Fitch Removes Mississippi GOs from Watch Negative; Rates New $254.78MM GOs 'AA'

NEW YORK--(BUSINESS WIRE)--Dec. 2, 2005--The unenhanced rating on approximately $3 billion outstanding Mississippi general obligation (GO) bonds is affirmed at 'AA' and removed from Rating Watch Negative by Fitch Ratings. The Watch was assigned on Sept. 12 and reflected the effects of Hurricane Katrina. Fitch also assigns an 'AA' rating to three series of GO bonds totaling $254.78 million, selling competitively on Dec. 8.

Although a degree of uncertainty remains, the removal from Rating Watch reflects what appears to be the manageable economic and financial impact of the hurricane. Employment declines have been moderate with modest revenue impact to date, as tax revenue performance has exceeded conservative estimates largely offsetting projected losses in gaming revenues from the destruction of the Gulf casinos. Legislation allowing land-base casinos bodes well for their reconstruction, which along with general rebuilding and expected although still undetermined levels of federal support, should also provide economic stimulus.

Mississippi's credit has been characterized with a moderate debt burden and an economy diversifying away from agriculture and manufacturing with the introduction of gaming and, more recently, foreign auto investment. The recession reduced manufacturing employment and affected revenues. Strong financial mechanisms and controls and ample reserves enabled the state to withstand the recent recession. Reserves were drawn down and use of nonrecurring revenues continued, although the reliance on such is phasing out. Economic improvement also had been underway. Employment increased 0.9% in 2004 and 1.1% in August 2005, compared with the same month the previous year; however, the effects of the hurricane are reflected in October's 3.3% decline from the same month the previous year. Second-quarter personal income grew 6.3% over the same quarter the previous year, compared with 6.5% for the U.S. Per capita income levels were 74% the U.S., the lowest in the nation.

Destruction along the coastal counties was broad. The heavily damaged Gulfport, Biloxi, and Pascagoula coastal metro areas comprise about 15% of the state's population and employment base. October 2005 employment was down 24% in Gulfport-Biloxi compared to the same month the previous year. The casino industry residing along the Gulf Coast was substantially damaged, although the large casino industry in Tunica in northern Mississippi was spared. Gaming revenues make up only about 4% of revenues, with direct lost revenue to the state estimated at only about $65 million this fiscal year. The impact of the losses in associated hotel and general tourist activity and employment is greater.

The growth in Mississippi's gaming industry has provided a significant stimulus for economic growth in the state for over a decade. It has been very profitable and the passage of state legislation allowing for the construction of land-based casinos within 800 feet of the shoreline enhances prospects for recovery of this key industry. The governor formed a commission to plan the future of the region and while area redevelopment will not be completed for the spring/summer tourist season, rebuilding and reinvestment are widely expected. Three casinos are resuming modified operations in December. The largest casino, Beau Rivage, has announced its reopening on Aug. 29, 2006, the one-year anniversary of the hurricane. The leisure and hospitality industry make up 11% of employment in Mississippi. Officials have indicated that 93% of 13,000 workforce of the Northrup Grumman shipyard, the state's largest employer, is back on the payroll.

Clean-up and repair work is underway. While the loss of residential homes along the coast has been substantial, state officials have indicated that the vast majority of the affected population has remained within the state and most within the same zip code, which augurs well for economic and tax base restoration. Congressional decisions for federal support -- including public facility and infrastructure repair, capital investment, economic development, and other areas such as Medicaid coverage -- have still not been determined. The state has estimated that damage to state public facilities exceed $2.5 billion, but FEMA funds and insurance should provide for a significant portion of the costs. The state has indicated it will address any related capital or operating costs in the next legislative session in January.

Prior to the storm, the state made considerable progress in reducing a structural budget imbalance resulting from the recent national downturn, which had resulted in reduced general and special fund balances. Restrained budgets enacted over a two-year period through the current fiscal year were designed to help transition from relying on one-time resources, which amounted to only about $100 million - $150 million this year. Fiscal 2005 general fund revenues of $3.8 billion exceeded original budget estimates by over $135 or 3.7% and generated a $60 million surplus over the final revised estimate. The general fund ended fiscal 2005 with $52.5 million and currently the working cash fund has a $44 million fund balance.

Revenue estimates for the current year were very conservative; consequently, a lowered forecast for gaming revenues was offset by higher individual income and use tax estimates, resulting in only a $34 million net reduction. The revised forecast calls for 3.6% revenue growth following 7.2% growth in fiscal 2005. Through October, revenues were 1.6% above original estimates and 6.3% above the same period over the prior year. Furthermore, daily cash reports for November indicate revenues exceeded the month's estimates by $35 million or over 12%.

Liquidity is significant with over $1 billion in treasury funds plus a $500 million external line, which is effectively a safety valve as internal borrowing must be repaid by fiscal year end. Mississippi's tax-supported debt burden is 4.6% of personal income, also a moderate level, although up significantly from levels a decade ago. Amortization is rapid with nearly 69% of principal retired over ten years.

The general obligation issues now being offered include $97.07 million taxable bonds, $7.475 million Mississippi small enterprise development finance act issue 2005 series A through D, and $150.235 million series 2005C. Approximately $67.285 million is for refunding purposes.

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