Fitch Rates Oregon's GOs 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following state of Oregon general obligation (GO) bonds:

--$68.85 million GO refunding bonds (Oregon University System Projects), 2012 series A;

--$22.125 million GO refunding bonds (Oregon University System Projects), 2012 series B;

--$11.57 million GO refunding bonds (Oregon University System Projects), 2012 series C (Taxable);

--$10 million GO bonds (Alternate Energy Projects) 2012 series G.

Further, the state's GO bonds initially designated and rated as (Alternate Energy Projects) 2011 series Q, R, and S (Taxable), subsequently revised to and currently designated as (Alternate Energy Projects) 2012 series A, B, and C, will be revised again and now be designated as (Alternate Energy Projects) 2012 series D, E, and F (Taxable).

In addition, Fitch affirms the following ratings:

--$4.95 billion in outstanding state GO bonds at 'AA+'.

The Rating Outlook is Stable.

The 2012 series A, B and C bonds are expected to sell via negotiation on Feb. 9, 2012, while the 2012 series D, E and F bonds are expected to be offered via negotiation on Feb. 28, 2012.

SECURITY

GOs of the state of Oregon, with the full faith and credit of the state pledged.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT OFFSETS REVENUE VOLATILITY: State finances are heavily dependent on the personal income tax, a volatile revenue source which declined sharply during the recent recession. The state's management reviews revenue and economic forecasts quarterly, and has taken measures necessary to maintain balance. State reserve levels have been drawn upon among balancing measures, but a thin level of cushion remains.

DIVERSIFIED ECONOMY: Oregon's economy, historically based on its natural resources, has diversified toward the computer and service sectors.

MODERATE DEBT BURDEN: Debt levels are above average for a U.S. state but a moderate burden on resources, despite having risen significantly in recent years. Fitch expects the state's debt burden to remain moderate. Pension funding is sound.

CREDIT PROFILE

Oregon's 'AA+' GO bond rating reflects an economy that has diversified, moderate debt levels, and the state's prompt actions to maintain financial flexibility in a challenging revenue environment. Strong financial management is critical to the rating given a revenue structure largely dependent on the cyclical personal income tax, a proclivity for voter initiatives with negative fiscal impact, and constitutional 'kicker' provisions requiring return of surplus revenues to taxpayers. While anticipated reserve levels are now well below original expectations, a thin level of cushion still remains. The 'AA+' rating and Stable Outlook reflect Fitch's expectation that the state will continue to promptly address budgetary gaps as they arise.

The state is dependent on the personal income tax (PIT), which made up 85% of 2011 general fund revenues. PIT collections have been volatile, falling 12% in the 2001 - 2003 biennium and rising by nearly 17% in the 2003 - 2005 biennium and 22% in the 2005 - 2007 biennium. Income tax receipts for the 2007 - 2009 biennium were $1.2 billion below original estimates and 8.5% below those of the prior biennium. A mix of spending cuts, federal stimulus dollars, and the use of available balances, including a full drawdown of the then-available balance in the Education Stability Fund, were employed to maintain balance.

For the 2009 - 2011 biennium, which ended June 30, 2011, PIT revenues, adjusted for kicker payments remitted and reflecting a tax increase upheld by voters in January 2010, were 3.7% above those of the prior biennium, though approximately $1.1 billion below budgeted expectations. Balance was maintained through exhausting the originally budgeted ending balance, implementing across-the-board spending reductions of approximately $550 million, utilizing $241 million in additional stimulus monies, and applying emergency board monies and other available funds. The ending general fund balance for the biennium of $35 million has been deposited into the state's rainy day fund. An additional $15 million in resources between the rainy day and Education Stability funds was available at the close of the biennium.

Oregon passed a balanced budget for the 2011 - 2013 biennium that did not raise revenue though it does in part rely on reserve draws. PIT projections in the adopted budget for the biennium reflected the expectation of recovery, with 16% growth projected over the two-year period. The legislature held back 3.5% of agency spending to protect against revenue underperformance, leaving a projected ending balance of $446 million at the time of budget passage.

As of the most recent economic forecast, released Nov. 17, 2011, PIT revenue expectations have been reduced by $192 million, forecast corporate tax revenues have been reduced by $73 million, and the projected ending balance is now $169 million, assuming no release of held-back monies noted earlier. While no further budget cuts are expected before the legislature comes back into session in February 2012, contingency planning is underway should the economic and revenue outlook deteriorate and/or budgeted spending control measures fail to achieve projected savings. Inclusive of monies available in the state's emergency fund, rainy day fund, and Education Stability Fund, the state currently projects ending the 2011-2013 biennium with approximately $300 million in reserves, totaling 2.2% of biennial revenues. A revision to the forecast released in November is expected next month.

Oregon's economy tends to be more cyclical than the nation's, due historically to its reliance on agriculture and natural resources and today because of its large high-tech sector. While the state had seen modest job growth through mid-2008, the deepening recession resulted in an acceleration of job losses, particularly in the manufacturing sector, and annual employment losses of 0.7% and 6.2% for 2008 and 2009, respectively. The 2009 decline was significantly deeper than that nationally. Employment growth returned in the fourth quarter of 2010, and for the year the state recorded a loss of 0.8%, on par with the national rate of decline. Based on preliminary numbers for December 2011, statewide employment was 1.1% above December 2010 levels, just below the national growth rate of 1.3% for the same period.

As reflected in its November economic forecast, the state is estimating annual employment growth of 1.7% for calendar year 2011, followed by 1.95% growth in calendar 2012. State unemployment, typically above the national level, was recorded at a high 8.9% for December 2011 against a national rate of 8.5% for the same month. In 2009, Oregon's personal income decline of 3.9% was better than the 4.3% U.S. rate of loss, though Oregon's 2010 growth of 3.2% fell short of the 3.7% growth seen nationally. Per capita personal income in 2010 totaled $36,427, representing 91% of the U.S. level and ranking Oregon 32nd among the states.

The Oregon University System bonds currently offered will refinance certain outstanding maturities for debt service savings. State debt levels had risen significantly in the last decade, in part as a result of deficit financing in the prior downturn and pension borrowings. The state did not undertake any deficit borrowing in the recent recession. As of June 30, 2011, the state's debt at 5.7% of 2010 personal income is above average but still a moderate burden on resources. Principal amortizes at a below-average pace.

Oregon's public employees' retirement system, which had a funded ratio of 112.3% at Dec. 31, 2007, was funded at a still sound 87% as of Dec. 31, 2010. The significant swing in the funded ratio is due to the fact that system assets are marked to the market annually with no smoothing and fully reflect negative financial market performance in 2008. As of Dec. 31, 2010, the state's portion of system liabilities was 89.5% funded.

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).

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

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