CHICAGO - Fitch Ratings yesterday revised its outlook to negative from stable on Ohio's general obligation debt, citing the state's ongoing economic struggles as well as potential future fallout from the decline of the U.S. automobile industry.
At the same time, the agency affirmed the debt's AA-plus rating.
The revision was prompted by the state's recent release of grim economic and revenue news, according to analyst Douglas Offerman.
"Ohio's economy has been weakening for some time well in advance of the national recession, and there's been very little growth there for some time," he said. "They still have a very large presence of U.S. automakers, and that's a big risk right now. The result of much of this economic uncertainty is that state revenues have been very, very weak."
Moody's Investors Service, which rates the state's GOs Aa1, has maintained a negative outlook on the debt since February 2007. Standard & Poor's rates the state AA-plus with a stable outlook. State debt officials did not return phone calls seeking comment.
Ohio has three GO sales totaling $183 million scheduled through February 2009, although no firm pricing dates have been set. Two state agencies, the Ohio Air Quality Development Authority and the Ohio Housing Finance Agency, have revenue bond sales scheduled for this week.
Offerman praised the state for its fiscal management, singling out its well-funded pension systems - its largest system, the Ohio Public Employees Retirement System, is 96% funded - as well as its policy of pre-funding its other post-employment benefits liabilities. For example, the state has funded 39% of its OPEB liability in its public employee's retirement system.
"To have an OPEB funded like that is pretty rare - very unique among the states," Offerman said.
Fitch's revision follows gloomy economic news that came from a press conference held two weeks ago by Gov. Ted Strickland and budget director J. Pari Sabety, and more recently from a monthly financial report released last week.
Strickland warned that Ohio faces nearly unprecedented economic hardship that could lead to a record $7.3 billion deficit in the next two-year budget cycle. In addition, it faces a $640 million shortfall in its current budget. Even if agencies slash 10% from their budgets, the state would be looking at a $4.3 billion shortfall, Strickland said.
"We expect significantly more weakness going forward, and that really impacts the state's ability to generate revenue," Offerman said. He added that Fitch does not expect the state's debt to increase substantially over the next few years, in part because of its massive $5.5 billion tobacco bond sale last year.
Ohio's rainy-day fund, however, which is estimated at $1 billion and is considered top credit strength, could be reduced over the upcoming biennium. The move would limit the state's financial flexibility, Fitch warned.
In September, the state withdrew $63 million from the fund, and the legislature earlier this year approved a plan to withdraw another $200 million for capital projects. Last week, a House committee approved a bill that would finance up to $200 million in bonuses for recent war veterans by dipping into the rainy-day fund. The governor vowed to veto the bill in its current form - he favors borrowing.
"Considering the historic budget challenges before us, I do not believe it is fiscally responsible to pay for this worthy priority with rainy-day funds that are designed to be used for budget emergencies," Strickland said in a statement.
