OUTLOOK IS STABLE
General Obligation Alternate Energy Project Bonds, 2011 Series A (Tax-Exempt)
Expected Sale Date
General Obligation Alternate Energy Project Bonds, 2011 Series B (Tax-Exempt-AMT)
Expected Sale Date
NEW YORK, Mar 7, 2011 -- Moody's Investors Service has assigned a rating of Aa1 with a stable outlook to
the State of Oregon's 2011 General Obligation Bonds, consisting of $20.8 million
2011 Series A (Tax-Exempt), and $23 million 2011 Series B (Tax-Exempt,
subject to AMT). The bonds are expected to sell on or about March 10th. Proceeds
will be used to refund outstanding bonds and finance a variety of energy
improvement, conservation and renewable energy projects in Oregon.
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
2009-2011 BIENNIUM BUDGET RESOLVED $3.8 BILLION PROJECTED BUDGET GAP; LATEST
REVENUE FORECAST PROJECTS $65 MILLION ENDING FUND BALANCE
Oregon's $13 billion adopted 2009-2011 biennial budget addressed a sizeable
projected $3.8 billion budget gap through a combination of reduced expenditures,
new revenues, federal stimulus funds, and the state's own reserves. The
legislature authorized and the voters approved an increase in both the personal
income tax rate (PIT) and the corporate income tax (CIT) rates. The increase in
PIT raises the top taxable income rate to 11% from the current 9% during the
2009-2011 biennium, and then the rate declines to 9.9% thereafter. The increase
in CIT raises the top marginal tax rate to 7.9% from the current rate of 6.6%
during the 2009-2011 biennium, and then the rate will decline to 7.6%
thereafter. In addition to the new revenues, the state also approved $1.8
billion in spending reductions and the use of $1.6 billion in federal stimulus
funds and state reserves.
As of the March 2011 revised revenue and economic forecast, the state expects to
realize $12.4 billion in general fund revenue, little changed from the December
2010 forecast but down $1.1 billion (8.7%) from the budget adopted in June
2009. The revenue decline is mainly attributable to weakness in the PIT and the
CIT. In light of the revenue declines, the governor took action to rebalance the
budget by making across the board General Fund reductions. Oregon is now on
track to end the biennium with a small operating surplus of $65 million.
2011-2013 EXECUTIVE BUDGET INTRODUCED
The Governor introduced his balanced budget proposal to the legislature in
February. The budget proposal assumes revenue growth of $1.2 billion (8% ).
Expenditure growth is limited to a level below the expected revenue growth. The
budget assumes an ending budget balance of $230 million. The biennium budget
proposal does not rely on tax increases or use of one time resources to
balance the budget.
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 $533 million at the
end of the 2011-2013 biennium: $292 million in the ESF, $11 million in the
RDF. The $533 million available reserve balance equals approximately 4% of
2009-2011 biennial revenues. Strong reserve levels are especially important
given Oregon's exposure to potential fluctuations in its personal income tax
ECONOMIC FORECAST INCORPORATES DEEPER ECONOMIC DOWNTURN
The state's unemployment rate of 10.6% in January 2011 remains higher than the
national rate of 9.4%, 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 4% for 2009 versus 3% for the
U.S. The state revised its economic forecast to expect a modest 1.1% employment
growth of 1.1%in calendar year 2011.
STATE DEBT BURDEN REMAINS ABOVE AVERAGE
Oregon's 2010 net tax-supported debt as a percentage of personal income is 4.5%,
and debt per capita is $1,859, well above Moody's 50-state medians of 2.5% and
$936, 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 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 now above average debt ratios are expected to rise slightly but
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
*Failure to adopt a structurally balanced plan to cover expenditures once
federal fiscal stimulus monies are no longer available
The principal methodology used in this rating was Moody's State
Rating Methodology published in November 2004.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, and public
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
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Public Finance Group
Moody's Investors Service
Marcia Van Wagner
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa1 RATING TO $43 MILLION STATE OF OREGON GENERAL OBLIGATION ALTERNATE ENERGY PROJECT BONDS
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