Oregon votes against sales tax could hurt state credit rating, treasurer Jim Hill says.

LOS ANGELES -- Oregon's credit rating is at risk if voters reject a constitutional amendment on the Nov. 9 special election ballot to establish a 5% sales tax, state Treasurer Jim Hill warned this week.

Oregon's first-ever sales tax would raise about $1.3 billion a year for public education programs, according to an analysis by the Oregon Legislative Revenue Office.

Sales tax revenues would help the state government meet its public education obligations mandated by Measure 5, approved by voters in November 1990, Hill said.

Measure 5 lowers local property tax rates and requires the state to replace revenues lost by elementary, high school, and community college districts.

"we've been told by the rating agencies there is a good chance our bond rating would be in jeopardy if we do not solve the problem" of finding replacement revenues, Hill said.

The Nov. 9 amendment, known as Measure 1, is designed to help address the problem.

If Measure 1 is defeated, Hill said, the rating agencies should withhold taking "any [immediate] action against us." He said they should first see if the Legislature develops an alternative solution to the school funding problem.

In the post-Measure 5 era, the state has successfully balanced two biennial budgets -- 1991-93 and 1993-95, Hill said. The state replaced $456 million of lost revenues to school districts in the 1991-93 biennium and has budgeted $1.57 billion in replacement revenues for the current 1993-95 biennium.

But the full impact of Measure 5, which is being phased in over five years, will be felt in the 1995-97 biennium, when state spending on education will account for more than 50% of the general fund budget.

Paul Warner, an economist in the Oregon Office of Economic Analysis, said the general fund budget for the 1993-95 biennium is $6.4 billion, with an ending balance projected at $120 million.

The revenue forecast for the 1995-97 biennium is $6.95 billion "if we give the public the same bundle of services in that biennium as we are giving them in [the current] biennium" Warner said. To provide those services without finding additional revenues would create a shortfall of "a little over $1 billion," Warner said.

While the state has strong credit factors such as a diverse economic base and low tax-supported debt, they are offset by "the increasing burden of funding education as required by Measure 5," Standard & Poor's Corp. said in a recent issue of CreditWeek Municipal. The agency has assigned a negative outlook to Oregon.

Hill, who supports Measure 1, said lawmakers must develop a plan for replacement revenue if the measure fails. If they falter in that task, "I think the rating agencies will start to say we don't have the will to solve our problems," Hill said. "And that is when we would start to look at being downgraded."

Oregon general obligation bonds are rated Aa by Moody's Investors Service, AA-minus by Standard & Poor's, and AA by Fitch Investors Service Inc.

Fitch said in a recent credit report that "the ability of the state to achieve orderly implementation of the [Measure 5] budget shift and to manage growth pressures remains a major factor in future evaluations." Oregon's credit trend is uncertain, Fitch said.

In a recent Moody's report, the rating agency said Oregon's ability to meet its obligation under Measure 5 "will be an important factor in assessing the state's credit position for several years to come."

Oregon voters, meanwhile, are seemingly reluctant to approve a sales tax to expand state revenues for education funding.

Polls show that Measure 1, which requires simple-majority approval, is likely to fail, Hill said. Oregon voters have defeated sales tax measures eight times since 1930.

Hill, a state senator for 10 years before winning election as treasurer in November 1992, said Oregon lawmakers are committed to meeting their obligation under Measure 5.

If Measure 1 is defeated, Hill said, the legislative leadership should consider calling a special session. The next regular session begins in January 1995.

The rating agencies "would look favorably" on legislators calling a special session "as quickly as possible," Hill said.

If Measure 1 should win, however, it probably will face a legal challenge, Hill said.

Under Oregon's constitution, a ballot measure can only contain a single constitutional amendment. Opponents of Measure 1 have said it contains at least two constitutional amendments.

The measure calls for a 5% sales tax and, secondly, calls for a change in the distribution of state lottery proceeds.

On Oct. 13, a county circuit judge ruled that Measure 1 violated the state constitution. However, on Oct. 21, the Oregon Supreme Court ruled that the measure would remain on the ballot because those making the legal challenge missed a filing deadline.

The Supreme Court based its decision on procedural grounds and did not rule on the constitutional question. Hill said the high court's ruling leaves open the possibility of a post-election challenge.

"This is another anchor on the measure," Hill said. "If you want to vote no, this gives you a reason."

As for Measure 5, Hill said, shock waves continue to emanate from voter approval of the amendment three years ago. Measure 5 is having "a chilling effect" on state agency debt issuance, Hill said.

"In effect, Measure 5 has imposed its own bond moratorium" on state agencies, Hill said. The agencies "are reluctant to issue debt because they know they are facing serious problems," he said.

All but a fraction of Oregon's $5 billion in general obligation debt is fully self-supporting veterans' mortgage bonds "and is no drain in our general fund," Hill said.

Only $77 million of the $5 billion in GO debt is supported by general fund revenues.

The self-imposed moratorium by state agency issuers means they are missing opportunities "to lock in these low interest rates," Hill said.

"Most projects for which we issue bonds produce infrastructure," Hill said. The projects provide "decent-paying construction jobs," he said.

Standard & Poor's said the state has reduced its outstanding indebtedness by $700 million since 1987. The rating agency said "future GO debt issuances are not expected to be significant."

On Oct. 11, Oregon issued $43 million of GO bonds in a negotiated sale for its State Board of Higher Education.

Oregon plans to issue $17.5 million of GO bonds for elderly and disabled housing during the week of Nov. 8.

"That is the only GO bond sale on the horizon," said Chuck Smith, director of debt management for the treasurer's office.

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