Fitch Ratings assigns an 'AA+' rating to State of Ohio general obligation (GO) bonds consisting of the following:

--$300 million higher education GO bonds, series 2012A;

--$125.68 million higher education GO refunding bonds, series 2012B;

--$55.195 million infrastructure improvement GO refunding bonds, series 2012B.

The bonds are expected to sell via negotiation the week of March 19, 2012. In addition, Fitch affirms the following ratings:

--$8 billion outstanding state GO bonds at 'AA+';

--$2.2 billion outstanding appropriations backed bonds of the state at 'AA'.

The Rating Outlook is Stable.

SECURITY

General obligation, full faith and credit of the State of Ohio, excluding net lottery proceeds and highway user receipts.

KEY RATING DRIVERS

SLOWLY GROWING ECONOMY: Ohio's economy is broad and diverse and employment has stabilized from the recession's large-scale losses. The state remains exposed to a disproportionately large manufacturing sector.

MODERATE DEBT BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed, although the state has repeatedly refunded debt to push off debt service as part of its budget balancing measures.

CONSERVATIVE FISCAL MANAGEMENT: The state generally has a careful and conservative approach to financial operations and has consistently managed to achieve budgetary balance despite revenue declines associated with economic weakness. However, the use of one-time revenues in the downturn required extensive actions to address a large structural budget gap in the current biennial budget.

CREDIT PROFILE

Ohio's 'AA+' GO rating is based on the state's careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden, tempered by an economy that is slowly adding jobs lost in the recession midst tepid national economic growth. The recession had a widespread impact on the state's economy, accelerating a longstanding slump in manufacturing and weighing on the slowly growing service sector. Steps taken in the fiscal 2010 - 2011 biennial budget, including significant non-recurring resources, and improving revenue in fiscal 2011 enabled the state to maintain balanced operations. However, sizable budget gaps for the biennium that began on July 1 required broad balancing actions.

The state steadily added jobs in 2011, evidenced by year-over-year (yoy) growth in every month from July 2010, and 2012 is evidencing a continuation of this positive, yet slow trend. Growth of 4.3% in January 2012 yoy durable goods manufacturing, surpassed by 5.6% yoy growth in the mining sector reflecting the state's ongoing gas shale development, were tempered by losses in the government and financial services sectors. Motor vehicle manufacturing yoy employment growth, which slowed in the latter part of 2011, after improving earlier in the year, improved once again with 3.1% yoy growth in January.

Yoy through January 2012, state employment has increased by 64,000 jobs, yet employment remains well below its pre-recession peak that was set in June 2006. Overall, the pace of the state's yoy employment growth has kept pace with that of the nation; 1.3% compared to 1.5% in January. Positively, gains resulted in a January 2012 unemployment rate of 7.7% that was below the U.S. average of 8.3%; an improvement from past rates that generally ranged above the national average.

Fitch considers Ohio's financial management to be sound, with the state consistently maintaining budgetary balance, including during the downturn. However, Fitch notes that during the downturn the state employed one-time measures for fiscal relief, a pattern that continued with debt restructuring and planned asset sales included as balancing measures in the enacted budget for fiscal 2012.

Recent economic improvement has bolstered the state's economically sensitive revenue sources in the current fiscal year. Personal income tax (PIT) receipts through February 2012 increased 6.7% yoy and sales tax receipts continue to be strong with 6.1% yoy growth. Overall, tax receipts through February 2012 are up 9.4% yoy, however, this increase includes the state's redirection to the general fund of tax receipts previously allocated to localities as part of its solution to closing the budget gap for the current biennium. As compared to estimate, tax receipts are running just above estimate by 1.6%, however, when including other revenue sources, total receipts are below estimate by 2.8%, incorporating several factors.

Proceeds from both the state's lease of its liquor distribution system to JobsOhio ($500 million) and the lease of a state prison ($50 million) were estimated to be received in January, and are now anticipated to be received later in the 2012 fiscal year. The lease of the state's liquor enterprise system through an associated bond financing has been the subject of litigation, but the state has obtained the necessary state board approvals to move the sale along. Additionally, federal government receipts are running about $123 million below estimate (2.3%), but this partly incorporates public assistance and Medicaid expenses that are currently $323 million (3.5%) below estimate, year-to-date. The state reports that year-to-date spending is running 2.1% below initial estimates; however, this partly reflects the implementation of a new Medicaid information technology system in August 2011 that has impacted the timing of claims submission and payment.

