Moody's revises outlook on Oklahoma's rating to positive

Moody's Investors Service revised the outlook on Oklahoma's Aa2 rating to positive from stable on Wednesday, citing the state's "strong reserves, low leverage, and expected budgetary balance."

The action followed S&P Global Ratings' placement of a positive outlook on the state's AA rating in July. 

Moody's said reserves will help in the management of Oklahoma's "somewhat volatile revenue performance" due to the large fossil fuel component of the state's economy.

Oklahoma Treasurer's Office

As of early August, the state had a combined $1.67 billion in its rainy-day and revenue stabilization funds, along with $2.4 billion in unspent cash and other balances, according to the Oklahoma Treasurer's Office. Meanwhile, oil and gas gross production taxes, which generated a record $1.83 billion in fiscal 2023, were down 49.4% in September.

"The state has made strides in improving fiscal governance evident in new reserves and larger fund balances," Moody's said. "Some challenges to fiscal flexibility and governance remain, however, including a supermajority requirement for tax increases, a late fiscal 2022 audit, political brinkmanship in the fiscal 2024 budget process, and ongoing political pressure to reduce revenue growth through tax cuts."

Republican Gov. Kevin Stitt's special legislative session earlier this month on tax cuts ended quickly after the Republican-controlled Senate adjourned without taking any action. Stitt wanted lawmakers to put the state on a path to eventually eliminating the income tax and to pass his proposal for a trigger law "mandating that if a state or federal court finds that some individuals, due to their race, heritage, or political classification, don't have to pay a state tax, then no Oklahoman will have to pay the tax."

The Oklahoma Supreme Court has scheduled oral arguments for January in a case related to the state's ability to tax certain Native Americans.

In a statement, Oklahoma Treasurer Todd Russ welcomed Moody's acknowledgement of the state's "strong financial position, prudent management of liabilities, and continued economic diversification." 

"Coupled with the upgrade to a positive rating from S&P in July, our office along with the governor and other leaders in the state have worked diligently to tell Oklahoma's story to the rating analysts over the last year," he said. 

S&P said there is a one-in-three chance it could upgrade Oklahoma's rating if, in part, the state demonstrates "a firm commitment to structurally balanced financial performance and sustaining reserves and liquidity at levels that we believe position the state to more readily respond to volatile swings within future budgets, particularly given that a higher proportion of the state's economy and revenue base are tied to cyclical global energy markets compared to the national average."

Moody's said an upgrade could result if the state maintains strong reserves, continues economic diversification beyond the oil and gas sector, and improves its financial flexibility, transparency, and stability. 

Oklahoma is rated AA with a stable outlook by Fitch Ratings.