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Q

I have a number of Ohio closed-end and open-end funds. They were down, but have recovered. I understand that the economic outlook for Ohio is pretty bad and I’m concerned about the funds. Will Ohio’s poor economic outlook affect them?

A

James A. Klotz responds:

The economic outlook and economic base of a state are major factors in the establishment of a general obligation rating. As such, trying to determine the direct impact of a state’s economic condition alone on the price of a security would be very difficult. There are many factors, including the overall market for Ohio securities, which dictate securities’ pricing.

As far as Ohio’s credit rating is concerned, the economic base is a major component for Standard & Poor’s. In its most recent assessment of Ohio (1/2/09), S&P reaffirmed Ohio’s “AA+” rating with a “stable” outlook. This rating is in the upper half of all state ratings and reflects, primarily, a long history of strong and disciplined financial management, as well as a strong and broad economic base. S&P noted Ohio’s weak economic performance in recent years, while recognizing an expanding services sector. Debt was seen as moderate, and S&P believes the state is well managed.

Debt ratings are one of the most important determinants of how securities trade, and Ohio’s debt rating is strong, despite weak economic performance. To what extent the economy alone is accountable for the price of the state’s securities is hard to gauge. But the price improvement you have seen may be related to the state’s continued confidence shown by S&P.