Fitch Rates Ohio's $40MM Capital Facilities Bonds 'AA-': Financial News

Fitch Rates Ohio's $40MM Capital Facilities Bonds 'AA-'
Tuesday December 1, 4:02 pm ET

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns 'AA-' ratings to $40 million State of Ohio capital facilities bonds, consisting of:

--$21,905,000 Mental Health capital facilities bonds, series II-2009A (tax exempt);

--$18,095,000 Mental Health capital facilities bonds, series II-2009B (Federally Taxable - Build America Bonds - Direct Payment).

The bonds are expected to sell via negotiation on or about Dec. 8, 2009. Fitch also affirms the 'AA-' rating on approximately $2.5 billion outstanding appropriation bonds of the state. The Rating Outlook is Stable.

The bonds now offered are secured by rental payments that are appropriated biennially under leases with relevant state agencies. 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 Treasurer 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' underlying general obligation (GO) rating, which reflects the its 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 the phase-in of a multiyear tax cut plan. Revenue weakness required multiple rounds of balancing actions in fiscal year (FY) 2009, including exhausting the $1 billion rainy day fund balance. The state has enacted a budget for the fiscal 2010-2011 biennium that 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; October 2009 state employment is down 4.5% year-over-year, compared to a 4% 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. The state's economic forecast assumes employment losses in fiscal 2009 and fiscal 2010 of 3.2% and 4.6%, respectively, 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. This leaves the state with almost an $850 million gap to address through FY 2011, which the governor has proposed to close by suspending the final phase of the income tax rate reduction. The legislature is considering this proposal as well as other gap closing measures. Fitch expects that the state will identify resources to close this gap. The budget forecasts ending the biennium with a $24.8 million fund balance.

State debt management is conservative. All GO bonds are constitutionally authorized by voters, and debt service for most GO issues is limited to 5% of general fund and lottery revenues. The current offerings will finance various mental health projects. Debt amortization is rapid, will all debt fully retired in 20 years. Total tax-supported debt of $10.6 billion equals 2.6% of 2008 personal income; 71% of GO debt amortizes in 10 years, a high level. 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 Dec. 2008.

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. For additional information on State ratings, see U.S. State General Obligation Bond Rating Criteria dated April 25, 2008.

Additional information is available at 'www.fitchratings.com'.

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