Fitch Rates $165MM Oklahoma OCIA Bonds 'AA'; Outlook Negative
--$165.065 million state highway capital improvement revenue bonds, series 2016 (subject to annual appropriation).
The bonds are expected to sell via negotiation on or about Sept. 27, 2016.
The Rating Outlook is Negative.
The bonds are limited special obligations of the OCIA secured by annual appropriations of the state of Oklahoma. The intended source of repayment on the bonds is payments received from the Oklahoma department of transportation (ODOT) from its annual budget appropriation.
KEY RATING DRIVERS
State Appropriation: The rating on the bonds, secured by annual appropriations from the state's general fund, is one notch below Oklahoma's 'AA+' Issuer Default Rating (IDR), reflecting the state's general credit standing, sound lease structure, and statutory authorization for these types of bonds. The Negative Outlook reflects the state's challenge in achieving structurally sustainable solutions over the medium term given the sizable economic concentration in natural resource development and subdued growth prospects for revenues.
Economic Resource Base
One-third of the state's gross state product is attributable to the drilling, production, and economic multiplier effects of the oil and natural gas sectors. After consistently outperforming national growth trends coming out of the last recession, the state's economy has weakened and employment has shown recent, steady declines as the slumping natural resources sector has led to shuttered rigs, production declines, and layoffs. The slump has caused the unemployment rate to move closer to the national average (80% in 2015 compared to 65% in 2012) while a recent increase in July to 5% pushed the rate above the U. S. rate of 4.9%. The still moderate rate highlights the state's progress in diversifying its economy beyond natural resource development in recent years. Population growth continues above the national pace.
Revenue Framework: 'aa' factor assessment
Fitch expects Oklahoma's revenues, which are supported by broad-based sources, to continue to reflect economic volatility tied to the extensive natural resources sector. The current economic slowdown is expected to extend over the medium term and will continue to challenge revenue growth. The state has complete control over its revenues, with an unlimited independent legal ability to raise operating revenues as needed, although a supermajority vote of the legislature or voter approval for tax rate increases limits flexibility.
Expenditure Framework: 'aaa' factor assessment
The state maintains ample expenditure flexibility with a low burden of carrying costs for liabilities and the broad expense-cutting ability common to most U. S. states. A policy of appropriating only 95% of expected revenues provides a cushion for revenue variability. As with most states, Medicaid remains a key expense driver but one that Fitch expects to remain manageable.
Long-Term Liability Burden: 'aaa' factor assessment
Debt levels are low. On a combined basis, the state's net tax-supported debt and unfunded pension obligations is at the median for U. S. states as a percentage of personal income and a low burden on resources. Other post-employment benefit (OPEB) obligations are small.
Operating Performance: 'aa' factor assessment
The state's strong management of its financial operations has historically offset volatility in its revenue sources; however, the state has been especially challenged by the current economic slowdown and prolonged period of low natural resource prices. The state's financial operations benefit from the maintenance of a separate rainy day fund (RDF; the constitutional reserve) and cash flow reserve funds although the state drew on its reserves to cover gaps in fiscal 2016 and further applied reserves in the enacted budget for fiscal 2017. There is a consistent history of rebuilding reserves as the economy strengthens; however, a likely prolonged low oil price environment will continue to subdue the economy over the medium term and rebuilding of reserves may prove difficult.
The rating on the state's appropriation-backed bonds is sensitive to shifts in the state's IDR to which it is linked.
The Negative Outlook on the IDR reflects Fitch's concern that the state will be challenged in providing a durable response to its current economic and financial challenges, diluting its future financial flexibility.
The OCIA bonds currently offered are secured by annual state legislative appropriations and will be funded by lease rental payments made by ODOT. OCIA is one of the principal financing agencies of Oklahoma. Both the state constitution and enabling statutes provide for appropriation of lease payments and this type of bond issuance has been validated by the Oklahoma state supreme court. The term of the lease extends through the 18-year life of the bonds; lease payments are not abatable. The bonds will provide funds for various road and highway improvements in the state as authorized by the 2016 legislature.
Oklahoma's 'AA+' IDR reflects the state's strong control over revenues and spending, conservative budgeting practices and low liability position. These factors are critical to the 'AA+' rating given the sizable economic concentration in natural resource development and subdued growth prospects for revenue. Continuing recent trends, early fiscal 2017 sales tax collections are running below expectations by 6.8%; however, the underperformance was more than offset by several irregular August receipts that were well above expectations. Overall, Fitch expects the state to maintain balanced financial operations in fiscal 2017.