OKLAHOMA CITY— Two years of revenue failures, budget shortfalls and the use of one-time funds to close budget gaps led one of the nation’s major ratings agencies on Wednesday to downgrade the Oklahoma’s bond and appropriation debt rating.
S&P Global Ratings issued a report that lowered the state’s general obligation bond debt rating from AA+ to AA. The agency also lowered its rating on the state’s appropriation debt from AA to AA-.
“The downgrade reflects our view that persistently weak revenue collections — leading to a declared revenues failure for the remainder of fiscal 2017 — have further compounded the state’s challenge to achieve structural balance in fiscal 2018,” S&P Global Ratings credit analyst Oscar Padilla wrote in the report.
Padilla also noted that while the revenue failure alone is nominal compared to previous revenue failures, Oklahoma’s financial position has deteriorated to the point that it limits the state’s ability to replenish its reserves, making it more vulnerable to regional or national economic contraction.
Oklahoma’s revenue problems have been exacerbated by the Legislature’s decision in recent years to reduce the individual income tax rate, expand tax incentives for business and industry and slash taxes paid on oil and natural gas production.
“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 notes.
S&P’s decision amounts to a lowering of the state’s credit rating and could lead to higher interest rates on the state’s bond debt, although it’s difficult to determine exactly what that potential cost is.
“Obviously, the better your credit the lower your borrowing costs, so over time it will have an impact, but it remains to be seen what that will be,” said Jim Joseph, Oklahoma’s state bond advisor.
Oklahoma currently has about $2.1 billion in tax-backed debt, which Joseph said is among the lowest per-capita debt ratios in the nation.
Oklahoma’s Secretary of Finance Preston Doerflinger, Republican Gov. Mary Fallin’s chief budget negotiator, said the report underscores warnings the governor has been sounding for the past few years about an over reliance on one-time revenue sources and the need to increase revenues.
“We need to fix the structural budget deficit and our revenue problem,” Doerflinger said.
Fallin has proposed a major overhaul of the state’s tax system to boost revenues, including an increase in tobacco and fuel taxes, an expansion of the existing sales tax rate to dozens of services that are currently exempt, and the elimination of the corporate income tax and the state sales tax on groceries.
The ratings agency kept its outlook on Oklahoma’s overall financial picture as stable, but warned the state’s reliance on one-time sources of revenue to balance the budget makes the state vulnerable to further revenue declines.