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Fitch puts stable outlook on state bond refinancing

Ratings agency leaves ‘negative’ outlook in place for other debt

 

By TED CARTER

Successful refinancing of $226.5 million in general obligation bonds in the next few days could erase a $14 million debt-service deficit legislators failed to address in their last session.

The refinancing would apply to general obligation bonds issued in previous years.

The state’s hopes for a successful refi got a boost from Fitch Ratings Service Monday with Fitch choosing not to assign a “negative” outlook to the bond sale. The ratings agency placed the negative outlook last October and said early in 2016 it expected to keep the downgraded outlook in place for at least another two years.

The stable outlook “is just for this issue,” said Michelle Marston, chief of staff for Mississippi State Treasurer Lynn Fitch. She said the treasurer’s office thinks meetings with Fitch and other credit rating agencies in September helped to show the state is serious about strengthening its debt repayment abilities.

The negative outlook Fitch has placed on state debt for the past 12 months is not actually detrimental to the pricing of the debt, according to Marston. “The outlook basically says, ‘We’re watching you,’” she said.

Karen Krop, a Fitch senior director who evaluated the state’s borrowing and repayment circumstances in designating the lower credit outlook on Oct. 31 2015, said the outlook is a big picture look at a state’s overall credit quality. It provides a direction on where that credit quality is headed, Krop said in an interview soon after the outlook change.

Gov. Phil Bryant’s elimination of a $56 million shortfall crated by a legislative revenue forecasting error is believed to be a big factor in getting the stable outlook on the refinancing, Marston said. Bryant achieved the savings through 1.6 percent cuts in most state departments and agencies.

“They know he is not afraid to go ahead and use that authority he has,” Marston said of Bryant.

In August, Fitch downgraded about $4 billion in Mississippi’s outstanding debt from AA+ to AA.  The AA is considered quality debt but with a slightly higher risk that the previously held AA+ rating.

The $226.5 million bond refinancing is expected to provide the $14 million in savings the state needs to cover a shortfall that occurred earlier this year in debt repayment allocations. The shortfall originally stood at about $31 million but transfers of various state funds helped state official whittle down the total, according to Marston.

A remaining sore spot between bond rating agencies and Mississippi’s legislators is the waiving of the “2 percent rule.” When the rule is followed, the state spends 98 percent of the money it has allocated in a fiscal year and leaves the rest to cover unanticipated shortfalls. Legislators waived the 2 percent cushion in 2015 and again this year.

“Had they not done that, the $56 million error wouldn’t have been a problem,” said Marston, whose boss, Treasurer Fitch, has often criticized legislative leaders for what she deems “abusive” borrowing and revenue allocation practices.

Mississippi limped to the end of its fiscal year on June 30 with revenue collections for the year falling nearly $89 million below legislative projections. To offset the shortfall, Gov, Bryant raided the rainy day fund for a this year and ordered the $56 million in cuts.

The three raids on the reserve fund in the last fiscal year totaled $110 million and left Mississippi with its lowest rainy-day fund level in 13 years. Moody’s Investors Service followed by deeming the drawdowns a “credit negative.”

Moody’s took the additional step in early August of revising the state’s debt outlook from stable to negative.

In the meantime, state revenue collections continued to sag in July, coming in $9.7 million below projections, according to the Mississippi Legislative Budget Office. August collections fell $3 million below projections. September brought a sizable rebound, however, with collections totaling $16.2 million above projections. October totals are not yet available.

Mississippi relies on sales taxes for 37 percent of its 2016 general fund revenues; personal income taxes for 32 percent and corporate income taxes for 11 percent.

In assessing Mississippi’s economic health in advance of this week’s planned $226 million bond refinancing, Fitch said state debt liability is moderate but “well above average for a U.S. state.”

On the upside, Fitch noted Mississippi’s economy continues to diversify beyond its historical concentration in manufacturing and some successful economic development initiatives should bolster employment in the coming years.

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