Published: March 11, 2010
Fitch Rates Ohio Building Authority's $81MM Bonds 'AA-'
NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns an 'AA-' rating to $80.7 million in State of Ohio
(Ohio Building Authority) bonds as follows:
--$6.3 million state facilities bonds (Administrative Building Fund
Projects), 2010 series A (tax exempt);
--$34 million state facilities bonds (Administrative Building Fund
Projects), 2010 series B (Federally Taxable - Build America Bonds -
Direct Payment);
--$12.1 million state facilities refunding bonds (Highway Safety
Building Fund Projects) 2010 series A (tax-exempt);
--$3.7 million state facilities bonds (Juvenile Correctional Building
Fund Projects) 2010 series A (tax-exempt);
--$13.2 million state facilities refunding bonds (Juvenile Correctional
Building Fund Projects), 2010 series B (tax-exempt);
--$11.5 million state facilities bonds (Juvenile Correctional Building
Fund Projects) 2010 series C (Federally Taxable - Build America Bonds -
Direct Payment).
The bonds are expected to sell via negotiation on or about March 15,
2010. Fitch also affirms the 'AA-' rating on approximately $2.5 billion
of outstanding appropriations backed bonds and the 'AA' rating on
approximately $7.1 billion of outstanding general obligation (GO) bonds
of the state. The Rating Outlook is Stable.
RATING RATIONALE:
--The 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.
--Despite Ohio's economic breadth and diversity, a disproportionately
large manufacturing sector continues to decline, leading to broader
economic weakness and diminishing prospects for longer-term growth.
--The state's debt burden is moderate and rapidly amortized. Debt is
typically conservatively managed although the budget includes some
restructuring for fiscal relief in 2010/11.
--The state generally has a careful and conservative approach to
financial operations. However, the extended weakness in both the
national and local economies is pressuring state revenues and leading to
persistent budget stress.
--The use of one-time revenues including debt restructuring, federal
stimulus funds, and the draw-down of rainy day funds combined with
increased state responsibility for education funding will potentially
create a large structural budget gap going forward.
KEY RATING DRIVERS:
--Rebuilding the budget stabilization fund once the economy begins to
recover;
--Continued, steady economic deterioration amid slow transition from
manufacturing dependence or significant economic shock presented by the
weakened national economy.
SECURITY:
The bonds are a special obligation of the state, payable from payments
under various lease agreements, subject to appropriation. The source of
payment is appropriation from the general revenue fund.
CREDIT SUMMARY:
The bonds now offered are secured by rental payments that are
appropriated biennially under separate leases between the Ohio Building
Authority and three state agencies: the department of public safety, the
department of youth services, and the department of administrative
services. The debt is authorized by Ohio's constitution and secured by
the state's pledge of legislative appropriation, with the leases
renewable biennially until bonds are repaid. The Building Authority is
required to submit an estimate of debt service to the departments and to
the director of budget and management prior to the start of each fiscal
year, and debt service must be included in the budget. The trustee does
not have the ability to take possession of or operate the leased
projects.
The rating is based on Ohio's 'AA' GO rating, which reflects the state's
careful financial management; ongoing record of maintaining fiscal
balance; and a moderate, rapidly amortizing debt burden, tempered by a
severely weakened economy that remains closely tied to the troubled
manufacturing sector. The current recession has had a widespread impact
on the state's economy, accelerating a longstanding slump in
manufacturing and weighing on the once growing service sector. State
revenue collections have lagged in the downturn, exacerbated by a
multiyear tax cut. Revenue weakness required multiple rounds of
balancing actions in fiscal year (FY) 2009, including exhausting the $1
billion rainy day fund balance. The budget for the fiscal 2010-2011
biennium relies on one-time revenues to achieve balance. The plan also
expands over several biennia the state's responsibility for education
funding, elevating the risk of structural gaps beyond the current
biennium.
State economic performance, already dragged down in this decade by a
chronic decline in the manufacturing sector, has been disproportionately
affected in the current recession. Following the recession of 2001-2002,
employment increased a total of just 0.3% from 2004 to 2007, compared to
U.S. growth of 4.7% over the same period. Job losses are more severe in
the current downturn; the state lost over 289,000 jobs during calendar
year 2009. Employment losses are continuing into 2010, with January 2010
state employment down 4.2% year-over-year, compared to a 3% decline for
the U.S. overall. Manufacturing losses, particularly those tied to
automotive sector weakness, have been joined by service sector losses
and the widespread impact of the deep housing market downturn. Personal
income gains have been limited in Ohio in this decade at approximately
60% of gains nationally, although declines over the past three quarters
have been less than the national and regional averages. The state's
economic forecast assumes employment losses in fiscal 2010 of 4.6%,
before a weak recovery begins.
