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Treasurer Fitch reports State credit on ‘positive trend’

Lynn Fitch

Lynn Fitch

A State of Mississippi bond issue set to close in mid February will raise the state’s bond debt to $4.17 billion, Treasurer Lynn Fitch told legislators last week.

Mississippi ended 2014 with bond debt of $3.9 billion.

Fitch said the State’s credit is on a “positive trend” she attributed to “disciplined spending on the part of the Legislature” and “conservative issuance on the part of the State Bond Commission over the past several years.”

State government, nonetheless, has yet to shake a “negative” credit outlook Fitch Ratings placed on the State’s bonds on Oct. 31 2013, even though the AA rating for the bonds denotes “solid” and “stable” credit.

A Fitch analyst said last March the negative outlook likely would remain at least two more years.

The outlook is a big picture look at a state’s overall credit quality that provides a direction on where that credit quality is headed, said Karen Krop, a Fitch senior director who evaluated the state’s borrowing and repayment circumstances in designating the credit outlook.

“We look at trends in the direction rather than a moment when something happens. The outlook tends to be two or three years.”

Mississippi’s reliance on one-time revenues to avoid budget shortfalls, a weak demographic profile, a tendency to use cash reserves despite an improving economy and an increasingly weak pension funding level led Fitch Ratings to designate the negative credit outlook.

All three represented a direction that must see at least some change for the return to a stable outlook, according to analyst Krop.

Meanwhile, the other two ratings services – Moody’s Investors Services and Standard & Poor’s have kept a “stable” outlook on Mississippi’s credit worthiness. Standard & Poor’s has maintained an AA rating on Mississippi since 2001. Moody’s gives state government an Aa2. Both the Moody’s and S&P ratings represent a very strong capacity to meet financial commitments.

Treasurer Fitch noted in a press statement last week that state government credit standing has “room for improvement,” but has helped itself significantly through reducing reliance on “one-time” funds. “Our ultimate goal is to move from an AA-rated state to an AAA state,” she said, emphasizing the importance of using recurring revenue to cover recurring expenses.

Treasurer Fitch released a Debt Affordability Study last spring that projected Mississippi can borrow $1.8 billion over the next five years for new buildings, highways and economic development. She expects to issue an updated debt study in March.

The treasurer said state government has seen a continued decline over time in existing debt service payments. Its currently spends 7.01 percent of its budget on debt service.

Treasurer Fitch’s $1.8 billion debt affordability figure is seen as far short of the state’s actual borrowing needs over the next five years. How far beyond that level the state goes could hinge on continued increases in revenue. Collections for 2013 surpassed 2012 by $248 million. Mississippi tax collections are running $91 million ahead of projections just over halfway into the fiscal year, House Appropriations Committee Chairman Herb Frierson said last week.

Looking ahead, state coffers will be minus large chucks of revenue from ad valorem taxes on business inventories.

In 2012, legislators approved new tax credits to defray the ad valorem taxes. The hits to the General Fund began in fiscal 2014 with a $7 million loss, according to the state Department of Revenue.

In 2015, the loss is projected to grow to $14 million, as the tax credit increases from $5,000 to $10,000 per business location, the DOR says.

With the credit increasing from $10,000 to $15,000 per location in 2016, the General Fund is projected to lose another $21 million.

The big hit comes in 2017, with a General Fund loss of $126 million, as the tax credit increases to the amount of inventory tax a business location is due to pay, the DOR says.

Inventory tax is the property tax paid on a business’ inventory, regardless of the size of a business. Inventory includes raw materials, goods in progress, and the inventory of finished goods for sale.

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