Fitch Ratings assigns an 'AA+' rating to $146.16 million State of Ohio general obligation (GO) refunding bonds consisting of the following:
--$100.835 million State of Ohio common schools GO refunding bonds, series 2011C;
--$28.095 million State of Ohio higher education GO refunding bonds, series 2011B;
--$17.23 million State of Ohio infrastructure improvement GO refunding bonds, series 2011C.
The bonds are expected to sell via negotiation on Nov. 14, 2011. In addition, Fitch affirms the following ratings:
--$7.8 billion outstanding state GO bonds at 'AA+';
--$2.3 billion outstanding appropriations backed bonds of the state at 'AA'.
The Rating Outlook is Stable.
SECURITY
General obligation, full faith and credit of the State of Ohio, excluding net lottery proceeds and highway user receipts.
KEY RATING DRIVERS
STABILIZING ECONOMY: Ohio's economy is broad and diverse and has recently stabilized from the recession's large-scale employment losses although the pace of future growth remains uncertain. The state remains exposed to a disproportionately large manufacturing sector.
MODERATE DEBT BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed, although the state employed debt restructuring in fiscal 2012 as part of its budget balancing measures.
CONSERVATIVE FISCAL MANAGEMENT: The state generally has a careful and conservative approach to financial operations and has consistently managed to achieve budgetary balance despite revenue declines associated with economic weakness. However, the use of one-time revenues including debt restructuring, federal stimulus funds, and the draw-down of rainy day funds in the downturn required extensive actions to address a large structural budget gap in the current biennial budget.
CREDIT PROFILE
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, tempered by an economy that is struggling to regain jobs lost in the recession despite recent signs of stabilization amidst tepid national economic growth. 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. Steps taken in the fiscal 2010-2011 biennial budget, including significant non-recurring resources, and improving revenue in fiscal 2011 enabled the state to achieve balanced operations. However, sizable budget gaps for the biennium that began on July 1 required broad balancing actions.
Economic momentum has been building in the state this year although the cyclical nature of Ohio's employment is exemplified by total nonfarm employment numbers that while still growing, have slowed from earlier in 2011. Notable improvement in year-over-year (yoy) durable goods manufacturing, construction, and professional and business services employment have been tempered by losses in the government sector while motor vehicle manufacturing is exhibiting yoy weakness, declining 7.4% in September yoy. Yoy through September 2011, employment has increased by 56,800 jobs, but remains 368,800 below the pre-recession peak that was set in June 2006 and growth prospects for the balance of the year, while remaining positive, have been moderated by slower growth in the state's large manufacturing sector and uncertain expectations for national economic growth.
Overall, state employment increased 1.1% yoy in September 2011; equivalent to the national rate. These gains resulted in a September 2011 unemployment rate that was also equivalent to the U.S. average, at 9.1%, but has increased from 8.6% recorded in April. Current economic forecasts are for continued employment growth in the state through the balance of 2011, albeit at a much reduced pace than earlier in the year. Economic uncertainty nationwide adds some risk to the state's generally conservative revenue forecasts.
Fitch considers Ohio's financial management to be sound, with the state consistently maintaining budgetary balance, including during the downturn. However, Fitch notes that during the downturn the state employed one-time measures for fiscal relief, a pattern that continues with debt restructuring and planned asset sales included as balancing measures in the enacted budget for fiscal 2012. The recent economic improvement has bolstered the state's economically sensitive revenue sources. Personal income tax (PIT) receipts through October 2011 increased 9.7% yoy and sales tax receipts continue to be strong with 4.9% yoy growth. Overall, tax receipts through October 2011 are up 10% yoy and are 1.6% ahead of estimate; however, this increase includes the state's redirection to the general fund of tax receipts previously allocated to localities as part of its solution to closing the budget gap for the current biennium.
The enacted budget for the 2012-2013 biennium cut spending and instituted Medicaid reforms while directing the restructuring of outstanding debt, 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 by accelerating the phase-out of certain tax reimbursements to school districts and other local governments. As part of the 2011 legislative session, collective bargaining reforms were also enacted as the state expected the reforms to reduce local government labor costs, offsetting to some extent the reductions in aid to local governments that were included in the state's budget for the biennium that began July 1. However, the law (Senate Bill (SB) 5) enacting these reforms was recalled by voters on Nov. 8, 2011, eliminating a means to expenditure savings. The measures included in SB 5 provided only modest savings to the state and the state had not included in its enacted budget any savings related to its passage (for more information, see Fitch's report dated Nov. 10, 2011, ' Ohio State and Local Government Credit Profiles Unaffected by SB5 Repeal' available on Fitch's website at 'www.fitchratings.com').
The enacted budget contains one-time measures to achieve balance, however, these measures are concentrated in the first year of the biennium, and the state believes some of the measures may provide recurring resources. One-time measures in fiscal 2012 are budgeted at $1 billion and included: $440 million in combined savings from now completed debt restructurings; $256 million from a lease, through bond financing, of the state's liquor enterprise to a not for profit corporation; and $75 million from a sale of five state prisons. The state is moving on the sale of one state prison and privatization of two others for an estimated $50 million in net revenue after accounting for the outstanding debt on the facility. The timing for the lease of the state's liquor enterprise system through an associated bond financing is currently uncertain, due to pending litigation, placing approximately $250 million in funding at risk to the financial plan. One-time measures are budgeted to drop to $30 million in fiscal year 2013.
The budget does not contain any revenue raising measures and instead institutes the final phase of a previously suspended PIT rate reduction, effective Jan. 1, 2011, reducing revenues by an estimated $440 million in fiscal 2012. General fund revenues in fiscal 2012, inclusive of federal revenues, are projected to decline by 2.2%, reflecting the falloff of federal stimulus aid and the PIT rate reduction, offset by moderate growth in non-auto sales tax receipts and the acceleration of the phase-out of certain state tax reimbursements to local governments. Actual receipts have increased 2.3% through October, reflecting strong growth in personal income, sales, and commercial activities taxes. Baseline revenue sources in fiscal 2013, which include expected economic growth and the PIT rate cut, are forecast to increase by 7.1% from fiscal 2012 and include a 6.1% forecast increase in state tax receipts, supported by a projected 5.9% increase in PIT revenue and an approximate 7% increase in sales tax revenue. Fitch believes there is downside risk to the revenue forecast given the current economic climate.
Unaudited results for fiscal 2011 show the state ended the year with an $844.5 million cash balance, equal to 3% of general fund revenue, and a $430.7 million unencumbered general fund balance (1.6% of general fund revenue), allowing for a $45 million transfer for disaster and emergency funds and a $246.9 million deposit to the budget stabilization fund. State debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 73% of general revenue fund-backed debt amortizes in 10 years. Total tax-supported debt of $11.9 billion is equivalent to a manageable 2.8% of 2010 personal income.
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 75% funded as of Dec. 31, 2009. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 67.8% funded ratio. The state reports that PERS' funded ratio increased to 76% as of Dec. 31, 2010.
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', dated Aug. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'Ohio State and Local Government Credit Profiles Unaffected by SB5 Repeal', dated Nov. 10, 2011;
--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations', dated Feb. 17, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
Enhancing the Analysis of U.S. State and Local Government Pension Obligations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604785
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