OKLAHOMA CITY – S&P Global Ratings has affirmed its “AA” rating on the state’s general creditworthiness, but revised its opinion of the state’s fiscal health from stable to negative.
[T]here is at least a one-in-three chance we could lower” Oklahoma’s bond rating, S&P reported May 11. The negative outlook “reflects our view that ... the state is likely to grapple with considerable budget uncertainty due to a steep decline in revenue collections...”
S&P said it might lower the state’s long-term rating “if Oklahoma is unable to implement revenue or expenditure changes to structurally align its budget, and the state relies primarily on non-recurring sources and the use of reserves as stopgap measures to balance future budgets or fund new programs.”
S&P said it might “further adjust the rating downward based on the expected length and severity of the structural imbalance.” A protracted statewide recession due to contraction in the energy sector “could intensify this downside risk, particularly if Oklahoma’s core wealth and income metrics materially weaken relative to the U.S. level.”
S&P said its negative outlook “reflects difficult ...decisions ahead for Oklahoma as it deliberates the Fiscal Year 2021 budget, and will be challenged to operate within constitutional and practical budget limitations to close structural gaps beyond the next fiscal year.”
While Oklahoma entered FY2020 with its highest reserve levels in state history, projected budget conditions for FY2021, “if unmitigated,” would expend much of the state’s $1.035 billion in rainy day balances...at the end the next fiscal year, S&P wrote.
Oklahoma is “likely to be more vulnerable” to a national economic recession “due to the indirect economic fallout from COVID-19 and the significant supply and demand imbalance in global energy markets,” S&P wrote.
“[W]e consider the state to be entering a new period of heightened fiscal uncertainty and potential credit deterioration, not unlike what it went through over a two-year period beginning in 2015,” S&P Global Ratings predicted.