Fitch’s ‘negative’ outlook for state credit in place for a while
by Ted Carter
Published: March 28,2014
Mississippi can expect Fitch Ratings Service to maintain its “negative” outlook on the state’s credit for at least another two years, says Karen Krop, a Fitch senior director who evaluated the state’s borrowing and repayment circumstances in designating the credit outlook on Oct. 31.
It’s a big picture look at a state’s overall credit quality that provides a direction on where that credit quality is headed, Krop said in an interview last week.
“We look at trends in the direction rather than a moment when something happens. The outlook tends to be two or three years.”
Should the negative outlook cause Mississippi to pay more for the money it borrows?
The answer, Krop said, depends more on the conditions of the bond market at the time a state seeks to sell bonds. And while a ratings service does not involve itself in bond pricing, a state’s credit outlook is a factor — but only one of several, she said.
“Presumably your credit quality affects where bonds price, and a lot of other things affect it, too,” Krop noted.
Treasurer Lynn Fitch says she does not expect the revision of Fitch’s outlook to change the cost of the state’s financing “at this time.”
The key, she said, is to implement the “suggestions and changes that are of concern for them,” and added: “We will continue to work with the State Bond Commission members and the state Legislature to ensure all the concerns of Fitch Ratings Service are addressed.”
To that end, the Joint Legislative Budget Committee was expected to reach a three-year goal of limiting the spending of recurring revenues to recurring expenses. Whether that will happen hinges on state revenue projections, according to Lt. Gov. Tate Reeves, chair of the Joint Legislative Budget Committee. Reaching the goal, Reeves said, “would be a significant accomplishment considering we inherited a budget that spent more than $450 million in one-time money on recurring expenditures just three years ago.”
While Fitch Ratings lowered the state’s credit outlook from stable to negative, it and rating services Moody’s and Standard and Poor’s all maintained Mississippi’s “double A” rating.
That’s “very, very positive,” Treasurer Fitch said in a mid March interview after releasing a Debt Affordability Study that projected Mississippi can borrow $1.8 billion over the next five years for new buildings, highways and economic development.
The $1.8 billion is seen as far short of the state’s actual borrowing needs over the next five years. How far beyond that level the state goes could hinge on continued increases in revenue. Collections for 2013 surpassed 2012 by $248 million; 2014 collections are currently $175 million over the year-to-date estimates, according to Treasurer Fitch.
Mississippi’s reliance on one-time revenues to avoid budget shortfalls, a weak demographic profile, a tendency to use cash reserves despite an improving economy and an increasingly weak pension funding level led Fitch Ratings to designate the negative credit outlook.
All three represented a direction that must see at least some change for the return to a stable outlook, according to analyst Krop.
One-time money also can refer to the $90 million to $100 million that the state gets each year from a 1997 lawsuit settlement with tobacco companies. The money is received annually and will be for another eight years until the state’s $3.6 billion share is depleted. It is viewed as one-time money because by law it is not supposed to go to fund recurring expenses.
Additionally, by law the Legislature is not supposed to spend 2 percent of anticipated revenue each year. When the Legislature changes the law to spend the 2 percent set aside, it is identified as one-time money, the Associated Press said in a 2012 analysis of the state’s dependence on stopgap money.
Especially worrisome to Fitch Ratings, Krop said, is the “structural gap in your Medicaid.
“It needs to be addressed.”
Legislators in recent years have diverted as much as $300 million from the Department of Transportation’s highway maintenance fund to cover Medicaid shortfalls.
That sort of stopgap budgeting does not go unnoticed by creditors and credit ratings services, according to Krop.
In the meantime, with each annual convening of the Legislature, lawmakers face new demands to trim revenue sources.
In 2012, legislators approved new tax credits to defray ad valorem taxes on business inventories. The hits to the General Fund will begin in fiscal 2014 with a $7 million loss, according to the state Department of Revenue.
In 2015, the loss grows to $14 million, as the tax credit increases from $5,000 to $10,000 per business location, the DOR says.
With the credit increasing from $10,000 to $15,000 per location in 2016, the General Fund is projected to lose another $21 million.
The big hit comes in 2017, with a General Fund loss of $126 million, as the tax credit increases to the amount of inventory tax a business location is due to pay, the DOR says.
Inventory tax is the property tax paid on a business’ inventory, regardless of the size of a business. Inventory includes raw materials, goods in progress, and the inventory of finished goods for sale.
This year legislators are considering business tax bills the DOR projects could drain more than $300 million a year from the state’s General Fund. Supporters of the bills — HB299 and SB287 — argue the DOR has greatly inflated the cost to the General Fund the bills represent. The DOR, however, insists it has thorough documentation and data to support its $300 million-plus cost projection.
The bills initiate new standards for the DOR or for business taxpayers to follow when applying such alternative methods that base a tax on revenues earned in the state.
The bills would force the DOR — or a taxpayer — to present “clear and convincing evidence” that the statutorily authorized “cost-of-performance-based” apportionment method does not fairly represent the taxpayer’s activity. The measures would also require the DOR to present “clear and convincing evidence” to support requests for out-of-state companies with operations in Mississippi to provide the DOR with combined tax returns.
Meanwhile, Fitch Ratings will watch Mississippi’s revenue and borrowing trends. “We’ll need time to look at it to see how the trends develop,” Fitch’s Krop said.
Treasurer Fitch stressed in an interview that a negative outlook from a ratings service is not meant as a scarlet letter. Many states end up with that kind of designation for many different reasons, she said.
Krop agrees. Fitch Rating’s recently designated a negative outlook for a $400 million bond issue by Connecticut, the nation’s wealthiest state per capita. It based the outlook on the state’s weak recovery from the Great Recession.
“We’re an equal opportunity” ratings service, she said.
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