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Fitch Rates Oklahoma CIA's $168MM Lease Rev Bonds 'AA-'; Outlook Positive

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April 4, 2024


Fitch Ratings - New York - 04 Apr 2024: Fitch Ratings has assigned a 'AA-' rating to the following bonds to be issued by the Oklahoma Capitol Improvement Authority (OCIA):

--$121.4 million state facilities refunding revenue bonds series 2024A;

--$46.54 million state facilities refunding revenue bonds series 2024B.

The bonds are expected to sell via negotiation on, or around, April 18. Proceeds will be used to currently refund the OCIA's series 2014A and 2014C bonds for net present value savings.

The Rating Outlook is Positive.

The 'AA-' rating on the OCIA lease revenue bonds is directly linked to the state's 'AA' Long-Term Issuer Default Rating (IDR). The one-notch rating differential reflects a slightly elevated risk of non-appropriation of moneys sufficient to pay debt service on the bonds, given the optionality inherent in repayment of bonds from budgetary appropriations.

Oklahoma's 'AA' IDR reflects a low long-term liability burden and Oklahoma's still sizable concentration in natural resource development industries, which limits its long-term revenue growth prospects while increasing tax revenue volatility. The state's reserves have been strongly affected by economic cycles in the past. Fitch expects this may remain the case over the medium term. However, Oklahoma's fiscal reserve cushion is now at its highest-ever level.

The Positive Outlook reflects sustained improvements in Oklahoma's expenditure flexibility and overall fiscal management, particularly its adherence to conservative budgeting practices through economic cycles -- including revenue volatility during the recent pandemic -- which are improving the state's financial resilience. A long pattern of supplemental pension contributions and restoration of service levels enhances the state's ability to adjust spending when necessary.


The bonds are lease revenue obligations of the OCIA backed by annual state budgetary appropriations to the respective state agencies overseeing the projects financed. The lease revenue bonds are issued pursuant to lease agreements for use and occupancy (lease agreements) entered into between the respective state agency or other obligor and the OCIA. Debt service is secured by payments received by the OCIA from the various state agencies according to their lease agreements. These payments are ultimately backed by annual budgetary appropriations of the state.


Revenue Framework - 'aa'

Fitch expects Oklahoma's revenues, which are supported by a broad-based taxes and fees, will continue to reflect above-average economic volatility tied to the natural resource sector over the medium term. The state legislature has unlimited legal ability to raise operating revenues, but tax rate increases require either a legislative supermajority or direct voter approval, limiting the state's practical revenue-raising flexibility to some degree.

Expenditure Framework - 'aaa'

The state maintains ample expenditure flexibility with a low burden of carrying costs for liabilities and the broad expense-cutting ability common to most U.S. states. As with most states, Medicaid remains a key expense driver but one that Fitch expects the state will continue to actively manage to prevent impairment of other functions.

Long-Term Liability Burden - 'aaa'

On a combined basis, the state's debt and net pension liabilities are well below the median for U.S. states as a percentage of personal income, and are a low burden on the resource base. Net pension liabilities have shrunk as a proportion of statewide personal income over the past decade as a result of the state's decision to fund annual pension contributions above their actuarially determined amounts since the early 2010s. Oklahoma's other post-employment benefit (OPEB) obligations are minimal compared to its debt and net pension liabilities.

Operating Performance - 'aa'

A constitutional provision limiting appropriations to 95% of expected general revenue fund revenues provides a cushion for revenue variability, while the state's proactive management of financial operations has, to some extent, offset underlying revenue volatility. The state rapidly rebuilds reserves during periods of economic growth, but regular drawdowns during periods of low crude oil and natural gas prices have tended to limit the state's prospects for sustained financial resilience.

Consistently strong budget and revenue forecasting have provided the state with ample gap-closing capacity, while adroit management of long-term liabilities has kept carrying costs low. Reserve levels are currently above historical norms.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--An inability to maintain dedicated fiscal reserves at or near the pre-pandemic peak of 12% of revenues through economic cycles;

--State revenue growth that falls below the level of Fitch's expectations for long-term U.S. inflation for an extended period of time;

--Evidence of weaker budget management practices that lead to recurring budgetary structural imbalances.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--Maintenance of fiscal reserves at or near current levels as a percentage of revenues and sustained prudent budgeting practices including management of recurring expenditure growth to maintain structural balance;

--Revenues demonstrate less volatility and/or grow at a faster pace, ahead of Fitch's long-term expectations for national inflation;

--Material diversification of the state's economy such that natural resource market volatility is less consequential for operating performance.


Oklahoma's economy is broad, but has a high concentration in natural resources given the state's role as a major producer of crude oil and natural gas. Nearly one-fifth of state GDP is directly tied to natural resource development and multiplier effects boost this concentration still further. Excluding federal offshore areas, Oklahoma was the sixth-largest crude oil producing state in 2022 and fifth-largest natural gas producer. The state's economic base also includes notable healthcare, higher education, trade and federal government components.

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