Budget deficit causes slip in bond rating.

Byline: Dennis Walters Bloomberg News

SALEM - Oregon's bond rating was cut two levels by Fitch Ratings because of less-than-expected tax revenue from a stalled economic recovery, leaving it one level higher than Fitch's grades on Louisiana and California.

The downgrade occurred two days after Gov. Ted Kulongoski signed into law a budget-balancing plan, including $450 million in borrowing, to erase a gap in the current fiscal year ending June 30. Oregon will collect $244.5 million less in tax receipts than it projected in December for the rest of the fiscal year, state economists said in a forecast.

``They are more reliant on one revenue source than anyone else'' among states because Oregon doesn't have a sales tax, Claire Cohen, vice chairwoman of Fitch, said. Oregon is dependent on personal and corporate income tax collections for more than four-fifths of general fund revenue.

Fitch cut the rating on Oregon's $2.2 billion in general obligation bonds to A+ from AA. Lower ratings can cut the value of existing bonds and raise future borrowing costs. Debt backed by legislative appropriations from the state's operating budget, including certificates of participation, fell to A from A+, Fitch said. The rating on lottery-backed revenue bonds stayed at A+.

Oregon is the only state with an A+ general obligation bond rating from Fitch, Cohen said. California and Louisiana are one level lower at A.

The downgrade reflects ``the state's substantial and continuing financial deterioration,'' Fitch said in a report, including income tax collections that ``are still lagging estimates'' that have been revised lower during the current two-year budget.

Oregon ``is a little more boxed in than some of the other states'' by past voter initiatives, Cohen said, including a 1990 measure that shifted more responsibility for school funding to the state from local property taxes.

State residents in January rejected a proposal for a temporary income tax increase, adding to the state's budget pressure, she added.

Oregon also has ``really been hit among the worse'' by the slowing economy, Cohen said. Its unemployment rate, the second- highest among U.S. states, rose from 4.9 percent in January to as high as 8.1 percent a year ago. It was 7 percent in December. Alaska has the nation's highest unemployment rate.

The state's Department of Administrative Services plans next week to sell $23.5 million in certificates of participation, a form of lease obligation backed by budget appropriations by the legislature. Oregon also plans to sell $450 million in bonds next month to help close the budget gap in the current fiscal year.

Oregon plans to use bond insurance for those sales, providing AAA ratings based on the financial guarantees. Some past state sales also have included insurance, which helps the bonds maintain their value and limits price declines over downgrades, analysts said.

Fitch's cut applies to the rating that applies absent bond insurance. Moody's Investors Service rates Oregon general obligation debt Aa2 and Standard & Poor's, AA. Both Moody's and S&P have a ``negative'' outlook on Oregon, meaning the credit rating is more likely to fall than stay the same over the next two years.

Tax collections in most other U.S. states are running below projections because of the nation's stalled economy and stock market losses. The states face estimated collective deficits of $112.71 billion, including figures through mid-2005 for 21 states that budget every two years, the American Legislative Exchange Council said last month.