State
OR
Moody's Rating
ISSUE | RATING |
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Full Faith And Credit Tax Anticipation Notes, 2011 Series A | MIG 1 |
Sale Amount | $800,000,000 |
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Expected Sale Date | 07/20/11 |
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Rating Description | Tax Anticipation Notes |
|---|
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Opinion
NEW YORK, Jul 11, 2011 -- Moody's Investors Service has assigned the highest short-term rating of MIG 1 to
the State of Oregon's $800 million 2011 Series A Tax Anticipation Notes (TANs).
The notes are being issued to meet the state's General Fund cash management
purposes during fiscal year 2012 of the current 2011-2013 biennium. The highest
short-term rating reflects the state's (long-term general obligation bond rating
of Aa1) full faith and credit pledge to the payment of these notes, satisfactory
cash balances projected at the end of the biennium, and the strong liquidity
afforded by substantial borrowable resources available from other state funds.
The Aa1 long term general obligation rating incorporates the state's
effective management of voter initiatives in the context of maintaining
structural budget balance; improved reserve levels with the establishment
and initial funding of a rainy day fund, significantly higher than
average unemployment and a revenue structure that is heavily exposed to
volatility in personal income tax collections. As a result, Moody's expects that
Oregon could be subject to greater rating volatility than states with more
diverse revenue streams.
SATISFACTORY CASH MARGINS PROJECTED AFTER NOTE REPAYMENT
Cash flow projections incorporate the state's enacted budget for the
2011-2013 biennium based on the latest revenue forecast, excluding
federal funds. The forecast assumes modest economic improvement. Oregon
experienced mild employment growth in calendar year 2010 and stronger gains
through mid-calendar year 2011. Oregon's quarterly economic and revenue
forecasts provide an established process to adjust cash flow projections as
needed over the course of the biennium. As evidenced by the actions taken by the
legislature during the 2009 legislative session as well as in the previous
recession, the state is willing and able to make budgetary adjustments in
response to changes in the state revenue estimate in order to maintain budget
stability.
Oregon's General Fund fiscal 2011 year-end cash balance is projected to be a
$155 million, approximately 2% of expected receipts (excluding proceeds of the
cash flow notes). The state expects to end fiscal year 2012 with a cash balance
of zero after note repayment, although alternative liquidity resources are
expected to remain substantial.
Prior to the 2001-03 biennium, the state used its broad internal borrowing
authority to manage its cash flow needs, Since then Oregon has regularly issued
tax anticipation notes for this purpose. The 2011 TAN represents about 10% of
projected general fund receipts (excluding the note proceeds and federal aid),
in line with other note offerings in recent years.
SUBSTANTIAL BORROWABLE RESOURCES PROVIDE AMPLE ALTERNATE LIQUIDITY FOR NOTE
PAYMENT
The state has pledged its full faith and credit to payment of the
notes. Pursuant to that pledge, the state treasurer must transfer to
the short-term borrowing account anticipated income taxes, other taxes and all
other legally available revenues of the state, or make inter-fund loans to the
General Fund, in an amount sufficient to pay the notes. The state has
historically used its broad internal borrowing authority to manage its cash flow
needs. The authorizing act for the issuance of notes contains a continuing
appropriation of amounts in the short-term borrowing account, which allows the
expenditure of the proceeds of these notes and their repayment without further
legislative action.
In the event of a cash shortfall in the general fund, two sources may be used
for internal borrowings: restricted accounts within the general fund (intra-fund
sources); and available balances in other funds of the state treasury
(inter-fund sources). Available intra-fund resources for 2011-2013 are
estimated to total about $389 million. The state is not required to pay interest
on intra-fund borrowings, nor must it repay such loans by the end of the
biennium in which the loan was made.
Available inter-fund resources are more substantial and, similar to intra-fund
borrowings, do not have to be repaid by the end of the biennium. However
inter-fund borrowing would be required to be repaid with interest. Given the
municipal market's current low interest rate environment, the state has
determined it is cheaper to issue notes than to borrow internally to address
current general fund cash flow needs. At the end of the 2011-2013 biennium, the
state expects the balance of interfund borrowable funds to be approximately
$15.03 billion. Projected amounts available to make such inter-fund loans
reflect state agency funds, including the education stability fund (ESF) and
local government deposits, in the Oregon short-term fund (OSTF) as well as the
state accident insurance fund (SAIF). The OSTF is a cash and investment pool
that is available for use by all funds and local governments. The fund's
investment policies are oriented toward liquidity and safety of principal. Local
governments are not required to participate in the pool and the SAIF is financed
solely through policyholder premiums and investment income realized through the
writing of workers' compensation insurance coverage in Oregon by the SAIF
Corporation.
