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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