CHICAGO - Ohio, which is struggling with a $2.3 billion budget hole, yesterday received its second dose of bad credit news in a week when Moody's Investors Service lowered its general obligation rating one notch to Aa2 due to the overall deterioration of the state's credit profile and declining financial flexibility.

Moody's took the action ahead of the state's sale this week of $40 million of GO bonds for development of projects that support the use of Ohio coal. The downgrade affected $6.8 billion of GOs. Appropriation-backed bonds were lowered one notch to Aa3, affecting another $2.8 billion of debt. The outlook on the credit is now stable.

"These rating actions follow a long period of pronounced economic underperformance caused, in part, by the overweighting of manufacturing in the state's industry employment profile," analysts wrote. Moody's had assigned a negative outlook to the credit in February 2007 due in part to the implementation of tax cuts that strained the state's balance sheet.

The state's still-solid credit is supported by its history of prompt action to address budget shortfalls, its rebuilding of reserves - although they are expected to be drained to address a $900 million shortfall in the current budget - well-funded pensions, and currently strong liquidity.

Ohio's challenges include its 2005 tax restructuring, which is straining the balance sheet in the current recession; dwindling revenue; and the use of one-time revenues - such as reserves and payment delays - to address the current shortfall.

The state also entered the current recession more poorly equipped to deal with dwindling revenue because its past economic recoveries have lagged the national average.

"Ohio's economy has consistently underperformed the nation during the past decade, in recessions as well as recoveries, because of the state's heightened manufacturing sector exposure," Moody's wrote.

Ohio's unemployment rate hit 10.2% in April, up from the national average of 8.9%, due to declining manufacturing jobs and layoffs related to General Motors Corp. and Chrysler LLC's woes that led to their bankruptcy filings. The state has lost 25,000 automotive jobs in the last year.

State officials last week announced a new $2.3 billion hole in the next budget as lawmakers continue work on a new spending plan. Gov. Ted Strickland has proposed a $54 billion spending plan for the next biennium that begins July 1.

Moody's action followed Fitch Ratings' move last week to drop Ohio's rating down a notch to AA. Standard & Poor's affirmed the state's AA-plus GO rating.

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