DALLAS – Oklahoma City's triple-A rating was placed on Moody's Investors Service watch for a downgrade as a declining energy sector lowers sales tax revenue.
"The negative outlook reflects the challenge that management faces in light of the negative revenue trends and budget gap, and the possibility that the city's financial profile may weaken as a result," Moody's analyst Adebola Kushimo wrote in a report Friday.
Sales tax revenue, which accounts for more than 50% of the state capital city's revenue, has shown marked weakness in six of the past five months, Kushimo said.
"Slower revenues are contributing to an increase in the budget shortfall for fiscal 2016, with the shortfall increasing to $22 million by fiscal year end, June 30, from the $16 million anticipated in January," she wrote.
With a population of 620,602 and a metro area of 1.3 million people, Oklahoma City is the largest metropolitan area in the state.
In 2015, year over year growth in employment averaged 2%, compared to the 1.6% average in 2014, according to Moody's. However, the pace of growth softened in the latter part of 2015, compared with the first half of the year.
Devon Energy Corp., rated by Moody's at Ba2 with a negative outlook, recently reduced its 3,000-employee workforce by 20%. Foreclosure activity within the city is higher than the prior year, with an increase in both bank owned and auction activity, as reported by RealtyTrac.
Oklahoma City's large tax base averaged 3.7% growth in assessed value annually over the past five years, per Moody's.
In fiscal year 2016, values increased 5.3% to $5.4 billion. Wealth indicators within the city are low with a 2013 median family income equal to 90.3% of national levels, Moody's said.
The city adopted a balanced budget with an assumption of a 1.95% increase in sales taxes for fiscal year 2016. With continued negative collections compared to the prior year, officials expect sales taxes will be down by 4% or $9 million below the budget.
Underperforming revenues are contributing to a higher budget shortfall of $22 million, or 5.2% of the budget, in fiscal 2016, compared to the $16 million, or 3.8% of budget shortfall projected in January, which Kushimo called "a key driver of the revision to the negative outlook. "
The city has imposed a hiring freeze, freezing contingency spending, and halting transfers typically made for capital spending. The spending cuts should generate about $10 million in savings, Kushimo said.
The city has also delayed an additional $8 million capital outlay for streets, which was originally expected to be funded with reserves.
"The contingencies will provide some cushion," Kushimo said. "However, the city intends to draw between $10 million and $12 million from reserves reducing the general fund balance to $126.8 million (29.7% of budgeted revenues) at fiscal year end."
In a separate report as part of its Weekly Credit Outlook, Moody's noted that the state of Oklahoma's continuing revenue decline will make it tougher for the current legislative session to cover a $1.3 billion, or 19%, revenue shortfall in the fiscal year that begins July 1.
Moody's has a negative outlook on the state's Aa2 rating.
Oklahoma's February revenues fell 25% from a year ago and were 18% below forecast for the month.
The drop was largely due to declines in gross oil production and sales taxes.
"The large budget imbalance presents a significant test for Oklahoma, whose constitution requires a three-quarters supermajority of the legislature to raise taxes, something it has not done since 2005," Moody's wrote.
"Oklahoma in fact implemented an income tax cut this January and current state law calls for another cut in two years, depending on meeting certain revenue triggers," analysts wrote.
In early February, Gov. Mary Fallin proposed a budget for fiscal 2017 that would bridge a gap, then estimated at $901 million, with recurring revenues. Proposed solutions include a large increase in cigarette taxes, the closing of certain sales tax exemptions and income tax deductions, permanently redirecting agencies' fees to the general fund, and limiting the amount collected in the cash flow reserve.
Under the state constitution, when revenues are more than 5% below budget, the state cuts agency budgets 7%. Those cuts came earlier this year, with more scheduled later this month.
State officials recently decided to use $78 million of the $385 million rainy day fund to support spending on schools and prisons in fiscal 2016.
"Further use of the rainy day fund in fiscal 2017 would erode the state's financial cushion available to absorb additional revenue shocks," Moody's said.
"While Oklahoma's broad economy remains strong, we suspect it will slowly worsen over the next few months as energy producers are unable to continue high production levels at low prices."
