DALLAS – Caught in a severe fiscal crisis after energy prices collapsed, Oklahoma is offering $181 million of revenue bonds to keep its highway construction program moving.
In its last session, the Oklahoma Legislature agreed with Gov. Mary Fallin's call to issue bonds for transportation projects to minimize impact on programs that rely on the general fund, particularly education.
To balance the budget, lawmakers had to overcome a $1.3 billion deficit that ballooned in 2015 as oil prices in the energy-centric state continued to fall before leveling off recently at around $45 per barrel, less than half their average price in the first six months of 2014.
Originally, Fallin had sought $500 million of bond authority for the Oklahoma Department of Transportation.
Because of the need for all available revenue to overcome the general fund deficit, officials believed that taking advantage of low interest rates instead of using pay-as-you-go financing made more sense. In a subsequent deal with legislative leaders, that amount was reduced to $200 million.
"At some point you have to ask yourself, 'Do you want to do bonding for these things or do you want deeper draconian cuts?'" said state finance director Preston Doerflinger.
State Bond Advisor James Joseph said the bonds issued under the Oklahoma Capitol Improvement Authority will price Sept. 27 and Sept. 28 through a syndicate led by Wells Fargo, whose senior vice president John Moore is lead banker. The two days will include a retail order period.
"We will sell an amount necessary to generate $200 million in net proceeds," Joseph said.
"We expect strong demand from high net worth individuals, trust departments, and national retail investors during the retail order period," he said. "Balances should be attractive to institutional buyers on the second day."
The bonds are rated AA by S&P Global Ratings and by Fitch Ratings. Both assign negative outlooks.
Moody's Investors Service does not rate this deal but also has a negative outlook on Oklahoma's Aa2 rating.
Because the bonds depend on appropriations from the state legislature, they are rated one notch below the state's issuer credit rating of AA-plus, according to Fitch.
"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," Fitch analyst Marcy Block wrote.
Of the top 10 energy producing states, Oklahoma is one of the most dependent on oil and gas production. 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, Block wrote.
While Oklahoma enjoyed boom years shortly after the 2008 recession, the pattern has reversed. Now, non-energy producing states get the economic benefit of low fuel prices while the producing states suffer downgrades and negative outlooks as energy-related revenues slump.
In Oklahoma, employment has shown recent, steady declines as the slumping natural resources sector led to shuttered rigs, production declines, and layoffs. State Treasurer Ken Miller recently reported that Oklahoma's unemployment rate exceeds the national average for the first time in 26 years.
However, population growth continues above the national pace, Block said.
"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," Block wrote. "The current economic slowdown is expected to extend over the medium term and will continue to challenge revenue growth."
While Oklahoma has an unlimited independent legal ability to raise operating revenues as needed, a supermajority vote of the legislature or voter approval is required for tax rate increases.
"The state's financial operations benefit from the maintenance of a separate rainy day fund 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," Block said.
"There is a consistent history of rebuilding reserves as the economy strengthens," she added. "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 series 2016 bonds are secured by payments to OCIA from the Oklahoma Department of Transportation.
Their agreement provides for equal monthly payments on the 15th day of each calendar month by the ODOT in amounts sufficient in the aggregate to pay the principal and interest on the bonds when due, subject to receipt by the ODOT of annual appropriations.
The OCIA, which issues much of the state's debt authorized by the legislature, has eight members, including the governor.
Oklahoma's total general revenue fund collections for fiscal 2016 were $5.2 billion, which is $541.3 million, or 9.4%, below the official estimate and $521.9 million, or 9.1%, below prior-year collections. Oklahoma did end fiscal 2016 with a $140.8 million surplus because midyear cuts were deeper than necessary given final revenue collections.
"We understand that the surplus will be reallocated to the affected agencies on a pro rata basis," wrote S&P analyst Carol Spain.
Officials reported that state revenues dipped in July but increased in August, leading to overall collections for the first two months at 11% above official estimates.
In July, total general fund receipts were 4.4% below estimates, or 11.1% below prior-year collections. Sales taxes were the main cause of lower revenues, coming in 7.5% below official estimates, while total income tax collections were just 0.4% below estimates.
Motor vehicle tax and other revenue collections were 13.8% and 5.1% below official estimates, although gross production taxes were 7.9% above estimates. General fund revenues exceeded estimates by 31% in August, although sales taxes were 6.1% below official estimates.
"The overall increase in August revenues was due to several anomalies," Spain said. "August personal income taxes deviated from a trend of the past four years, partly due to a $17.5 million collection for Oklahoma's Promise Scholarship Fund, and came in 137.9% over estimates."
Spain said that S&P has not lowered Oklahoma's general obligation rating because 2017 revenues appear sufficient to fund operations.
"However, persistently weak revenue performance or failure to take action to structurally align future budgets could lead us to lower the rating," she added. "Also, a continuation of weaker economic performance relative to the U.S. over time could lead to rating pressure.
"Recovery in economic indicators, improvements in state revenue performance, and measures to achieve structural balance and rebuild reserves could lead us to revise the outlook to stable."
