Oklahoma’s Bond Rating
If the 2013 legislature decides to cut income taxes, how will the state fund its continued cost obligations?
The state could pass more bonds, but how far can it go in running up what amounts to debt on the state’s credit cards.
The Council of Bond Oversight meets to discuss bonds for OU, OSU and the Oklahoma Housing and Oklahoma Development Finance Authorities.
The five-member board reviews and approves all financing requests by State agencies, authorities, departments, and trusts.
Oklahoma currently has a credit rating of AA-2, the third highest possible.
Oklahoma State Bond Advisor Jim Joseph admits officials have tried to get it upgraded.
“The biggest issues with ratings analysts tend to be difficulty in raising taxes due to our constitutional provision against that without a supermajority in the legislature and the unfunded liabilities in the pension systems.”
According to the Sunshine review, a government transparency organization, in 2010 Oklahoma’s pension system had only 56% of its benefits funded and only a 70% payment toward annual required contribution.
New laws over the past couple of years to increase the retirement age for new teachers and put Cost of Living Increases in the hands of the legislature have reduced some of the education liability.
And officials at the Oklahoma Teachers Retirement System hope to be fully funded in 22 years.
State Question 640 passed in the 90s requires a supermajority of lawmakers or a vote of the people to increase taxes.
Joseph says this causes analysts to worry about Oklahoma’s ability to react in times of crisis.
According to Moody’s Investors Service, Oklahoma has about $2.4 billion in outstanding debt.
That’s the current situation, but another issue might also hamper the rating…more cuts to the income tax, Oklahoma’s primary source of revenue.
UCO Dean of Economics Mickey Hepner questions how this may affect Oklahoma’s ability to get credit.
“The proposal that came forward last year to eliminate 40% of the state’s general revenue without any plan to offset that loss of revenue would have been really scary for bond holders because they would see you’re just gutting you’re most important revenue source so how are you going to be able to generate the funds to pay us back.”
While there are some negatives on Oklahoma’s bond rating, there are some positives as well.
One example is the conservative way Oklahoma handles its money
State Treasurer Ken Miller says Oklahoma only appropriates 95% of the estimated revenue for the coming year just in case collections drop unexpectedly.
“They know that we’re not going to get into a position, hopefully, where we can’t pay our debt, where we can’t be solvent, because if we miss our estimate, we have that cushion that allows us to be off a little bit and still meet our expenditures.”
Miller says it’s also worth noting that Oklahoma’s taxpayer indebtedness is half of what most states have.
Oklahoma ranks 38th in the nation.
State Bond Advisor Jim Joseph says while a AAA rating is something to strive for, it doesn’t keep the state from getting the job done.
“It would be nice to have and be able to brag that we are AAA but it hasn’t prevented us from accessing the capital markets effectively and in today’s rate environment there’s such a small increment of difference you hardly notice it.”
Energy, one of the state’s largest industries works as a plus and minus for Oklahoma’s rating.
The positives are the oil and gas reserves in the state, but the volatility of energy draws concerns.
Meanwhile, Joseph says it’s Oklahoma’s growing economy which could keep the state’s bond prospects strong.