2011-2013 ENACTED BIENNIUM BUDGET PROJECTS ENDING BALANCE OF $150 MILLION
Oregon's enacted 2011-2013 $15 billion biennial budget (general fund and lottery
revenues) reflects an increase of approximately 12.3% over the 2009-2011
biennium budget. The increase in revenues is primarily attributed to growth in
personal income taxes compared with a low revenue base in the prior biennium.
The budget does not rely on tax increases or one time revenue sources. The state
took prudent action during the 2011 legislative session to restrain growth in
expenditures in order to maintain balance in its biennial budget. The
state enacted a 3.5% spending holdback across all major expenditure areas, with
the exception of K-12 education. The 3.5% spending holdback is expected to
provide a cushion of $460 million in the event the state experiences revenue
volatility during the course of the biennium. State legislators are now required
to meet annually, which will enable lawmakers to readjust the budget if
necessary half way through a biennium. The state currently plans on utilizing
$310 million of the $460 million cushion to avoid additional spending reductions
in the second year of the biennium, ultimately leaving a biennial ending balance
of $150 million.
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. Tax
rebates are required under the state's 2% kicker law (embedded in the state
constitution) which is triggered when individual and/or corporate income tax
revenue growth is more than 2% above budget levels. 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 $26.3 million at the end of the
2011-2013 biennium: $15.6 million in the ESF (after appropriating $182 million
in transfers to K-12 education) and $10.7 million in the RDF. The $26.3 million
available reserve balance equals approximately less than 1% of biennial
revenues, however, if current projections hold for the $150 million ending
balance, the rainy day cushion will increase. Strong reserve levels are
especially important given Oregon's exposure to potential fluctuations in its
personal income tax collections.
ECONOMIC FORECAST SHOWS SIGNS OF MODERATE IMPROVEMENT
The state's unemployment rate fell to 9.3 in May 2011 versus the national rate
of 9.1%. While the state's unemployment rate is slightly higher than the U.S.,
it has historically been as high as one percentage point higher than the
national average. Total non-farm employment was essentially flat in 2010 but
the state expects positive job growth of 2.4% for calendar
year 2011.Year-over-year employment growth through the second quarter of 2011
was 1.7%. Oregon eclipsed the nation in job growth coming out of the 2001-2002
recession.
Oregon continues to have exposure to high technology industries, which began to
weaken in the latter part of 2000, prior to the last national recession. While
this sector helped the state generate approximately 300,000 net new jobs during
the mid- to late- 1990's, by 2000 the bursting of the dot-com bubble resulted in
significant job losses in the high technology manufacturing and trade sectors in
Oregon. High technology exports make up about half of Oregon's total export
value, up from 35% 10 years ago. With a diverse array of exported products, the
state has benefited from the recent rebound in the export market.
The principal methodology used in this rating was Short-Term Cash Flow Notes
published in May 2007. Please see the Credit Policy page on www.moodys.com for a
copy of this methodology .
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this
announcement provides relevant regulatory disclosures in relation to each rating
of a subsequently issued bond or note of the same series or category/class of
debt or pursuant to a program for which the ratings are derived exclusively from
existing ratings in accordance with Moody's rating practices. For ratings issued
on a support provider, this announcement provides relevant regulatory
disclosures in relation to the rating action on the support provider and in
relation to each particular rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides relevant regulatory disclosures in
relation to the provisional rating assigned, and in relation to a
definitive rating that may be assigned subsequent to the final issuance of the
debt, in each case where the transaction structure and terms have not
changed prior to the assignment of the definitive rating in a manner that
would have affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties
involved in the ratings and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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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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MOODY'S ASSIGNS MIG1 RATING TO STATE OF OREGON $800 MILLION TAX ANTICIPATION NOTES 2011 SERIES A
