State’s credit rating is cut

Oklahoma’s declaration of a revenue failure last week prompted ratings agency Standard & Poor’s to drop the state’s credit ratings one notch Wednesday.

S&P said the state’s financial position leaves it vulnerable should the regional and national economy slow.

“While the revenue failure alone, in our view, is nominal relative to previous revenue failures, collectively the state’s financial position has deteriorated to a point that further precludes the state from building up reserves in subsequent fiscal years,” S&P said in a report. “As such, we believe that, relative to a year ago, the state is more vulnerable to broad regional or national economic weakness.”

S&P lowered its rating on Oklahoma’s general obligation bonds and appropriation debt to AA from AA+. It also lowered its rating on appropriation debt to AA- from AA. It said the outlook was stable.

Lowering those ratings means it could cost the state more to take on future debt. S&P, along with Moody’s and Fitch, rate the state’s debt.

“The downgrade reflects our view that persistently weak revenue collections — leading to a declared revenues failure for the remainder of the fiscal year (2017) — have further compounded the state’s challenge to achieve structural balance in fiscal 2018,” S&P said.

Lawmakers face a $878 million shortfall for the upcoming fiscal year. The state declared a revenue failure last week, meaning across-the-board spending cuts of 0.7 percent, or $34.6 million, in the current fiscal year ending June 30.

In a statement, Oklahoma Secretary of Finance Preston Doerflinger said the S&P report highlights several things the Fallin administration has been saying for some time.

“We need to fix the structural budget deficit and our revenue problem,” Doerflinger said.

However, the S&P report noted some actions taken by Fallin and the Legislature have contributed to the budget situation.

“A recent cut to the state’s personal income tax rate and tax breaks for the oil industry during periods of price declines have compounded the state’s revenue shortfall,” the report said.

A planned 0.15 percentage point cut to the state’s top personal income tax rate— which would take it to 4.85 percent — was due to come into effect, but the state hasn’t brought in enough revenue to trigger the cut. S&P said it didn’t have much confidence that the state’s structural financial problems would be resolved in the current session.

“While the legislative session is ongoing, we view the likelihood andwillingness to add sufficient revenue enhancer to achieve structural balance to be low,” the report said. “... Given our overall assessment that Oklahoma is markedly vulnerable in the event of a U.S. downturn, and that management has yet to demonstrate a sustainable path toward improving its financial position, even modest economic softness could have prolonged negative effects.”

‘Suboptimal budgeting’

Treasurer Ken Miller said he hoped the S&P critique of the state’s revenue problem from an independent third party “will finally spur action to correct the revenue imbalance.”

“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 in a statement. “This downgrade, and others likely to come, will lead to higher debt costs for future infrastructure projects unless sustainable corrective action is taken.

“These problems are well understood by most officers in the executive branch who stand ready, willing and able to work on solutions with our partners in the legislative branch.”

Jim Joseph, the state’s bond adviser, said ratings were requested from S&P and Fitch as the state prepares to sell $70 million in bonds next week to fund Capitol repairs and improvements.

S&P on Wednesday gave the Capitol repair bond issuance an AA- rating with a stable outlook. Fitch last week gave it an AA rating with a negative outlook. Fitch said it was concerned “the state will be challenged in providing a durable response to its current economic and financial challenges, diluting its future financial flexibility.”

Joseph said the S&P ratings cut Wednesday came as a surprise.

“We were hopeful they’d give us until the end of session to see what would happen,” Joseph said.

Moodys and Fitch already had the state on a negative outlook.

Joseph said it was too early to tell what effect the S&P ratings cut would have on future bond sales. Much of it depends on the length of borrowing, the size of the bond issuance and market conditions, he said.

Economic outlook

In its economic outlook, S&P said the state was outpacing national growth until the recent energyrelated downturn. Forecasting firm IHS expects the state’s economy to grow 1.2 percent in 2017, with employment growing 0.4 percent. That compares to national IHS forecasts putting economic growth at 2.3 percent and employment growth at 1.5 percent.

“Growth in Oklahoma GDP had been above the U.S. growth rate over 10and 5-year averages, supported partly by high oil prices, though it has lagged in the last two years,” the S&P report said. “Real gross state product contracted 2.9 percent in 2016, whereas the national economy expanded by 1.6 percent. Collapsing oil prices, lower agricultural commodity prices and weaker global growth will likely continue to dampen growth over 2017.

“Despite these challenges, we believe the state’s resources, employment opportunities, cost of living, cost of doing business and tax structure will continue to make it an attractive place for business over the long term.”