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Ratings bump hits where it hurts

• Three investor agencies put negative spin on state's borrowing ability and interest rates

Former Oregon Gov. John Kitzhaber couldn't sound the alarms loudly enough: Lowered bond ratings, he said repeatedly during his administration, could send the state into an economic coma.

'I actually vetoed several spending bills in March special sessions because I was concerned about our bond ratings,' he said this week after Fitch's Investors Service and Moody's Investor Service downgraded their assessments of the state's ability to repay its bonds.

'It was a consistent theme. The writing was on the wall for a long time: We were essentially on a credit watch. And now, they've cut the ratings.'

Along with the Fitch and Moody downgrades, a third agency, Standard & Poor's Rating Services, said it holds a 'negative' outlook of the state's rating ability.

While the service has no immediate plans to downgrade Oregon's top-level rating, the negative outlook means that any new assessment would be downward, S&P spokesman Christopher Mortell said.

The developments could have dramatic short- and long-term effects. Because a lower rating labels Oregon as a higher loan risk in the financial markets, the state will have to pay higher interest rates to attract investors.

Oregon, thus, could dig even deeper deficits, which would make it difficult to fortify the fallen bond ratings. It also would affect local businesses because the state cannot fund capital projects such as road and bridge projects as easily.

'It's an enormous impact over time,' Kitzhaber said. 'It'll cause big problems downstream.'

The rating agencies made it clear that the state's financial squeeze is not a temporary problem but bespeaks fundamental flaws in the state's tax system.

'When Wall Street looks at Oregon, it sees a one-legged stool,' said State Treasurer Randall Edwards. 'They're pointing out some fundamental problems they see with the state.'

Fitch, on March 7, lowered the ratings on the state's outstanding $2 billion-plus worth of general obligation bonds from AA to A+.

Moody, on Monday, downgraded its rating on $2.3 billion worth of the state's general obligation bonds from Aa3 to Aa2.

The bond ratings are the bleakest since those recorded in the mid-1980s, when financial problems within the then-floundering Department of Veterans Affairs also slashed the state's credit marks.

Chuck Smith, director of the state's debt management division, said the ratings will first apply to a $450 million bond measure that will go out for bid in the next three weeks.

The bond measure will go toward helping the state balance its budget, meaning it will fund appropriations across the board.

Kitzhaber called it 'essentially a $450 million borrowing measure, and we'll be paying for that over 10 years. Our bond rating will push more costs out into the future. It's a strategy that Ñ I'm not familiar with any successful business that uses it.'

Smith said the downgrade also means that Oregon's interest rates on bonds will rise by a quarter of 1 percent.

The increase will translate to 'millions of dollars in extra interest over the life of these bonds,' he said.

The state's dreary financial picture shows no sign of lessening.

Ruth Corson Maynard, Fitch's New York-based analyst, said her critique of Oregon's prospects stem from projected revenue figures, predicted to fall about 20 percent lower than original estimates.

'The economic recovery is slow because the state is heavily reliant on income taxes, both personal and corporate,' Maynard said. Economic weakness has had a serious impact on those potential revenues, she said.

Ray Murphy, a senior credit officer for New York-based Moody, also blasted the state's 'kicker' requirement, which returns excess taxes to citizens if Oregon exceeds annual revenue projections by 2 percent.

'During the economic expansion of the late 1990s, Oregon, unlike most other states, was unable to build up its reserves because of the kicker,' he said, in explaining Moody's lowered rating.

Rep. Randy Miller, R-Lake Oswego, chairman of the House Ways and Means Committee, took issue with Maynard's implication that an economy reliant on income taxes, as opposed to a mixture of levies including a sales tax, has harmed the state.

Miller, one of Salem's most ardent tax measure critics, said occasional e-mails refer to a sales tax as 'a worthwhile pursuit.' But, he said, 'for those of us with a history in the state, we know that it's something that voters, by a wide margin, aren't interested in.'

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