Did you answer Oregon? If so, you’re correct.
Now that we know the political shenanigans threatening nonpayment of US debt played by the Tea Party, as well as two of our local Congressional representatives, resulted in the downgrade of our national debt from AAA to AA+, most of us know that there are negative consequences to having a less than perfect credit rating. The State of Oregon’s credit rating, however, is not a result of politics. It’s the result of how we manage our money.
According to Barron’s Magazine, from data gathered from Janney Capital Markets, Evercore and the U.S. Census Bureau, there are seven criteria that explain state’s ratings from AAA to A-. Oregon, with its AA+ rating, ranks in the middle of the pack, 21st overall.
On a positive note, Oregon’s reliance on Federal and Medicaid spending is lower than most states’. Its ability to collect taxes is good – unless you are one of of its higher earners or businesses that had its taxes raised. Finally, we have most of our state pension obligations covered.
On the down side, Oregon relies heavily on bond obligations to pay for itself, and has relatively high levels of both unemployment and housing problems.
Here are the details.
Reliance on Federal Spending
The first criterion is the percentage of Federal spending to Oregon’s gross domestic product (measured in terms of its 2008 fiscal spending). The average for all states is 19.7%. Oregon’s is lower, 17%. A lower reliance on Federal spending is good because Federal belt tightening in our current trend of spending cuts is likely to lower this spending, and the more a state relies upon it, the more vulnerable to those spending cuts it will be.
The second category considered is the percentage Medicaid represents to total state spending. Again, Oregon’s 14% is lower than the 21% state average, and this, too is good. The Patient Protection and Affordable Care Act will require those without health insurance to enroll (with the Federal government paying for approximately half the additional cost). With medical costs rising at 9.5% this year, coupled with the additional enrollment for the uninsured, Oregon’s increased Medicaid costs will rise less than most states’.
Increase in Tax Revenue
The third consideration is the increase in taxes collected. Oregon’s tax receipts are up 16.2%, significantly more than the 10% average. Tax hikes represent the reason for this increase in most states, Oregon included.
In the fourth criterion, bond issues (debt) as a percentage of Oregon gross domestic product, Oregon definitely ranks on the high side, at 9.28%. Oregon has higher tax-backed debt than any AAA or AA+ rated state, and holds the more of this debt than any other state besides Connecticut, Hawaii and Maine.
Funded State Pensions
Next, is the issue of the amount of money owed to state pensions. Only Wisconsin and New York have all of its state obligation to retired pensioners covered. Oregon ties for 10th in all 50 states, with 86% of its pension obligations covered.
Foreclosures and Delinquent Home Loans
6% of Oregon’s homes are in trouble. Portland is one of seven metropolitan areas in which serious delinquencies continue to increase. That fact is directly related to unemployment, our final topic.
Oregon’s June unemployment rate was 9.4%, higher than the U.S. 9.2% rate. As mentioned above, there is a clear relationship between unemployment and housing foreclosures and delinquencies.
Our personal and business tax system is not business friendly. Further, a preponderance of our businesses are cyclical in nature, i.e., those that do very well in an economic upturn, and very badly in economic downturns. Instead of instituting policy to improve its general business climate, Oregon has chosen to specialize its investments in green technology, with spotty results to show for it.
Its reliance on bond issues to solve its fiscal problems has resulted in a very high level of tax-backed debt.
These problems, while still at a manageable level, must be addressed if this state is to be considered AAA. Otherwise, like the US, Oregon will continue to “kick the can down the road” instead of facing its fiscal problems.