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MOODY'S ASSIGNS Aa2 RATING TO STATE OF OHIO'S $15 MILLION STATE FACILITIES BONDS (JUVENILE CORRECTIONAL BUILDING FUND PROJECTS) 2011 SERIES A, ISSUED THROUGH THE OHIO BUILDING AUTHORITY

12 Apr 2011

NEGATIVE OUTLOOK APPLIES TO CURRENT ISSUE AND APPROXIMATELY $9.8 BILLION OF OUTSTANDING DEBT

Ohio (State of)
State
OH

Moody's Rating

ISSUE

RATING

State Facilities Bonds (Juvenile Correctional Building Fund Projects) 2011 Series A

Aa2

  Sale Amount

$15,000,000

  Expected Sale Date

04/18/11

  Rating Description

Lease Rental

 

 
Moody's Outlook   Negative
 

Opinion

NEW YORK, Apr 12, 2011 -- Moody's Investors Service has assigned a rating of Aa2, with a negative outlook, to the State of Ohio's$15 million of State Facilities Bonds (Juvenile Correctional Building Fund Projects) 2011 Series A, issued through the Ohio Building Authority. Moody's has also affirmed the state's Aa1 general obligation and Aa2 lease ratings and its negative outlook,

SUMMARY RATINGS RATIONALE

The state's Aa1 G.O. rating reflects a record of strong financial management that has been tested by long-running economic underperformance. Ohio's rating outlook was revised to negative from stable on August 24, 2009, because of continuing economic challenges and increased use of non-recurring fiscal measures. The state's revenues have stabilized, with moderate growth expected over the next biennium. The budget is projected to return structural balance in 2013, when excess revenues may be used to rebuild reserves. The state has moderate debt and unfunded pension liabilities, comparable to similarly rated states The current issue is rated Aa2, a notch below the state's Aa1 general obligation (G.O.) rating, because of the need for biennial legislative appropriation of lease payments backing the bonds.

Strengths:

-- Conservative fiscal management that helped the state to withstand the recession, despite employment levels that have lagged the nation in recent years

-- Established practice of prompt action to address budgetary shortfalls

-- High, though diminished, levels of internal liquidity

Challenges:

-- Depletion of rainy day fund in fiscal 2009 and lack of plan for rebuilding

-- Reliance on federal stimulus funding and other non-recurring measures to achieve operating balance

-- Economic weakness from manufacturing industry exposure

-- Lack of certain best financial management practices

DETAILED CREDIT ANALYSIS

BONDS ARE SECURED BY LEASE AGREEMENTS WITH OHIO BUILDING AUTHORITY

The state facilities bonds, which will be issued by the Ohio Building Authority, are secured by lease agreements between the authority, as lessor, and the Department of Youth Services. The authority is a state entity formed in 1963 to build, manage and operate capital facilities for state agencies. It has five members, each appointed for a six-year term by the governor, subject to legislative approval. The lease agreement stipulates that the obligation to make rental payments is contingent only upon the appropriation of funds by the legislature, and not on whether the financed projects are in use. Interest payment dates (April 1 and October 1) are far enough removed from the July 1 start of the state's fiscal biennium to limit risk of an event of non-appropriation due to late budget adoption. There is no debt service reserve fund associated with this issue. Ohio's reliance on continued market access for subject-to-appropriation lease debt, in general, indicates a high probability that appropriations will continue to be made in a timely manner. Approximately 20% of Ohio's net tax-supported debt requires appropriation for payment.

PROPOSED BUDGET REFLECTS RETURN TO STRUCTURAL BALANCE BY 2013

The governor released the proposed fiscal 2012 and 2013 biennium budget on March 15, 2011. More than two-thirds of state agencies will experience reductions in funding. Total general fund appropriations are expected to increase by approximately 1.1% (from $26.6 billion to $26.9 billion) in fiscal 2012 and 6.4% (to $28.6 billion) in fiscal 2013. Overall state spending, however, is expected to decrease 5.3%, from $62.7 billion to $59.4 billion. While general state aid to districts is budgeted to increase modestly each year, total funding would decline due to loss of federal stimulus funding, which had partially replaced state aid in fiscal years 2010 and 2011, and the accelerated phase-out of the state's reimbursement to districts to replace the tangible personal property tax.

The budget also proposes $4.3 billion of Medicaid savings and cost containment, largely through the modernization of payment systems, negotiation of better rates with hospitals and controlling costs for behavioral health services. Pension reform shifts 2% of the pension percent of salary contribution from the employer to the employee, which would save the state and local governments an estimated $570 million annually. As in fiscal 2010 and 2011, a debt restructuring is expected in fiscal 2012, along with the privatization of five prisons and the state's liquor enterprise, representing the bulk of non-recurring revenues in fiscal 2012 and bringing the structural imbalance down from 9% of revenues in fiscal 2011 to approximately 3% of projected revenues in 2012. If the state realizes current revenue projections, the proposed budget projects structural balance for fiscal 2013. The budget is currently under consideration by the legislature and must be enacted by June 30, 2011.

NEGATIVE FUND BALANCE IN FISCAL 2010

The state released its fiscal 2010 Comprehensive Annual Financial Report on January 28, 2010, ending a trend of late CAFRs in recent years. The undesignated, unreserved fund balance in the general fund continued a declining trend of GAAP fund balances, with the first negative ending balance since fiscal 2003, at -$141 million. The state ended fiscal 2010 with a cash balance of $139 million, 28% short of estimates. General fund revenues were $621 million, or 2.4% below projections, primarily reflecting a shortfall in expected federal revenues. The state has also announced that it will adopt multi-year financial planning, an additional improvement to its fiscal management policies.

REVENUES CONTINUE TO TREND POSITIVE

Ohio has seen better-than-expected performance across most tax sources in fiscal 2011, with tax receipts for the first nine months of the fiscal year $627 million (or 5.4%) above estimates, and 8.3% above receipts for the same period last year. The largest contributors to growth were non-auto sales and personal income taxes. Casino gaming was authorized in 2009. The gross revenues from this gaming are subject to a 33% tax, projected to result in $390 - $520 million in annual revenue largely to be distributed to local governments.

For more information regarding the State of Ohio, see our report published September 23, 2010.

Outlook

The outlook for the State of Ohio is negative, reflecting reliance - though decreasing - on non-recurring measures and likely continuation of sluggish economic performance that will make it difficult for the state to rebuild financial reserves even as the national economy recovers.

What could change the rating - UP:

-Better-than-expected financial results

-Rebuilding of reserves and positive audited fund balance position

-Sustained structurally balanced operations

-Economic recovery over an extended period

-

What could change the rating - DOWN:

-Evidence of financial deterioration, including more reliance on non-recurring measures than projected

-Failure to reach expected revenues or downturn in revenue growth

-Failure to achieve budget's reforms and cost savings

-Trend of negative GAAP-basis general revenue fund balances

-Decreased liquidity

-Worsening state economy, with continued job loss

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit 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.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Lisa Heller
Analyst
Public Finance Group
Moody's Investors Service

Edward Hampton
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 RATING TO STATE OF OHIO'S $15 MILLION STATE FACILITIES BONDS (JUVENILE CORRECTIONAL BUILDING FUND PROJECTS) 2011 SERIES A, ISSUED THROUGH THE OHIO BUILDING AUTHORITY
No Related Data.
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