The state's financial management is sound, with the state consistently
maintaining budgetary balance, including in the current downturn. Over
the course of the fiscal 2008-2009 biennium, the state grappled with
revenue shortfalls totaling approximately $2.7 billion, prompting
multiple rounds of spending cuts, transfers and other measures to
maintain fiscal balance. Fiscal 2009 tax receipts fell $951 million, or
5.3% below revised estimates, largely due to weaker than expected
personal income tax collections. As the state's constitution precludes
ending a fiscal year in deficit, spending was reduced further and the
rainy day fund, which had been funded at $1 billion at the start of the
year, was applied to close the gap. The year ended with a fund balance
of $389 million, or 2.3% of tax revenues.
Budget balance in the fiscal 2010-2011 biennium is achieved through the
use of additional one-time and ongoing resources, including $2.4 billion
in federal stimulus and $1 billion in transfers or savings, including
$272 million from 10 unpaid employee leave days. The budget also assumed
revenues from newly authorized video lottery terminals (VLTs) which had
been expected to contribute $933 million over the biennium; however, the
Ohio Supreme Court ruled that implementation is subject to a voter
referendum, which will not take place until fall 2010. The suspension of
the final phase of the income tax rate reduction is expected to close
the resulting $850 million gap. The budget forecasts ending the biennium
with a $25 million fund balance.
Revenues, which had been on target through December, fell off somewhat
in January as personal income tax payments came in 15.6% below target,
primarily due to lower than expected quarterly payments. Continued
strength in automobile sales tax and cigarette taxes offset some of the
decline in the personal income tax (PIT). Tax revenues are now 1.1%
below forecast year-to-date and down 9.8% year-over-year. February
receipts show some rebound in the PIT, and state officials are
optimistic that revenue estimates will be met for the fiscal year.
State debt management is conservative. The enacted budget assumed debt
restructuring to provide $736 million in savings over the fiscal
2010-2011 biennium, with $480 million allocated to the Public Facilities
Commission and $256 million to the Building Authority. Debt amortization
is rapid, with all debt fully retired in 20 years. Total tax-supported
debt of $10.9 billion equals 2.6% of 2008 personal income; 69% of GO
debt amortizes in 10 years, a high level, but down slightly due to the
previously discussed debt restructuring. Funding for Ohio's pension
systems has declined significantly, with the largest system, PERS,
declining from 96% funded in 2007 to 75% funded as of December 2008.
However, market gains over the past year have mitigated some of these
losses.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for
investors new to the municipal market.
State Appropriation-Backed Bonds:
A U.S. state government's overall credit quality is reflected in the
rating for its general obligation (GO) full faith and credit pledge, the
broadest security that a state can provide to the repayment of its
long-term borrowing. In cases where bond payment requires annual or
biennial legislative appropriation, this lesser long-term commitment to
repayment is reflected in a lower rating than the GO rating. Such debt
is typically rated one notch below the GO rating. If concerns about
non-appropriation are heightened, for example in cases where there is
not clear essentiality for the project being funded, such debt can be
rated two or more notches below the GO rating. Conversely, if the risk
of non-appropriation is judged to be effectively eliminated, for example
through a mechanism that traps substantial operating funds if
appropriation is not made, the appropriation debt can be rated on par
with the GO credit.
State GO ratings generally fall within the two highest rating categories
of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect
states' inherent strengths: states generally have broad economic and tax
base resources and all possess sovereign powers under a federal
government system, with substantial, although varying, control over
revenue raising and spending. Given these inherent strengths, in only a
few instances have economic concentration and long-term structural
decline or the inability or unwillingness to address large financial
challenges led to ratings below the 'AA' category.
Applicable criteria available on Fitch's web site at www.fitchratings.com:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28,
2009.
Additional information is available at www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
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Fitch Ratings, New York
Karen Krop, +1-212-908-0661
Ken
Weinstein, +1-212-908-0571
Media Relations:
Cindy Stoller,
+1-212-908-0526
cindy.stoller@fitchratings.com
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