MOODY'S ASSIGNS Aa1 RATING TO $40 MILLION STATE OF OREGON GENERAL OBLIGATION

OUTLOOK IS STABLE

State
OR

NEW YORK, Sep 15, 2011 -- Moody's Investors Service has assigned a rating of Aa1 with a stable outlook to the State of Oregon's $40 million General Obligation Bonds 2011 Series M. The bonds are expected to sell on or about October 4th. Proceeds will be used to fund various capital projects in the state.

RATINGS RATIONALE

The general obligation rating reflects the state's maintenance of moderate reserve levels during the current economic downturn; effective management of voter initiatives in the context of maintaining budget balance; higher than average unemployment; and a revenue structure that is heavily exposed to volatility in personal income tax collections.

Credit strengths:

-- Sound financial controls underscored by strong executive authority to reduce spending

-- Maintenance of a moderate Rainy Day Fund balance

-- Favorable funding ratios in the state's retirement systems following reforms and pension obligation bond issuance

Credit challenges:

-- Unusually high reliance on economically sensitive personal income taxes creates increased budgetary strain, reflected in large revenue shortfalls in last fiscal year and forecasted declines for the current biennium

-- Constitutional 2% "kicker" that requires refunds of personal and/or corporate income taxes if collections are 2% or greater than the budgeted amount, which adds budgetary challenges, including cash flow pressures

-- Above-average debt ratios

DETAILED CREDIT DISCUSSION

2011-2013 BIENNIUM BUDGET REVISED DOWN BY 1.3%, FORECAST PROJECTS $253 MILLION ENDING FUND BALANCE

During the 2011 legislative session, Oregon adopted a $14 billion general fund budget for the current 2011-2013 biennium. The adopted budget incorporated revenue growth of approximately 12%. The adopted budget did not rely on tax increases or relying on one time resources to balance the budget, with the exception of a transfer of $182 million from the Education Stability Fund for K-12 funding. The legislature included a hold back of 3.5% of all appropriations, with the exception of K-12 funding, to create a budgetary cushion of $460 million. In planning for the biennium the state earmarked $310 million of the cushion to avoid any midyear program reductions that may occur if revenues experienced a decline.

As of the September 2011 revised revenue and economic forecast, the state expects to realize $13.8 billion in general fund revenue, a decline of 1.4% from the adopted budget. The change in the forecast reflects the weakness and uncertainty in the national economy and is not a direct result of changes in actual revenue collections or economic trends within the state. The state now expects to end with a balance of $253 million, which still allows for flexibility in offsetting additional spending reductions that may need to occur. Additionally, as a result in a change to the state's constitution the legislature will now meet annually which allows the legislature time to adjust the budget if necessary in the off year of the biennium.

REPLENISHMENT OF RAINY DAY FUNDS A PRIORITY

During the 2007 legislative session, Oregon established a rainy day fund (RDF) that was initially funded at $319 million from a one-time suspension of the corporate kicker law, which is similar to the personal income tax kicker. In addition to retaining interest earnings, the fund will also receive biennial deposits from the General Fund ending balance, with amounts limited to the lesser of the actual General Fund ending balance for the preceding biennium or 1% of General Fund appropriations for the preceding biennium. The RDF is capped at 7.5% of General Fund revenues for a biennium. A three-fifths vote of each house of the Legislative Assembly is required to appropriate RDF moneys in the event of certain triggers. The state has also maintained additional reserves in its education stability fund (ESF), which receives 18% of net lottery revenues. The state anticipates combined reserve levels of $61.3 million at the end of the 2011-2013 biennium: $15.3 million in the ESF, and $46.1 million in the RDF. The low balance reflects a $182 million withdrawal from the ESF to bolster K-12 funding. Additionally the state has access to $72.7 million that is held by the Legislative Emergency Board, which can easily be accessed in the event of budgetary pressure. Strong reserve levels are especially important given Oregon's exposure to potential fluctuations in its personal income tax collections. The state expects to build the combined reserve levels up to $461 million by the end of the next biennium (2013-2015).

ECONOMIC FORECAST INCORPORATES DEEPER ECONOMIC DOWNTURN

The state's unemployment rate of 9.6% in August 2011 remains higher than the national rate of 9.1%, as it has throughout the recession. Total non-farm employment was essentially flat in 2010, although Oregon began losing jobs in August 2008, led by declines in the construction, manufacturing, and financial sectors. Employment declines averaged 6% for 2009 versus 4% for the U.S. The state revised its economic forecast to expect modest 1.7% employment growth in calendar year 2011 vs. 1.1% for the U.S..

