CHICAGO - Just two months after downgrading Ohio to Aa2, Moody's Investors Service yesterday revised its outlook on the state's credit to negative from stable.

The negative outlook reflects growing fiscal stress and the state's increasing reliance on one-time revenue measures to plug budget shortfalls, Moody's said. While many states are suffering from weak economies, Ohio's problems could linger beyond the national recession due to its significant exposure to permanently downsized manufacturing and automobile industries.

The rating news came the day before Ohio began pricing $40 million of coal-development general obligation bonds. It originally had scheduled the issue for June. The state was hit with duel downgrades from Moody's and Fitch Ratings as it prepared to enter the market. Officials were not immediately available to say whether the delay was due to the downgrades.

Yesterday the state took retail orders on the bonds before opening it up for institutional buyers today. JPMorgan is the lead underwriter on the transaction. The Ohio Public Facilities Commission is the issuer.

Ohio has $9.7 billion of general obligation and related debt.

Fitch rates the state's GOs AA. Standard & Poor's rates them AA-plus. Both agencies maintain a stable outlook on the debt.

Like many states, Ohio is facing budget shortfalls stemming from declining revenues and a weak economy. To balance its recently passed two-year budget, it relied on a number of one-time revenue measures. Relying on such measures will make it more difficult to return to a structural balance in the future, Moody's analyst Edward Hampton warned in a report released late Monday.

When crafting the current budget, Gov. Ted Strickland had proposed dipping into the $1 billion rainy-day fund to balance the second fiscal year of the 2010-2011 biennium. But the state was instead forced to deplete the entire fund to address a 2009 deficit of $900 million, Hampton noted.

"The faster-than-expected depletion of this reserve underscores the state's diminishing financial flexibility, and the state has no specific plan to rebuild its [budget stabilization fund]," he wrote.

Among other one-time revenue measures, the state plans to restructure a chunk of its outstanding debt in order to generate an expected $736 million in savings.

The state has seen some growth in its education and health care sectors, but not enough to offset "dramatic manufacturing deterioration," according to Hampton.

"Ohio has consistently underperformed during the past decade, in recessions as well as recoveries, because of its heightened manufacturing exposure," he said. "Continued underperformance will further hinder the state's ability to rebuild its financial strength."

There are some bright spots in the fiscal outlook. State leaders have a history of acting quickly to address revenue shortfalls, Moody's said. Ohio enjoys a relatively low debt burden, and its pension plans are reasonably well-funded. While the state's other post-employment benefits accrued liability is sizable, at $29.8 billion, its retirement system already has about $12.8 billion in assets to cover the liability.

In related news, Moody's yesterday revised its outlook to negative from stable on the Ohio School District Credit Enhancement Program, which is rated Aa3, one notch below the state's GO rating. The outlook revision affects $916.4 million of outstanding debt.

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