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UPDATE: S&P latest to hit Mississippi with negative credit outlook

 

By TED CARTER

It could have been worse.

That’s the assessment Mississippi State Treasurer Lynn Fitch made after a Standard & Poor’s credit outlook downgrade to negative for Mississippi’s general obligation bond debt.

Mississippi’s gets to keep its AA rating from S&P Global Ratings, but the ratings agency doesn’t see a fiscal turnaround ahead for the state any time soon.

“The outlook change reflects our view of continued weakness in the state’s revenue trends and relatively slow economic growth, and our expectation that Mississippi could continue to experience budget pressures as it manages through budget reductions and the incremental revenue loss from the scheduled implementation of recent tax changes,” S&P said in the downgrade notice issued May 3.

“We’re fortunate it wasn’t worse,” Treasurer Fitch said in a press statement just after S&P Global issued the downgrade.

Fitch, a Republican, has been critical of the GOP-controlled Legislature’s borrowing and budget decisions for the past couple of years. Unless practices change, Mississippi can expect yet more downgrades, warned Fitch, a former bond attorney who won the treasurer’s post in 2011 and won re-election in 2015.

Fitch’s press statement noted Mississippi’s progress in lowering its jobless rate and initiating positive economic growth, but added, “We are still lagging behind most of the nation.”

And with Mississippi’s stagnant population growth, “It’s common sense that investors would have concerns,” she said.

Standard and Poor’s put Mississippi on notice with the new assessment report, said Fitch. Odds are strong for further erosion of the state’s credit worthiness, she added.

Mississippi, she said, has a “likelihood of one in three of downgrade in the next two years, so we have time to turn things around before more serious consequences for taxpayers.”

The negative outlook could remain as Mississippi lawmakers continue a lengthy series of budget cuts and the approximately $425 million in business and individual tax cuts begin kicking in next year, Standard & Poor’s said in its outlook downgrade notice.

S&P’s May 1 outlook revision also brought a criticism of funding levels for the state’s public employee retirement fund.

Until now, the credit ratings agencies have noted concerns about the Mississippi Public Employee System, or PERS. But S&P’s new outlook downgrade says the declining trajectory of the pension funding is “likely to require future increases to pension contributions in an already tight budget environment.”

Fitch said she does not want to see similar criticisms of PERS in future assessments from S&P and other credit ratings services, principally Moody’s and Fitch. “As a trustee of the PERS Board, I will do whatever I can to ensure that S&P never again says that we are lagging in or responsiveness to a declining funded ratio.”

Based on the most recent actuarial valuation, PERS is 60 percent funded, the retirement system said in its 2016 annual financial report. However, total assets of the $23.9 billion fund fell by more than $750 million in the fiscal year that ended last June, The Associated Press reported.

The system pays out nearly $2.4 billion in annual benefit payroll. The state and other public agencies in the PERS system pay 15.75 percent of payroll for a pension contributions benefit. PERS officials touted the 2013 legislatively approved increase in employer share as a way to reach 80 percent funded liability by 2042.

Employee contributions are 9 percent, a level in place since 2010.

Analysts say they are uncomfortable with funded ratios that drop below the high 60s and have warned states that continued declines in funded ratios could lead to downgrades in credit ratings. For the states, downgrades could significantly increase the cost of borrowing money.

In its May 1 outlook downgrade, S&P noted Mississippi’s current budget has been revised four times to cover revenue shortfalls and a forecasting error earlier in the year. Reaching a balanced budget required a series of cuts to the budgets of most every state agency and department the last two years.

Yet more cuts may be necessary to avoid a downgrade from the current AA rating, S&P warned in its recent report. “If financial flexibility is compromised due to the state’s 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,” the credit rating agency said.

S&P said if the state can manage through the scheduled tax cuts while maintaining good reserve and liquidity levels and structural budgetary balance, it could revise the outlook to stable.

Moody’s maintained its Aa2 rating on Mississippi’s general obligation bonds in August, but downgraded the credit outlook to negative.

A month before Moody’s lowered its outlook, Fitch Ratings Service downgraded Mississippi’s general obligation debt to AA from AA+.

Reports from both Fitch and Moody’s cited above average debt levels and continued sluggish economic growth.

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