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Rating firms’ visit will assess state’s bonding strength after setbacks

bonds-sidebarBy TED CARTER

Representatives of the nation’s three major credit ratings agencies will be in Jackson later this month to begin grading the credit strength of the state’s approximately $562 million general obligation bond for fiscal 2016-2017.

The visit comes after Fitch Ratings Service recently downgraded the state’s current general obligation and revenue bonds and Moody’s put a “negative” outlook on the debt. Fitch’s action came in mid-July and Moody’s in early August.

The third agency, Standard &Poor’s, warned in June a rating drop would be likely if the state fails to cut spending or back its new debt with “a commensurate increase in liquidity.”

The visits also come as a joint legislative committee studies a possible revamp of Mississippi’s tax structure to help avoid sagging revenue collections becoming an annual occurrence. Collections fell more than $100 million below estimates at the end of the fiscal year and slid $11 million below estimates in July, the first month of the new fiscal year.

Whatever fixes the joint committee tries, a record $415 million of phased-in tax cuts will be a backdrop. Those cuts phase out the state’s corporate franchise tax over 12 years and lower income taxes by $125 million over the same period.

The franchise tax puts a levy of $2.50 on every $1,000 of a businesses’ assets. It generated about $260 million in fiscal 2015, according to the Department of Revenue.

Mississippi’s taxes on business represented the lone tax category to show an increase in collections over the same month of 2015. Those taxes were up $2.3 million, or 14.5 percent.

The whopper-size tax cuts of 2016 followed four years of tax rollbacks, mostly for businesses, that have decreased state tax collections by an estimated $350 million annually.

State Treasurer Lynn Fitch in late spring strongly criticized the state’s bond bill, saying many of the spending items did not fit statutory requirements for longevity value and some items inappropriately provided operational funds to public entities around the state. However, she stopped short of criticizing the tax cuts, referring instead to state economist Darrin Webb’s assessment that the cuts have contributed to shortfalls in revenue collections

Fitch has since edged closer to placing some fault with the business tax cuts fellow Republican Phil Bryant has pushed through in his four-plus years as governor. In an email last week, Fitch indicated state leaders picked the wrong time to slash away at revenue sources.

“I support tax cuts as a tool to help struggling Mississippi families and businesses, as well as to spur economic growth.  But, they are never enacted in a vacuum,” said Fitch, a former bond lawyer in her second term as treasurer.

She suggests a bigger picture approach.

The holistic approach to fiscal policy she wants would address:

» Declining revenues

» Strained agency budgets

» Three dips into the rainy day fund

» Continuing shortfalls at PERS and MPACT

» A fiscal year starting at a deficit

» An economy that continues to be sluggish under the weight of federal policies.

PERS is the Public Employees’ Retirement System and MPACT is the Mississippi Prepaid Affordable College Tuition Plan,

Fitch said the saving grace in the two downgrades is that the rating agencies still consider Mississippi’s fiscal safeguards to be strong.  But that could also change, especially if the kind of tax cutting the state has done the past few years continues, according to Fitch.

“We must be very measured and conservative in our fiscal policies and that includes our approach to cutting taxes,” she said.

Treasurer Fitch noted that in S&P’s June warning to investors, the rating service said it is cautiously monitoring the impact of this year’s tax cuts. It is also closely assessing 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.

How much more Mississippi must pay to cover the new bond issue will likely hinge on conclusions the ratings agencies reach about the state’s fiscal strength in their visit later this month. They’ll take looks at the ratings drop from Fitch and the Moody’s outlook switch to “negative” from stable in assessing the state’s $308 million bond bill for 2016 as well as $254 million to cover incentives for Continental Tire and TopShip.

Despite the downgrades in Mississippi bonds, Fitch maintained a “stable” rating outlook on the debt.

Moody’s did the opposite in an Aug. 7 assessment that placed a “negative” outlook on the debt. “The negative rating outlook reflects ongoing revenue weakness and below-average economic growth,” Moody’s said, and noted the state’s growing reliance on a rainy day fund to keep state finances afloat.

It further noted final numbers for July killed whatever hopes state officials had for signs of a stop for sliding tax collections. “Revenues continued to underperform in July, the first month of fiscal 2017, which… may lead to a worsening in the state’s fiscal position,” Moody’s said.

The rating service predicted that the state will likely address its fiscal weaknesses with further budget cuts and use of one-time revenues, like the rainy day fund, which could leave it with less financial cushion than peer states.

In its early July warning, Moody’s analyst Julius Vizner said he estimated the state’s rainy-day fund balance will drop to 1.4 percent of total revenues from 6.7 percent just two years ago.

The 1.4 percent of total revenue marks the lowest percentage of reserve money for the state since 2003, according to Moody’s spokesman David Jacobson.

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