Fitch Ratings assigns an 'AA' rating to the State of Ohio's (the state) $30 million cultural and sports capital facilities bonds, series 2008B. The bonds are expected to sell via negotiation on or about Nov. 19, 2008. The bonds mature Oct. 1, 2009-2018; there is no redemption prior to maturity. Fitch also affirms the 'AA' rating on approximately $2.4 billion of outstanding appropriation bonds of the state and certain agencies rated by Fitch. The Rating Outlook is Stable.
The 'AA' rating on bonds backed by Ohio's lease appropriations 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. Debt service on the bonds is paid from biennial appropriations to the Ohio Cultural Facilities Commission for lease payments.
Ohio's 'AA+' general obligation (GO) rating reflects its careful financial management, a demonstrated record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden. Fitch will continue to monitor closely the state's challenged economic situation. The long-term erosion of manufacturing has been exacerbated by a housing market downturn and the weakening national economy, leading to declines in employment and clouding the state's near-term economic and fiscal outlook. The state has lowered its economic and revenue forecasts several times, most recently in September 2008, prompting spending cuts and other measures, including a draw on the budget stabilization fund (BSF), to maintain fiscal balance.
The state's economic performance remains weak, with persistent declines in manufacturing joined by decelerating service sector employment and a continued deep housing market downturn. Since the last recession, employment growth had been limited, rising 0.5% from 2004 to 2007, compared to U.S. growth of 5.9% over the same period. September 2008 employment is down 0.4% year-over-year, matching the U.S. decline, dragged down by job losses in manufacturing and construction, while services growth remains weak. Personal income, though growing, continues to underperform comparable national figures: personal income rose 4.7% in Ohio in 2007, versus 6.2% nationally; second quarter 2008 personal income rose 4.2%, versus 5.2% nationally.
State fiscal management has been conservative. In response to economic weakening, in February 2008 the state lowered its revenue forecast for the fiscal 2008-2009 biennium, largely in the fiscal 2009 forecast, and instituted spending cuts and other measures to maintain budgetary balance. Actual tax revenues for fiscal year 2008 were 0.6% below the reforecast figures, led by weakening in personal income and non-auto sales taxes. Lower than forecasted spending nonetheless helped the state to achieve an ending fund balance of $808 million, or 3.8% of revenues and transfers.
Fiscal 2009 revenue performance began on a weak note; below forecast receipts during July and August prompted the state to revise downward its fiscal 2009 forecast in September 2008. Forecast revenues were lowered $540 million, primarily in personal income and sales tax collections. Simultaneously, the state announced $540 million in corrective actions, including using lapses and balance transfers, drawing $63 million from the BSF, and cutting $198 million from agency spending plans.
Through September 2008, revenues are 0.8% above the revised forecast but 0.6% below last year's level. Fiscal year 2009 is expected to end with a fund balance of $137 million, or 0.7% of estimated revenues, below the $187 million fund balance foreseen prior to the revenue reforecast. The BSF balance is $1 billion, or 3.8% of prior-year revenues, prior to the $63 million draw announced in September 2008. The legislature has authorized another $200 million in draws during fiscal 2009 for capital projects associated with jobs stimulus. Further reductions of the rainy day fund balance could limit state flexibility in the event that continued economic weakening requires additional balancing actions in fiscal 2009 and beyond.
State debt management is conservative. All GO bonds are constitutionally authorized by voters; debt service for most GO issues, including the current bonds, is limited to 5% of general fund and lottery revenues. Total tax-supported debt of $10.7 billion equals 2.7% of personal income; 69% of GO debt amortizes in 10 years, a high level. As part of $1.6 billion job stimulus program passed earlier this year, the state will issue $770 million in debt over several years, using a combination of existing authorizations and proposals for voter approval. Debt under the plan will be backed by the general revenue fund and net profits of the state's liquor enterprise. Ohio's largest pension system is well-funded, at 96% in 2007.
Note: Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
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