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S&P maintains state’s strong credit rating but waves caution flag

By TED CARTER

The fiscal distress of Mississippi state government has not kept it from maintaining “AA” S&P ratings on its $4.3 billion in general obligation bonds and $1.1 billion in bonds backed by state appropriations.

The ratings news came with a warning that the debt rating agency is concerned about the level of state spending amid sustained drops in revenue collections. Addressing fiscal problems through continued reliance on money from the state’s rainy day fund and non-recurring revenues could force a ratings downgrade, S&P Global Ratings Inc. said.

The ratings issued June 7 by S&P Global also maintained “stable” outlooks on both categories of borrowing.

An AA rating differs from the top rating of AAA by only a small degree and reflects “very strong” credit worthiness, according to S&P, formerly Standard & Poors.

Nonetheless, S&P cautions that “expenditure pressures” could be ahead for Mississippi. The result would be increasing reliance on the state’s rainy day fund to cover shortfalls in revenue collections which through the end of May exceeded $100 million.

State Treasurer Lynn Fitch said she thinks the state’s strong budgetary controls largely saved it from a ratings downgrade. “S&P was not very optimistic about our prospects for economic growth and is cautiously monitoring the impact of this year’s tax cuts and the Budget Simplification and Transparency Act,” said Fitch, referring to a late-session budget maneuver that changed how the state allocates charges to state agencies and gives the general fund money historically used for other designated purposes.

Added Fitch: “These factors make it all the more critical that Mississippi’s leaders adhere to budgetary controls that have been increasingly relaxed or waived altogether.”

Gov. Phil Bryant twice this year has tapped the rainy day fund for tens of millions of dollars. At the same time, he signed into law $415 million in tax cuts to businesses and individual taxpayers to be phased in over 11 years starting in 2018. Those cuts came on top of $350 million in cuts to businesses Bryant pushed through since taking office four years ago.

To keep Mississippi fiscally afloat, Bryant has ordered two rounds of emergency cuts and more cuts will come with the  fiscal 2017 budget which begins July 1.

At the same time, Bryant signed a general obligation bond bill for $560 million that includes $245 million in incentives to Continental Tire, a tire maker which has promised to build a plant in Hinds County just outside of Clinton.

Meanwhile, expenditure pressures could also come from potential underfunding of Medicaid and the state’s pension fund, according to S&P Global.

If unchecked, the pressure could cause Mississippi to lose its AA rating on its bonds, S&P said in its June 7 assessment report.

“If financial flexibility is compromised due to unwillingness to cut expenditures where and when needed or increased debt issuance occurs without a commensurate increase in liquidity, these could all lead us to lower the rating,” S&P cautioned.

The credit rating service advised Mississippi should not expect an upgrade in the next couple of years. For a higher rating, S&P said, the state would have to achieve greater economic diversification and improve the level of funding for its pension fund.

Fitch, a former bond lawyer and state legislator who is in her second term as treasurer, said in addition to ceasing the use of one-time money for recurring expenses, “The state should begin setting aside 2 percent of the annual revenue estimate for potential budget volatility, prioritizing replenishment of the rainy day fund, and reducing our debt burden, which S&P views as high.”

Additionally, the state must address a pension system that is funded well below the national average, she said.

“Kicking the can down the road on any of these issues puts our credit ratings at risk.”

 

 

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