NEW YORK–(BUSINESS WIRE)–Fitch Ratings assigns an ‘AA’ rating to the following lease revenue bonds of the Oklahoma Development Finance Authority (ODFA):

–$12.08 million ODFA Oklahoma State system of Higher Education Master Real Property Lease Revenue Bonds, series 2010D;

–$4.13 million ODFA Oklahoma State system of Higher Education Master Equipment Lease Revenue Bonds, series 2010B.

In addition, Fitch affirms the following ratings:

–$262 million in outstanding State of Oklahoma general obligation (GO) bonds at ‘AA+’;

–$1.8 billion outstanding appropriation-backed debt of ODFA and the Oklahoma Capital Improvement Authority (OCIA) at ‘AA’.

the Rating Outlook is Stable.

the bonds are expected to sell via negotiation on Dec. 8, 2010.

RATING RATIONALE:

–As bonds are paid from annual state appropriations from the general fund, the rating is based on the credit position of the state of Oklahoma, whose general obligation (GO) bonds are rated ‘AA+’ by Fitch.

–Financial operations are conservative, including maintenance of separate rainy day and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. the rainy day fund is being depleted to balance the fiscal year 2010 and 2011 budgets.

–The state’s economy is commodity based with a focus on oil and gas production, as well as various agricultural products. a strong military presence provides a stabilizing factor.

–Debt levels are low and tax supported debt is amortized relatively quickly. Most new issuance is in the form of lease revenue bonds.

–The state regents receive one appropriation for all budgetary purposes with lease payments transferred monthly from the first dollars allocated by the regents to participating institutions. the state bond advisor tracks all lease payments that are appropriated to the board of regents.

KEY RATING DRIVER:

–Continued timely action to maintain budgetary balance and rebuilding of reserves.

the bonds are a limited obligation of the authority paid under a lease with the Regents of the Oklahoma State system of Higher Education from state general fund revenues, subject to annual appropriation. Appropriations to the university system are made by the legislature in one consolidated form and allocated to participating institutions by the regents.

CREDIT SUMMARY:

the rating reflects the payment of lease rentals by the State Regents from state general fund revenues, subject to annual appropriation, and allocation by the State Regents to the participating educational institutions.

Both the state constitution and enabling statutes provide for appropriation of lease payments in support of the master real property and equipment programs. all higher education appropriations to the State Regents are consolidated, with the State Regents authorized to allocate funds first to payment of lease rentals of each participating institution. the State Regents covenant to include a budget request for lease payments sufficient to pay debt service for these programs. the fiscal 2011 appropriation for the state regents is $1.1 billion. ODFA is one of the principal financing agencies of the state as the use of GO bonds is limited. the term of the lease extends through the life of the bonds, with a maximum term of 20 years; lease payments are not abatable.

the state’s ‘AA+’ GO bond rating and Stable Outlook reflect low debt levels and disciplined financial policies, including an appropriation limit of 95% of certified general fund revenues, close monitoring of revenue results, and provisions to maintain separate rainy day (the constitutional reserve fund) and cash reserves. the state continues to demonstrate a willingness and ability to address fiscal challenges including revenue underperformance over the past two fiscal years. Tax revenues are constrained both by an economic base with below-average wealth levels and a supermajority requirement of the legislature or voter referendum to raise taxes. Debt levels are low but rising.

the constitutional reserve had been fully funded at 10% of the prior year appropriation since fiscal year (FY) 2001 until drawn upon to close a budget gap in FY 2010. the state ended FY 2010 with $373 million remaining in the constitutional reserve fund, having utilized $223 million in FY 2010, and the cash flow reserve remains funded at $434 million. the enacted FY 2011 budget appropriated the balance of the rainy day fund, but held back $100 million to be used by the legislature if revenues fall short during the fiscal year. the cash flow reserve is maintained at 10% of general fund appropriations and is derived from any revenues in excess of the 95% appropriated, as noted above. it is typically reduced during the fiscal year and replenished as revenues are received late in the fiscal year.

FY 2009 general fund revenues were constrained by the weakened economy. Originally projected to rise 3.2% from the prior year, actual revenues came in approximately 6.8% less than expected and 7.3% below the prior year. while the state’s largest revenue source, income tax, fell 10.1% year over year, sales tax revenues, the second largest source, actually increased 2.2% year over year. nevertheless, the shortfall exceeded the state’s 5% cushion and cuts of 1% were instituted.

the enacted FY 2010 budget required 7% across-the-board reductions in agency spending and, when first-quarter revenues were realized 26% below estimate, another 5% reduction was implemented, later revised to 3.4% as federal stimulus funds became available to backfill expenditure reductions. Revenues began to stabilize in the second half of the fiscal year with revenues beginning to exceed the estimate and growing year-over-year as of March. However, due to the weak first half of the fiscal year, revenues for the fiscal year were down 17% year-over-year and 15% below budget. the FY 2010 budget was balanced with approximately $1.2 billion in federal stimulus funds and a partial drawdown of the rainy day fund.

with revenues expected to remain weak in FY 2011, the enacted budget achieves balance with a further reduction in appropriations of 3.5%, use of remaining federal stimulus funds, and depletion of the rainy day fund. Revenue collections have started to rebound with general fund revenues up 6.8% year-over-year in the first quarter, 4% above estimate. Sales tax revenues increased 9.3% in the first quarter and were 6.8% above estimate while personal income tax collections were 4.1% higher than expected but still down 1.4% year-over-year.

the state’s economy is diversifying, although oil and natural gas production and military installations remain important. Oklahoma continued to grow while the nation as a whole entered the recession, but the state contracted as well in 2009 with non-farm employment declining 3.6%, comparing favorably to the national decline of 4.3%. State employment was up 1.2% year over year in October 2010, while nation grew more slowly at 0.5%. Unemployment has increased but remains comparably low at 6.9% as of October 2010, versus the national rate of 9.6%. Personal income per capita for 2009 of $35,840 ranks Oklahoma 33rd among the states at 90.4% of the national average. Personal income, which fell 1.8% in 2009 versus the U.S. decline of 1.7%, has begun to increase, growing 2.4% in the second quarter of 2010, a pace slightly faster than the U.S. rate of 2.2% but still slower than the southwest regional average of 3.1%.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Additional information is available at ‘www.fitchratings.com‘

Related Research:

‘Tax-Supported Rating Criteria’, dated 16 Aug 2010.

‘U.S. State Government Tax-Supported Rating Criteria’, dated 8 Oct. 2010.

for information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

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<a href="http://www.businesswire.com/news/home/20101203005589/en/Fitch-Rates-Oklahoma-DFAs-16MM-Lease-Revstag:news.google.com,2005:cluster=http://www.businesswire.com/news/home/20101203005589/en/Fitch-Rates-Oklahoma-DFAs-16MM-Lease-RevsFri, 03 Dec 2010 16:17:50 GMT 00:00″>Fitch Rates Oklahoma DFA's $16MM Lease Revs 'AA'; Outlook Stable