DALLAS – A rating downgrade based on weakened state finances should not hurt demand for $70 million of Oklahoma Capitol Improvement Authority bonds for the century-old capitol building, according to the State Bond Advisor.
"As far as demand is concerned, I would not expect the rating revision to have any material impact on this issue," said State Bond Advisor James Joseph. "The security behind the authority's offering is strong and well-established."
Scheduled to price Tuesday, the capitol authority bonds took a one-notch downgrade to AA-minus from S&P Global Ratings last week. The state's general obligation rating fell to AA from AA-plus. The outlook returned to stable.
Fitch Ratings has a negative outlook on the capitol bonds' AA rating. The negative outlook also applies to Fitch's AA-plus GO rating for the state.
The appropriation risk for the OCIA bonds gives them a one-notch lower rating than the state's GO debt.
Goldman Sachs is book runner on the negotiated deal, with BOK Financial Services Inc. and Raymond James & Associates Inc. as co-managers. The Public Finance Law Group provides bond counsel.
With the bonds reaching final maturity in 2026, Joseph expects good demand from both the retail and institutional sectors.
"The OCIA Series 2017B issue is very short, so I would expect good professionally managed retail demand, as well as interest from bank trust departments and institutional buyers," Joseph said.
Oklahoma's state income tax provides double tax-exemption for investors in the bonds.
The S&P downgrade followed the state's declared revenue failure on Feb. 21. Revenues for the fiscal year beginning July 1 are estimated to be $701.5 million, or nearly 10.4%, less than appropriated for the current fiscal year, according to the State Board of Equalization.
Oklahoma finance secretary Preston Doerflinger said the true budget hole is larger than what the board certified.
Nearly $144.5 million in FY 2017 Rainy Day Fund appropriations and about $32 million in current-year revolving fund authorizations are not factored into the fiscal year 2016 baseline amount used by the board, he said. With those factors considered, the budget gap for FY 2018 rises to $878.2 million, or 12.7%, he said.
"The numbers are bad this year and bad next," Doerflinger said. "We need new recurring revenue sources. If we don't change our path, then we will be doing incredible harm that could set our state backward for decades."
State Treasurer Ken Miller said that the S&P downgrade should serve as a wake-up call for lawmakers. Miller said he has urged the Legislature to find structural solutions to the state's revenue shortfalls.
"Perhaps the critique of Oklahoma's revenue problem coming from an independent, nonpartisan and credible third party will finally spur action to correct the revenue imbalance," Miller said.
Miller emphasized S&P's finding that "In the absence of meaningful structural reforms that align revenues and expenditures and that do not materially depend on one-time budget solutions or measures that carry significant implementation risk, we could lower the ratings."
"Years of suboptimal budgeting that has relied heavily on the use of nonrecurring revenue is now impossible for the rating agencies to ignore," Miller said. "This downgrade, and others likely to come, will lead to higher debt costs for future infrastructure projects unless sustainable corrective action is taken."
Facing a similar scenario in 2016, the Legislature followed Gov. Mary Fallin's advice to authorize $125 million of bonds to finish $245 million of repairs to the crumbling state capitol. Fallin sought to have the building in good enough shape for its centennial this year. Issuing bonds would speed the process and lower final costs, she said.
Construction of the Oklahoma State Capitol began in Oklahoma City in 1914 and was completed in 1917. It is the only state capitol whose grounds have active oil wells.
The OCIA was created in 1959 to finance construction within the State Capitol Complex. In 1998 lawmakers added financing of improvements for state universities, colleges, agencies, boards, and authorities. The authority has about $1.06 billion of debt outstanding.
Over the last month, Oklahoma was the third fossil-fuel producing state to sustain a downgrade. In February, Moody's Investors Service downgraded coal-dependent West Virginia and oil-rich Louisiana one notch each.
Some light appeared in Oklahoma's fiscal tunnel in January as a 20-month string of declining Treasury receipts came to an end.
At $990.5 million, January receipts grew by $5.1 million, or 0.5% compared to January of 2016, driven primarily by increasing oil and gas gross production collections, Miller said.
"Low prices and curtailed production in the oil field led us into the latest downturn, and it appears rising prices and production are leading us out," Miller said. "Several data points – rising state GDP, rig counts, business conditions, and employment – give reason for cautious optimism."
However, for a sixth consecutive month, Oklahoma's 5% unemployment rate in December was higher than the national jobless number of 4.7%.
In her budget for the 2018 fiscal year, Fallin is again calling for authority to issue bonds for state projects.
While GO debt requires voter approval, the legislature can authorize appropriation bonds like those from the OCIA.
The state issues most of its debt through the OCIA and the Oklahoma Development Finance Authority. In the past, some bond sales faced legal challenges mostly tied to specific bond issuances.
As of Dec. 31, 2015, the state had just $122.1 million of GO bonds outstanding, including $40 million remaining from GO bonds issued by the Industrial Finance Authority. Lease revenue bonds issued by the OCIA totaling $1 billion and $636 million in ODFA master-lease program obligations, along with other state obligations totaling $342 million, bring Oklahoma's total tax-supported debt to $2.1 billion, according to S&P.
"Combined, tax-supported debt is moderate, in our view, at about $532 per capita, and is low, in our opinion, at an estimated 1.2% of state personal income and 1.1% of GSP," S&P analyst Oscar Padilla wrote.
Debt service for 2015 came to just 1.9% of appropriations, S&P said.
"Debt amortization is average, in our opinion, with 47% of tax-supported debt principal repaid in 10 years," Padilla said.