The state expects to meet its revenue target for the current fiscal year, which Fitch believes to be reasonable based on results year-to-date. Overall, the state is currently estimating an ending general revenue fund cash balance for fiscal 2012 of $406.3 million, down from $844.5 million ending fiscal 2011 but in line with budget targets.

The enacted budget for the 2012 - 2013 biennium cut spending and instituted Medicaid reforms while directing the refunding of outstanding debt for current-year debt service savings, the sale of state prisons for operational savings, the leasing of the state's liquor enterprise system, and the redirection of revenue to the state general revenue fund by accelerating the phase-out of certain tax reimbursements to school districts and other local governments. One-time measures in fiscal 2012 are budgeted at $1 billion and are budgeted to drop to $30 million in fiscal year 2013.

The budget did not contain any revenue raising measures and instead instituted the final phase of a previously suspended PIT rate reduction, effective Jan. 1, 2011, reducing revenues by an estimated $440 million in fiscal 2012. Total general fund revenues in fiscal 2012, inclusive of federal revenues, are projected to decline by 2.2%. Baseline revenue sources in fiscal 2013, which include expected economic growth, are forecast to increase by 7.1% from fiscal 2012 and include a 6.1% forecast increase in state tax receipts, supported by a projected 5.9% increase in PIT revenue and an approximate 7% increase in sales tax revenue. Fitch believes downside risk remains to the revenue forecast given current economic uncertainty.

The governor recently proposed a series of policy initiatives in a mid-biennial budget review (MBR) that would result in a net reduction in adopted expenditures for fiscal 2013. The proposal includes, among others, a revision to the state's severance tax structure, with new annual revenue from revised severance tax rates, targeted to capture the increased drilling activity in the state's shale formations. The new revenue would be applied to a lowering of state income tax rates in that tax year, resulting in related tax refunds. The governor plans the revenue proposal to be revenue neutral to the general revenue fund, as the increased severance taxes would be collected in the state's income tax reduction fund, not in the state's general revenue fund, prior to being applied to offset income taxes. There would not be a permanent change to the state's income tax rates. The revenue proposal would begin impacting state revenues largely in fiscal 2014. As the MBR was released just this week, it is too early to predict the outcome of these proposals.

The state ended fiscal 2011 with an $844.5 million cash balance, equal to 3% of general revenue fund (GF) revenue, and a $430.7 million unencumbered GF balance (1.6% of GF revenue, cash basis), allowing for a $45 million transfer for disaster and emergency funds and a $246.9 million deposit to the budget stabilization fund. The fiscal 2011 audited financial statements record a $606.9 million GF operating surplus and a fund balance, now incorporating the provisions of GASB 54, of $2.2 billion or 7.2% of GF revenues.

State debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 72% of general revenue fund-backed debt amortized in 10 years. Total tax-supported debt of $12.1 billion is equivalent to a manageable 2.9% of 2010 personal income. The governor recently proposed a $1.7 billion capital improvement plan for fiscal years 2013 and 2014, to be largely funded by $1.36 billion of general fund-backed debt. The largest beneficiaries of the proposal are higher education, public works, and primary and secondary education.

As is the case with many states, funding for Ohio's pension systems has declined significantly, with the largest system, PERS, declining from a strong 96% funded ratio as of Dec. 31, 2007 to 76% funded as of Dec. 31, 2010. Using Fitch's more conservative 7% discount rate assumption, PERS would have a 68.6% funded ratio. Recently, PERS proposed several changes to benefits to improve the system's funded ratios, primarily in the following areas; number of years of service credit, minimum retirement age, changes to cost of living calculations, and final average salary calculation. Fitch expects these proposals will be discussed in the current legislative session.

Additional information is available at 'www.fitchratings.com.' The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'Ohio State and Local Government Credit Profiles Unaffected by SB5 Repeal' (Nov. 10, 2011);

--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' (Feb. 17, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

Enhancing the Analysis of U.S. State and Local Government Pension Obligations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604785

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