Fitch Ratings assigns an 'AA' rating to the following lease revenue bonds of the Oklahoma Development Finance Authority (ODFA):
--$40.8 million ODFA Oklahoma State System of Higher Education master
real property lease revenue bonds, tax-exempt series 2010A (subject to
annual appropriation);
--$9.9 million ODFA Oklahoma State System of
Higher Education master real property lease revenue bonds, federally
taxable series 2010B (subject to annual appropriation).
The Rating Outlook is Stable.
The bonds are expected to sell via negotiation on Aug. 30, 2010.
RATING RATIONALE:
--The rating is based on the credit position of the state of Oklahoma, whose general obligation (GO) bonds are rated 'AA+,' reflecting an economy based on energy and other commodities, low but rising debt levels, and conservative financial operations with stringent controls and well funded reserves.
--The State Regents receive one appropriation for all budgetary purposes with lease payments transferred monthly from the first dollars allocated by the regents to participating institutions. The state bond advisor tracks all lease payments that are appropriated to the board of regents.
KEY RATING DRIVERS:
--Change in credit quality of the state including laws that would reduce appropriation holdbacks and funding of reserves.
SECURITY:
The bonds are a limited obligation of the authority paid under a lease with the Regents of the Oklahoma State System of Higher Education from state general fund revenues, subject to annual appropriation. Appropriations to the university system are made by the legislature in one consolidated form and allocated to participating institutions by the regents.
CREDIT SUMMARY:
The rating reflects the payment of lease rentals by the State Regents from state general fund revenues, subject to annual appropriation, and allocation by the State Regents to the participating educational institutions.
Both the state constitution and enabling statutes provide for appropriation of lease payments in support of this master real property lease program. 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 this program, which has been in use for over eight years. The fiscal 2010 appropriation for the state regents is $1.1 billion. ODFA is one of the principal financing agencies of the state as the use of GO bonds is limited. The term of the lease extends through the life of the bonds, with a maximum term of 30 years; lease payments are not abatable.
The state's 'AA+' GO bond rating and Stable Outlook reflect low debt levels and disciplined financial policies, including an appropriation limit of 95% of certified general fund revenues, close monitoring of revenue results, and provisions to maintain separate rainy day and cash reserves. The state continued to demonstrate a willingness and ability to address fiscal challenges including revenue underperformance over the past two fiscal years. Tax revenues are constrained both by an economic base with below-average wealth levels and a supermajority requirement of the legislature or voter referendum to raise taxes. Debt levels are low but rising.
Financial operations are conservative, including maintenance of a separate rainy day (the constitutional reserve fund) and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. The constitutional reserve had been fully funded at 10% of the prior year appropriation since fiscal year (FY) 2001 until drawn upon to close a budget gap in FY 2010. The state estimates it ended FY 2010 with $373 million remaining in the constitutional reserve fund, having utilized $223 million in FY 2010, and the cash flow reserve remains funded at $434 million. The enacted FY 2011 budget appropriated the balance of the rainy day fund, but held back $100 million to be used by the legislature if revenues fall short during the fiscal year. The cash flow reserve is maintained at 10% of general fund appropriations and is derived from any revenues in excess of the 95% appropriated, as noted above. It is typically reduced during the fiscal year and replenished as revenues are received late in the fiscal year.
FY 2009 general fund revenues were constrained by the weakened economy. Originally projected to rise 3.2% from the prior year, actual revenues came in approximately $402 million less than expected and $436 million below the prior year. While the state's largest revenue source, income tax, fell 10.1% year-over-year, sales tax revenues, the second largest source, actually increased 2.2% year-over-year. Nevertheless, the shortfall exceeded the state's 5% cushion and cuts of 1% were instituted.
The enacted FY 2010 budget required 7% across-the-board reductions in agency spending and, when first-quarter revenues were realized 26% below estimate, another 5% reduction was implemented, later revised to 3.4% as federal stimulus funds became available to backfill expenditure reductions. Revenues began to stabilize in the second half of the fiscal year with revenues beginning to exceed the estimate and growing year-over-year as of March. However, due to the weak first half of the fiscal year, revenues for the fiscal year were down 17% year-over-year and 15% below budget. The FY 2010 budget was balanced with approximately $1.2 billion in federal stimulus funds and a partial drawdown of the rainy day fund. With revenues expected to remain weak in FY 2011, the enacted budget achieves balance with a further reduction in appropriations of 3.53%, use of remaining federal stimulus funds, and depletion of the rainy day fund.
The state's economy is diversifying, although oil and natural gas production and military installations remain important. Oklahoma continued to grow in 2008 while the nation as a whole entered the recession, but the state contracted as well in 2009 with non-farm employment declining 3.6%, comparing favorably to the national decline of 4.5%. State employment was up 1.1% year-over-year in July 2010, while national employment remained flat. Unemployment has increased but remains comparably low at 6.9% as of July 2010, versus the national rate of 9.5%. Personal income continued to grow into early 2009, but has been declining since, albeit at a slower rate than the U.S. Personal income fell .8% in 2009 versus the U.S. rate of decline of 1.7%.
Additional information is available at 'www.fitchratings.com'
Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'U.S.
State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048
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