OUTLOOK IS STABLE
General Obligation Bonds 2011 Series M
Expected Sale Date
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.
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.
-- Sound financial controls underscored by strong executive authority to reduce
-- Maintenance of a moderate Rainy Day Fund balance
-- Favorable funding ratios in the state's retirement systems following reforms
and pension obligation bond issuance
-- 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
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
*Reliance on non-recurring solutions to balance budget.
*Slowing of economic recovery leading to further employment erosion and revenue
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.
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Public Finance Group
Moody's Investors Service
Marcia Van Wagner
Public Finance Group
Moody's Investors Service
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MOODY'S ASSIGNS Aa1 RATING TO $40 MILLION STATE OF OREGON GENERAL OBLIGATION
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