Fitch Ratings assigns an 'F1+' rating to the following State of Oregon full faith and credit tax anticipation notes (TANs):
--$800 million 2011 series A.
The notes will be due June 29, 2012 and are expected to sell via negotiation on July 20, 2011.
RATING RATIONALE:
--While not general obligations of the state, Oregon has pledged its full faith and credit to the TAN payment.
--The state has pledged all available funds to note payment, including significant interfund borrowables.
--A transfer equal to principal and interest will be made to the debt service account no later than one day prior to note maturity, and amounts in the short-term borrowing account are continuously appropriated.
--Oregon's long-term 'AA+' GO bond rating reflects an economy that has diversified, moderate debt levels, and the state's prudent financial management. These characteristics are offset by a revenue structure largely dependent on the cyclical personal income tax, a proclivity for voter initiatives with negative fiscal impact, and constitutional 'kicker' provisions requiring return of surplus revenues to taxpayers.
KEY RATING DRIVER:
--Continued availability of significant balances among borrowable funds.
SECURITY:
The TANs represent full faith and credit obligations of the state to which the state has pledged all available funds.
CREDIT SUMMARY:
The notes will be used to finance Oregon's fiscal 2012 cash flow needs. Note security is bolstered by the very large and stable amounts of interfund borrowables available. Monthly balances in the borrowable funds have averaged $15 billion over the past six years (and higher still in the most recent biennium), providing just under 20 times (x) coverage for note repayment. The consistency and reliability of the balances over time reflects their composition, primarily monies in the short-term fund (state and local investments as well as the investment of the general fund), the state accident fund, and the common school fund. Projected coverage by the ending general fund balance without borrowables is slim at 1x, including $250 million in interfund borrowing to maintain balance that is projected to be utilized in June 2012 and repaid following next fiscal year's note sale.
While the state has pledged its full faith and credit to note payment, the notes are not general obligations of Oregon. The state has pledged all available funds to note payment, including the interfund borrowables. Not later than one day prior to note maturity, a transfer equal to principal and interest will be made to the debt service account and amounts in the account are continuously appropriated. This is Oregon's first external borrowing during the 2011-2013 biennium and the ninth since fiscal 2002. While available interfund borrowables are considerable, interest costs associated with such borrowings are based on a minimum of 2% or cost of funds plus a margin if the resulting charge is higher than 2%. Rates in the tax exempt market can and have been lower, making a public sale of notes preferable.
Oregon's general fund is relatively narrow, largely dependent on the personal income tax (PIT), which made up 86% of 2011 general fund revenues. PIT collections have been volatile, rising by nearly 17% in the 2003-2005 biennium and 22% in the 2005-2007 biennium, while falling by 8.5% during the 2007-2009 biennium. PIT revenues were budgeted to grow by approximately 3.3% over the course of the 2009-2011 biennium, though base growth adjusted for revenue enhancement was approximately 1%. PIT projections for the 2011-2013 biennium reflect modest recovery, with 16% growth currently projected over the 2 year period. Oregon has passed a balanced budget for the biennium, which began on July 1, that does not raise revenue though it does in part rely on reserve draws. The legislature has also held back 3.5% of agency spending to protect against revenue loss and the release of held back monies will be discussed at the legislature's next session in February 2012.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
--'Rating Municipal Short Term Debt, dated Dec. 23, 2010.
Applicable Criteria and 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=564546
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