State debt study details challenges to staying creditworthy
by Ted Carter
Published: March 21,2014
Rich or poor, the negative can find you.
It’s a lesson the nation’s wealthiest state — Connecticut — and its least wealthy — Mississippi — have learned after Fitch Rating Service handed the two states “negative” debt outlooks.
Mississippi actually stands above Connecticut in creditworthiness at the moment, with an AA+ rating from Fitch compared to Connecticut’s AA.
Fitch based Connecticut’s negative outlook for a new $400 million general obligation bond issuance on the state’s budget vulnerability. Even though the Northeastern state has the country highest per capita income, its economic recovery has been slow and its large and important financial sector continues to weaken, Fitch said.
Like Connecticut, Mississippi’s revised outlook from stable to negative, Fitch said, reflects the state’s slow fiscal recovery from the recession.
Mississippi’s other main shortcomings on the credit front, according to Fitch, relate to its reliance on one-time budget infusions such as money from tobacco and foreclosure legal settlements. Further contributing to the poor credit outlook is the state weak demographic profile and increasingly weak pension funding levels, Fitch said.
The ratings service also noted it is troubled by the state’s use of reserves despite a revenue recovery. The enacted fiscal 2014 budget, for instance, transfers $109 million from state reserves to cover, in part, spending for Medicaid, leaving a balance estimated of about $109.5 million, or 2.2 percent of general fund revenues.
In noting the state’s strengths, Fitch said Mississippi’s fiscal management is generally conservative and successful economic development initiatives should bolster employment in coming years.
Mississippi’s $4 billion bond debt burden is moderate, Fitch said, but above average. In fact, Mississippians carry net tax-supported debt per capita above the state’s peer group mean and median and the national mean and median, according to Treasurer Lynn Fitch.
She noted in a new Debt Affordability Study that Moody’s Rating Service says each of the state’s taxpayers covers $1,735 of the state’s debt, compared to a national mean of $1,416 and a national median of $1,074.
The treasurer said Moody’s put the fiscal 2012 debt service ratio at 7.2 percent, 38 percent above the national mean and 46 percent above the median.
In her Debt Affordability Study, Fitch noted annual debt service will run about $433 million for fiscal 2014, down from $458.3 million in fiscal 2013. Over the next 10 years, principal and interest on the state’s existing debt will be about $3.929 billion, with principal totaling $2.496 billion and interest $1.422 billion.
State debt levels have remained “fairly consistent,” in recent years, according to Lynn Fitch, though her debt study noted borrowing has fluctuated greatly over the last10 years, going from over $1 billion in 2003 and down to around $150 million in 2005. It has remained in the $600 million to $700 million range from fiscal 2010 to fiscal 2013. The totals include new money issuance as well as refunding. For instance, of the $700 million attributed to 2013, only $176 million represented new issuances.
Treasurer Fitch said refinancing of general obligation bond debt “was one of the first issues we tackled” after she took office. “The last time we refinanced a lot of variable debt into fixed rate we saved $30 million,” she said.
She compiled the Debt Affordability Study after meeting with Fitch Ratings Service and the two other debt ratings companies, Moody’s and Standard & Poor’s. The latter two preserved a “stable” outlook for the state as well as double A ratings, with Moody’s giving an Aa2 and Standard and Poor’s an AA.
“Those ‘double As’ are very, very positive,” Treasurer Fitch said.
The debt study concluded the state could borrow $1.8 billion for new buildings, highways and economic development over the next five years, all of which would go to the Bureau of Buildings, Department of Transportation and Mississippi Development Authority.
It has helped that actual General Fund collections for fiscal 2013 surpassed 2012 collections by $248 million, the treasurer said. Collections for 2014 are currently $175 million over the year-to-date estimate, she added.
Meanwhile, the state’s unfunded pension liabilities remain a sore point with the ratings services, especially with Fitch Ratings. When measured as a percent of personnel income, Mississippi’s unfunded pension liabilities are among the highest of all states, according to Fitch Ratings.
The state adopted a fixed employer contribution rate of 15.75 percent last year designed to bring the funded portion to 80 percent by 2040. Employee contributions, which have been raised steadily in recent years, total 9 percent.
Despite the higher employer contribution rate this year, a combination of fewer public workers and an increasing number of retirements caused the funded portion of the pension fund to drop to 57.7 percent as of June 30, 2013.
Combined, the share of bond debt and pension liabilities borne by Mississippi taxpayers stands at 19.4 percent of 2012 personal income, well above the 7 percent U.S. median for U.S. states rated by Fitch Ratings.
Fitch Ratings said, however, that the demands of debt and pensions on the state’s operating budget continue to be manageable.
Lynn Fitch said the adoption of the fixed 15.75 employer share last year marked “a step toward stability,” and noted the pension has been helped this year by some “phenomenal returns” on investments.
But as a voting member of the Public Employees’ Retirement System of Mississippi, Treasurer Fitch said she has concluded the state must reduce taxpayer liability for the pension fund. “We need to address that. It’s an overall complex issue that has a lot of moving parts.”
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