DALLAS – Despite indications of an economic upturn, Oklahoma took a Fitch Ratings downgrade to AA from AA-plus Tuesday.
The rating outlook returned to stable from negative.
The downgrade to Oklahoma's issuer default rating impacts about $88 million of GO bonds; approximately $1.1 billion of Oklahoma Capitol Improvement Authority bonds, lowered to AA-minus from AA; and approximately $1 billion of Oklahoma Development Finance Authority bonds, downgraded to AA-minus from AA.
The downgrade represents “a decline in financial resilience over the past several years as the state has struggled with the economic and revenue effects of the downturn in energy markets,” Fitch analyst Marcy Block wrote. “The state has been unable to address its fiscal challenges with structural and recurring measures and revenue collections continue to reflect subdued energy prices.”
The Fitch action mirrors that of S&P Global ratings, which lowered Oklahoma’s general obligation rating to AA from AA-plus on March 1. Moody’s Investors Service has a negative outlook on its Aa2 rating.
The downgrade comes as the state prepares to price $27.3 million of revenue bonds July 25. The issue will include OCIA tax-exempt revenue bonds and a taxable series for the Oklahoma Museum of Popular Culture project.
State revenues are beginning to recover from a prolonged slump due to the collapse in oil prices three years ago. Oil and gas represents a third of the Oklahoma economy. State Treasurer Ken Miller reported Monday that revenue for fiscal year 2017 indicate the state’s treasury began recovery at the midpoint of the fiscal year and continued through June.
Monthly gross receipts have been higher than the same month of the prior year for five of the past six months. Fiscal year gross receipts remain lower than the prior fiscal year by 1.5%, but the rate of decline has become much smaller than the 7.2% decline between fiscal years 2015 and 2016.
June gross receipts, at $1 billion, are the highest June total since 2014 and 9.4% higher than the same month last year, Miller said. Fiscal year 2017 gross receipts, at $11 billion, are the highest 12-month total in 10 months, he said.
The most current figures from the federal Bureau of Economic Analysis, released in May, show Oklahoma’s economy expanded by 1.3% in fourth quarter of 2016 following four consecutive quarters of contraction.
With recessions typically defined as two or more consecutive quarters of GDP reduction, the state has emerged from a one-year recession, Miller said.
“Current data is encouraging with lagging economic indicators showing improvement in the state economy,” Miller said. “Leading indicators also point to continued growth, but the anticipated strength of the recovery may be moderating as oil prices have come down slightly.”
When S&P downgraded the state in March, the state legislature was looking for a solution to a $900 million revenue shortfall, the latest in a series of shortfalls.
Miller called on lawmakers to respond to the downgrade by abandoning one-time solutions and create a structurally balanced budget.
“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. “Years of suboptimal budgeting that has relied heavily on the use of nonrecurring revenue is now impossible for the rating agencies to ignore. This downgrade, and others likely to come, will lead to higher debt costs for future infrastructure projects unless sustainable corrective action is taken.”
With Gov. Mary Fallin calling for new revenue generating measures, lawmakers agreed in the late stages of the session.
While the tax increases on cigarettes and certain types of motor vehicles were approved, Fitch pointed out that a constitutional restriction that prohibits enacting new revenue measures during the final week of the legislative session is being tested by lawsuits.
“The validity of the measures, which are forecast to bring in almost $320 million in fiscal 2018, will be decided by the state's Supreme Court in August,” Block noted. “If the court rules that the measures are invalid, the state would be required to solve for any resulting budget gaps.”