STATE DEBT BURDEN REMAINS ABOVE AVERAGE

Oregon's 2011 net tax-supported debt as a percentage of personal income is 5.6%, and debt per capita is $2,006, well above Moody's 50-state medians of 2.8% and $1,066, respectively. A $2 billion pension bond issuance in fiscal year 2004 significantly improved Oregon's pension funding levels, which increased to over 100% funding in 2007 but also substantially increased its debt burden. The pension bonds are backed by the full faith and credit of the state; they are not secured by any assets of the pension system.

The state has approximately $441 million of Oregon's Department of Veterans' Affairs Bonds, of which $260 million are variable rate with enhancements provided by standby bond purchase agreements, primarily with Dexia Credit Local. Of the $260 million, $25 million is swapped synthetically to fixed rate debt. The variable rate bonds are uninsured and there are currently no bank bonds.

The state also has approximately $1.4 billion in highway user tax revenue bonds. The revenue bonds, rated Aa1 (senior lien) and Aa2 (subordinate line), are secured by highway user tax revenues consisting of motor carrier revenues, fuel tax revenues, and Department of Motor Vehicle (DMV) revenues. Of the total $1.4 billion outstanding, $155 million are variable rate supported by standby bond purchase agreements. There are no swaps on the highway revenue bonds, and the variable rate subordinate lien highway bonds are uninsured.

PENSION SYSTEMS WELL-FUNDED; MANAGEABLE OPEB LIABILITY

In 2003, the Oregon legislature adopted reforms in response to the state Public Employees' Retirement System's (PERS) growing unfunded actuarial liability and increasing charges to public employers to fund the system. The changes included lower benefits for new hires as well as reduced benefits for current employees and some existing retirees. As a result of an Oregon Supreme Court decision in 2005, many of the reforms were upheld. In April 2006, the Public Employees Retirement Board (PERB) approved changes to the system's valuation methodology, moving from a multi-year smoothing method to a mark-to-market valuation. These changes are expected to result in greater predictability, as well as a slight reduction in required employer contributions. Based on the 2009 valuation reports, the funded ratio of the combined state's PERS Tier 1 and Tier 2 pension programs' accrued actuarial liabilities was 88%. The state's portion of the unfunded liability is valued at $1.7 billion.

In terms of other post employment benefits (OPEB), Oregon's obligations appear manageable. State employee retiree healthcare benefits are provided through PERS or the Public Employees' Benefit Board (PEBB). As of December 31, 2009, the PERS-sponsored programs had unfunded actuarial liabilities of $78 million for the plan that offers retirees a subsidy for Medicare supplemental health insurance, and $18.1 million for a smaller subsidy for pre-Medicare age retirees. For the PEBB program, an implicit rate subsidy exists for retirees not yet eligible for Medicare, and the unfunded actuarial liability as of July 1, 2009, is estimated at $161.74 million.

The credit outlook for the State of Oregon is stable. The state's economy has weakened in line with that of the nation. Employment is expected to recover modestly in 2011. Oregon's unusually high dependence on personal income taxes poses downside forecast risk given the deeper-than-expected economic downturn. The constitutional 2% kicker prevents Oregon from fully capturing the revenue boost during periods of economic strength although building up the state's RDF is expected to have a positive effect on the state's long-term fiscal health. Oregon's debt ratios are above average but remain manageable.

What could make the rating move - UP

*Effective management of voter initiatives in the context of maintaining structural budget balance.

*Maintenance of strong General Fund reserve levels to offset revenue volatility during economic downturns.

*Controlling increase in debt levels in a growing state with sizeable infrastructure needs.

*Sustained healthy job growth.

What could change the rating - DOWN

*Deterioration in the state's financial performance and reductions in reserve levels.

*Reliance on non-recurring solutions to balance budget.

*Slowing of economic recovery leading to further employment erosion and revenue weakness.

The principal methodology used in this rating was Moody's State Rating Methodology published in November 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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Analysts

Kimberly Lyons
Analyst
Public Finance Group
Moody's Investors Service

Marcia Van Wagner
Backup Analyst
Public Finance Group
Moody's Investors Service

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