Revenue Drop Puts Bigger Hurt on Ohio Budget

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CHICAGO — Already facing a $900 million shortfall in its current budget, Ohio now must erase at least $2.3 billion of red ink in its proposed budget for the next fiscal biennium due to “historic” revenue losses, according to new revenue estimates presented to lawmakers yesterday by budget director J. Pari Sabety.

The bleak revenue projections for the biennium beginning July 1 added to the state’s escalating fiscal woes that prompted Fitch Ratings a day earlier to act on its negative outlook on the state’s $7 billion of general obligation debt.

Fitch dropped the credit one notch to AA and assigned a stable outlook ahead of a $40 million GO sale to back research and development of projects using Ohio coal. JPMorgan is lead underwriter for the issue, which is set for the middle of next week.

Analysts blamed the rating downgrade on the cumulative impact on the state’s credit profile in the current recession and the long-term erosion of the state’s economy due to declines in its manufacturing sector.

Like its neighbor Michigan to the north, Ohio is among the hardest hit by the domestic auto industry’s woes.

“The prominence of auto assembly plants and associated parts manufacturers is a particular concern,” Fitch analysts wrote.

The state — already reeling from the elimination of 25,000 automotive jobs in the last year and 100,000 manufacturing jobs overall — faces additional losses of General Motors’ plants and parts distribution facilities due to its recent bankruptcy filing.

Ohio debt coordinator Kurt Kauffman sought to emphasize the positive, including Fitch’s commentary that the “state’s financial management is sound and the rating incorporates the expectation that even with revenue declines, the state will balance the budget.”

The AA from Fitch is still a solid one, and with the downgrade, “the outlook has been moved back to stable,” Kauffman noted.

The state has received word that Standard & Poor’s intends to affirm its AA-plus rating but it was still awaiting notification on Moody’s Investors Service’s Aa1 with a negative outlook.

The latest revenue estimates come as Ohio lawmakers have begun meeting in a conference committee to work out differences between the House and Senate versions of a $54 billion biennial budget. The House is controlled by Democrats and the Senate by Republicans.

The new estimates forecast revenues will fall $2.3 billion short of the amount used in crafting Democratic Gov. Ted Strickland’s proposed budget. That number could grow to $3.2 billion, based on versions of the budget before the conference committee.

“The picture I have painted for you is bleak but realistic,” Sabety said.

Total general revenue funds were revised downward by $1.3 billion, or 7.7%, from budgeted levels of $17 billion in fiscal 2010 and by $1 billion, or 6.1%, from budgeted levels of $17.3 billion. The state still faces a $900 million current-year shortfall and is expected to tap its $1 billion reserve account to cover it.

Auto sales taxes are expected to fall by 10.4% in fiscal 2010 and then rebound the next year to grow by 12.6%. Non-auto sales taxes are expected to decline by 1.7% in fiscal 2010 and then increase by 2.3% in fiscal 2011. Individual income taxes were revised downward by $926 million from budgeted levels in fiscal 2010 and $601 million the next year.

The budget director outlined the stark numbers contributing to the state’s fiscal deterioration. Ohio entered the current recession less prepared than other states to cope because its recovery from past recessions lagged the nation.

“Ohio has never regained the jobs lost from the last recession. This under-performance appears to be even greater in the current recession and financial crisis,” Sabety said.

“The erosion in Ohio wage and salary income growth across the last three decades is a strong and driving force in the fiscal crisis facing our state,” she said.

Fitch noted as much in its report. Following the last recession, employment increased just 0.3% from 2004 to 2007, compared to a U.S. growth rate of 4.7%. Personal income gains in the state were limited at approximately 60% of national growth.

The administration has come under fire from Republicans for failing to more accurately project revenues. Sabety acknowledged the failures, but said such predictions are difficult, given the state’s individual circumstances.

Strickland’s budget proposed closing what earlier this year was a $7 billion deficit through federal stimulus funds, cuts, tapping reserves, and restructuring debt to push off some debt service payments coming due in fiscal 2009 through fiscal 2011.

However, the state will not have those reserves available as they will go to cover the current year’s deficit. Both Democrats and Republicans have previously pledged not to raise major taxes, which could mean deep spending cuts.

Sabety said the administration was considering its options for addressing the new deficit, but she did not offer specifics. The administration has already cut more than $1.7 billion in the current budget.

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