Fitch Rates State of Ohio GO Bonds 'AA '; Outlook Stable
--\\$100 million third frontier GO bonds series 2016A (taxable);
--\\$12 million coal development GO bonds series N (tax-exempt);
--\\$71.55 million infrastructure improvement GO refunding bonds series 2016A;
--\\$17.31 million conservation projects GO refunding bonds series 2016A;
--\\$44.82 million common schools general obligation refunding bonds series 2016A.
The bonds are expected to be sold via competitive bid on Feb. 23, 2016.
In addition, Fitch has affirmed the following ratings:
--\\$8.5 billion outstanding state GO bonds at 'AA+' (including highway capital improvement bonds);
--\\$1.6 billion outstanding appropriation-backed bonds of the state at 'AA', including those issued by the Treasurer of State and the Ohio Building Authority.
The Rating Outlook is Stable.
General obligation, full faith and credit of the State of Ohio, excluding net lottery proceeds.
KEY RATING DRIVERS
BROAD ECONOMY WITH LARGE MANUFACTURING SECTOR: The state's economy is broad and diverse, although manufacturing remains a disproportionately large sector. The economy is expanding but at a slower pace than immediately following the recession. The unemployment rate is under the national average.
MODERATE LIABILITY BURDEN: The state's debt burden is moderate and rapidly amortized. Debt is typically conservatively managed and primarily consists of GOs. On a combined basis, outstanding debt and pension obligations are manageable and a well below-average burden on the state.
DEMONSTRATED ABILITY TO MANAGE BUDGET CHALLENGES: The state generally has a careful approach to financial operations and has consistently managed to achieve budgetary balance. The state's budget stabilization fund (BSF) is fully funded.
The rating is sensitive to shifts in the state's fundamental credit characteristics, particularly its economic and financial profiles.
The state's 'AA+' GO rating is based on its careful financial management, ongoing record of maintaining fiscal balance, and a moderate, rapidly amortizing debt burden. Debt is supported by an economy that is slowly adding jobs lost in the recession.
The recession had a widespread impact on the Ohio economy, accelerating a longstanding slump in manufacturing and weighing on the slowly growing service sector. While there has been steady year-over-year job growth since July 2010, the state has yet to fully recover the jobs lost prior to and during the recession. As of December 2015, non-farm employment had reached only 96.7% of its pre-recession peak, below the U.S. state median of 103.5%. Job growth has lagged the U.S., most recently recording 1.5% year-over-year growth in December 2015 versus the U.S. rate of 1.9%.
TAX POLICY CHANGES MANAGEABLE TO DATE
In recent biennia the state has pursued wide-ranging tax policy changes, shifting the source of GRF tax receipts and lowering overall receipts relative to baseline. To date, these tax policy changes have been manageable, aided by favorable economic and fiscal trends. The fiscal 2016 - 2017 enacted biennial budget appears to be structurally balanced and the rebuilt budget stabilization fund (BSF) provides an important source of flexibility.
LAST BIENNIUM ENDED STRONGLY
Although the fiscal 2014 - 2015 biennium enacted budget anticipated a sizeable operating deficit in fiscal 2014, actual performance was better than anticipated primarily due to lower Medicaid spending. Tax revenues were just above forecast but 4.2% lower as compared to fiscal 2013, given tax policy changes noted above.
Fiscal 2015 performance was solid, with the state lifting its expectations for the ending GRF balance accordingly. As with fiscal 2014, higher than forecast revenues and lower than forecast state spending on Medicaid, drove the improved performance. Strong growth in both personal income tax revenues (up 5.5% on a year-over-year basis) and sales tax revenues (up 8.7%) contributed to stronger performance relative to the July 2014 (mid-biennium) estimate.
The state made a deposit to the BSF from the FY 2015 ending balance, raising it to \\$2 billion, or 6.4% of GRF revenue, while also maintaining a stable GRF ending unencumbered fund balance of \\$1.3 billion. The enacted budget for the current 2016-2017 biennium includes raising the statutory target for the budget stabilization fund from 5% of prior year GRF revenues to 8.5%.
FISCAL 2016 - 2017 BUDGET BALANCED
The budget for the 2016 - 2017 biennium is balanced as enacted while incorporating further tax policy changes. PIT rates have been lowered further across all brackets, with additional reductions for certain small businesses. Some offset to the reductions is provided by an increase in cigarette taxes, although the governor's proposed increase and expansion of the sales tax was not enacted. The net impact of tax policy changes is expected to reduce biennial revenues by \\$869 million in fiscal 2016 and \\$952 million in fiscal 2017, moderating what would otherwise have been strong revenue growth.
Including tax law changes, GRF tax revenues are forecast to grow 3.3% in fiscal 2016, to \\$22.1 billion, and another 4.1% in fiscal 2017, to \\$23 billion. Through the first half of fiscal 2016, tax revenues are meeting expectation overall, with over performance in sales tax collections offsetting slight underperformance in personal income tax collections. Overall the enacted budget was based on an assumption of GRF revenues, including transfers, increasing 10.8% in fiscal 2016 and 4.6% in fiscal 2017. This includes the impact of federal revenues for Medicaid expansion being shifted to the GRF as of fiscal 2016. The budget incorporates continued reforms to Medicaid for cost-containment and other savings.
CONSERVATIVE DEBT MANAGEMENT
The state's debt management is generally conservative. Debt amortization is rapid, with all debt fully retired in 20 years and 82% of GRF-backed debt amortized in 10 years. Total tax-supported debt of \\$11.1 billion is equivalent to a manageable 2.3% of 2014 personal income. Debt ratios are expected to approximate current averages as GRF principal continues to roll off and personal income grows.
Funding for Ohio's five pension systems declined significantly with recessionary market losses; the largest system, PERS, declined from a strong 96% funded ratio as of Dec. 31, 2007 to 77.4% as of Dec. 31, 2011. Reform measures enacted in September 2012 have contributed to the improved financial sustainability of PERS and the state's other major systems. The most recent PERS valuation, from Dec. 31, 2014, showed the benefit of the reform measures as the reported funded ratio increased to 83.8%. Using Fitch's more conservative 7% discount rate assumption, PERS would have an estimated 72.9% funded ratio.
As of Fitch's 2015 pension report, the combined burden of the state's net tax-supported debt and the adjusted unfunded pension (UAAL) obligations attributable to the state (including about 45% of the unfunded liability of the state division of PERS, the state highway patrol system and a small share of the teachers retirement system) was approximately 3.2% of personal income in 2015, well below the 5.8% median for U.S. states and the ninth lowest overall. Under GASB 68, the state is reporting a lower proportionate share of the PERS obligation than has been assumed in Fitch's prior reporting, 20.7% of PERS total unfunded liability, rather than the 45% noted above.