CHICAGO -Ohiothis week unveiled a $1.3 billion biennial capital budget that is less than half the size of its predecessor.

The smaller amount reflects declining revenues and the need for less capital, given that last year's record-setting tobacco bond sale provided a windfall for school funding in the state.

The capital bill totals $1.296 billion and relies on $1.185 billion of general-fund supported borrowing, with the remaining amount funded through cash and debt not backed by the general fund. Roughly $700 million of the $1.185 billion is expected to come from general obligation debt and another $485 million from appropriation-backed debt.

The borrowing plan comes as Ohio confronts a weakening economy and soft revenue collections that fiscal officials estimate could leave a current operating budget shortfall of between $750 million and $1.9 billion, depending on whether revenue growth slows, stays the same, or declines.

Separate from the capital bill, Democratic Gov. Ted Strickland and top Republican lawmakers recently proposed a $1.57 billion economic stimulus plan, which includes about $977 million of bonds. The relatively modest size of the capital budget ensures that, even with the additional $1 billion in economic-stimulus borrowing, the state will stay well below its cap that limits debt service on general-fund supported debt to 5% of general fund revenues, according to officials.

In addition to appropriations, the 2009-2010 capital budget includes a pair of provisions giving local governments the legislative authority to issue bonds for certain projects, as well as a number of spending-reduction measures for the current budget. The budget-reduction measures were ordered by Strickland last February when state fiscal officials revised their revenue estimates and projected shortfalls in the current budget.

Last year's record-setting $5.5 billion tobacco bond sale eased immediate funding demands facing the state - especially with regard to K-12 funding, according to Kurt Kauffman, Ohio's debt manager.

While the last capital budget included $1.12 billion in K-12 funding, the current budget includes none, and that is expected to continue over the next three to four years, Kauffman said.

"Usually our capital bill is twice this," he said. "We would have put $1.2 billion for schools if it wasn't for the tobacco deal."

Last year's tobacco transaction securitized Ohio's entire share from the 1998 Master Settlement Agreement between 48 states and the major tobacco companies. Of the $5.5 billion sale, about $4.1 billion of the tobacco bond proceeds went for K-12 education, Kauffman said.

The tobacco sale also means the state remains well below its 5% debt service cap. While under past capital budgets Ohio has come close to that 5% ceiling, it is now at about 4.25%, Kauffman said.

"Even with this bill and the economic stimulus package, we expect to stay under 4.5%," he said. "The tobacco securitization really alleviated the pressure on funding. The sizing of the bill is now related to how much debt service can be afforded in future budgets."

The size of this year's capital bill was also shaped by the expectation of slowed revenue growth in the future due to a weak economy, as well as a series of costly tax cuts enacted in 2005 and estimated to cost $502 million of reduced revenue in 2008 and $1.3 billion in 2009. The state will also maintain a freeze on higher education tuition through 2009.

"Future [general revenue fund] tax revenue is expected to show a real reduction in these revenues over the next two years. In addition, slow growth in the national economy will further constrain future GRF revenues," J. Pari Sabety, director of the Office of Budget and Management, told the House Finance and Appropriations Committee Monday. "The Strickland administration has taken a measured and judicious approach to the fiscal years 2009-2010 capital budget recommendations."

The largest chunk of the capital budget - $595 million of borrowing - would go towards projects for colleges and universities across the state. Most of that funding will fund infrastructure and new buildings, while $100 million will fund research and development projects. Another $150 million would fund public works projects for 19 districts across the state.

The Ohio Building Authority will issue another $72 million of special obligation bonds - also backed by the general revenue fund - that will be issued on behalf of the Department of Rehabilitation and Corrections. Another $87 million of special obligation bonds are expected to finance a new psychiatric hospital inCuyahoga County.

The Ohio Public Facilities Commission would issue $700 million of GOs and the Building Authority and the state treasurer would act as issuer for the remaining $485 million, according to Kauffman.

The state will sell the bonds as necessary over the next 12 to 18 months, and likely will not begin issuing the new debt for another six months, he said.

In addition to the capital budget, the state plans to issue $144.5 million for the public works commission under two separate pending legislative measures.

The bill also includes two provisions that expand local municipalities' bond-issuing authority. Under one measure, municipalities will be able to issue bonds to match other funding that would go toward conservation and revitalization projects. Another provision would revise the sewer district law to allow counties to issue revenue bonds that sewer districts would use to finance various sanitation projects. Those bonds would be repaid with sewer fees.

Ohio lawmakers will hold hearings on the capital bill through next week and are expected to pass it in June, before the state's 2009 fiscal year begins July 1. No major amendments are expected, according to early reports.

The state's current $52.4 billion operating budget won passage last June in a rare unanimous vote from the Republican-controlled Legislature.

Ohio has $9 billion of GOs, of which about 8%, or $725.4 million, is in variable-rate mode. The GOs are rated double-A-plus, while its special obligation debt is rated one notch lower at double-A. Moody's Investors Service assigns the state a negative outlook, reflecting its "long-running economic underperformance and budgetary stress associated with tax cuts."


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