionally, 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; the
maximum lease term permitted by the ODFA is 30 years and lease payments
are not abatable. The current offering will provide funding for three
projects at Oklahoma State University: construction of a laboratory
building for the College of Engineering, Architecture, and Technology;
expansion of the water treatment plant; and refinancing of a portion of
outstanding bonds that were issued for the central utility plant.
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 all bonds. The fiscal 2016 operating
fund appropriation for the State Regents is $963.4 million; this is a
3.5% reduction from the fiscal 2015 appropriation, enacted as part of
state's plan to close an identified $611 million revenue shortfall in
that fiscal year. Despite the appropriation reduction, Fitch believes
the state remains committed to funding its higher education institutions.
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 flow reserve funds (CFRF). 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 COMMODITY PRICES
After consecutively outperforming national growth trends coming out of
the recession, the state's year-over-year (yoy) employment growth has
slowed. The state recorded 1.1% yoy employment growth in 2014 as
compared to more robust national employment growth of 1.9%; however, the
state's recovery of jobs from the trough of the recession stands at a
robust 158% as of July 2015 as compared to a national average of 143%.
Slow employment growth is continuing in 2015 with July 2015 yoy
employment growth at 0.8% as compared with 2.2% yoy for the nation.
Positive trends continued in most state employment sectors through July
although a 10% three-month moving average decline in mining reflects
employment losses corresponding with low prices for both crude oil and
natural gas. Manufacturing has also recently trended downward,with a
4.2% three-month moving average decline through July.
Positively, Oklahoma's unemployment rate continues to be well below the
nation's; July's rate was 4.5%, inclusive of strong 4.3% 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. The low rate highlights the
state's success in diversifying its economy beyond natural resource
development. However, Fitch believes the state's economy has weakened
from the natural resources slowdown, as initial and continuing
unemployment claims continue to increase and the state's August revenue
sources were markedly under the state's expectations.
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 early September 2015 average rotary rigs in the state were
halved yoy, from 213 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 falloffs in the state's
collection of severance tax revenue, down 16% yoy for the first two
months of fiscal 2016 and 60% below forecast. The less-than-robust
results are attributable to below-forecast prices for natural gas as the
general fund does not receive severance taxes on crude oil production
until $150 million has first been allocated for education and other
specified programs.
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 forecast for GRF revenue in fiscal 2015 of $5.86 billion factored in
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 personal income
tax (PIT) exhibited 6.4% yoy growth from fiscal 2014; 4.1% 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. 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. The RDF balance remained at $535 million, equal to 9.3% of
fiscal 2015 GRF revenues.
The state enacted a $7.18 billion total budget for fiscal 2016 (0.5%
lower than expenditures in fiscal 2015) that solved for an 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.
In support of the enacted budget, the state Board of Equalization's
(BOE) June 2015 revenue forecast projected GRF revenue in fiscal 2016 to
total $5.7 billion. This would be a modest 0.3% increase from fiscal
2015 partly due to the implementation of lower PIT rates for the state's
highest taxpayers, from 5.25% to 5%, pursuant to previously enacted tax
reduction legislation. The lower rates contribute to an expected 6.4%
decline in the PIT from fiscal 2015, while lower severance tax revenues
are forecast from the natural resources softening, and the CIT is
projected to decline by 17.7%. 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. Severance taxes from oil production
are forecast to decline by 22% from fiscal 2015.
Year to date through August 2015, GRF revenues are just meeting
forecast, with better than expected results in July offsetting weak
revenue collections in August. In total, GRF revenues are exhibiting
0.6% yoy growth.
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 established
trigger guidelines. The state estimates the revenue loss from the fiscal
2016, 0.25% rate cut to be approximately $57 million in fiscal 2016
(partial-year impact) while the revenue loss in fiscal 2017 is estimated
at $147 million.
CONSERVATIVE DEBT MANAGEMENT
The state's debt management is conservative and net tax-supported debt
of $2.1 billion is equal to a very manageable 1.2% 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.
Date of Relevant Rating Committee: June 8, 2015.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government
tax-supported criteria ("Exposure Draft: U.S. Tax-Supported Rating
Criteria," dated Sept. 10, 2015). The draft includes a number of
proposed revisions to existing criteria. If applied in the proposed
form, Fitch estimates the revised criteria would result in changes to
fewer than 10% of existing tax-supported ratings. Fitch expects that
final criteria will be approved and published by Jan. 20, 2016. Once
approved, the criteria will be applied immediately to any new issue and
surveillance rating review. Fitch anticipates the criteria to be applied
to all ratings that fall under the criteria within a 12-month period
from the final approval date
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991133
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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