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MOODY'S ASSIGNS MIG1 RATING TO STATE OF OREGON $800 MILLION TAX ANTICIPATION NOTES 2011 SERIES A

Global Credit Research - 11 Jul 2011

State
OR

Moody's Rating

ISSUE

RATING

Full Faith And Credit Tax Anticipation Notes, 2011 Series A

MIG 1

  Sale Amount

$800,000,000

  Expected Sale Date

07/20/11

  Rating Description

Tax Anticipation Notes

 

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.

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

Kimberly Lyons
Analyst
Public Finance Group
Moody's Investors Service

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

Contacts

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


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MOODY'S ASSIGNS MIG1 RATING TO STATE OF OREGON $800 MILLION TAX ANTICIPATION NOTES 2011 SERIES A
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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