NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the $55 million Board of Public Buildings (BPB) of the state of Missouri special obligation bonds, series A 2015.
The bonds are expected to be sold through competitive bid on or about March 18.
The Rating Outlook is Stable.
SECURITY
The bonds are special obligations of the board, payable from annual state general assembly appropriations.
KEY RATING DRIVERS
APPROPRIATION SECURITY: Bond payments require annual state legislative appropriation, resulting in a rating one notch below the state of Missouri's 'AAA' GO rating. The state, acting through its Office of Administration, covenants to request annually an appropriation from the Missouri legislature to fund rental payments sufficient to pay debt service on the bonds.
CONSERVATIVE FINANCIAL MANAGEMENT: Missouri has a long record of conservative operations and has consistently displayed a willingness and ability to support fiscal balance, even after incorporating recent tax changes and a revenue shortfall in fiscal 2014. The state's financial flexibility and liquidity position remain healthy, providing a cushion in the event of additional volatility. Missouri's rainy day fund was fully funded throughout the recession and remains so today.
LOW DEBT LEVELS: The state's debt burden is low with minimal GO debt. Bonds issued for transportation needs represent just over 70% of total state net tax-supported debt.
STABLE ECONOMIC PROFILE: While the state's economy generally tracks in a similar direction as the nation, employment gains since the recession trough have been somewhat less robust than the U.S. experience. Positively, recent employment growth has been widespread covering nearly all of Missouri's metro areas and industrial sectors. Missouri's economy remains broad and diverse, with overall sector distribution very similar to the national distribution.
RATING SENSITIVITIES
FUNDAMENTAL CREDIT CHARACTERISTICS: The rating is sensitive to shifts in fundamental credit characteristics, including the state's stable economic profile, proactive and conservative financial management, and very manageable long-term liabilities.
IMPLEMENTATION OF TAX CUTS: Given the state's constrained revenue-raising ability under the Hancock Amendment, Fitch will closely monitor the state's ability to manage the revenue implications of a significant multi-year income tax reduction planned for implementation during fiscal 2017 while maintaining fiscal balance and a stable reserve position. Further, any indication that the governor's concerns about the statutory ambiguity of the legislation are valid would trigger negative rating pressure.
CREDIT PROFILE
Missouri's 'AAA' GO rating reflects a low debt burden, historically conservative financial operations, and a broad and diverse economy. The state has a long record of maintaining fiscal balance through spending restraint. The budget must be balanced, and the governor has strong constitutional authority to withhold funds as needed which he recently utilized. Additional financial flexibility is provided by a budget reserve fund (BRF) equal to 7.5% of net general revenues; notably, reserve funds were not drawn on in the recession. Proceeds of the bonds will be used to advance refund certain outstanding maturities of BPB series A 2011 bonds.
PRUDENT FINANCIAL MANAGEMENT
Although state revenues were negatively affected during the recession, the state consistently acted to maintain balance. In both fiscal 2009 and 2010, the state revised revenue forecasts downward mid-year, and concurrently implemented multiple rounds of spending cuts. As Missouri climbed out of the recession in fiscal 2011 and 2012, the state maintained tight expenditure controls even as revenues recovered and the state benefited from the tail-end of federal stimulus funds distributions. Missouri ended fiscal 2013 on a strong note, with surpluses adding to reserve balances. The fiscal year 2013 budget included several minor one-time budget solutions, including $45 million from debt restructuring and use of $40 million in monies from the national mortgage settlement to fund higher education. The state ended the year with reserves in its general fund balance and BRF totaling $951 million, covering a solid 11.7% of final fiscal 2013 net general revenues.
Fiscal 2014 (ended June 30) performance trailed the state's January 2014 revenue estimate with weakness in the key revenue sources of personal income and sales taxes. Revenues were in line with the originally enacted budget, thereby mitigating any need for significant balancing actions. Missouri's fiscal 2014 gross general revenue collections increased a weak 0.2% year-over-year (yoy) to $9.3 billion versus the January revised revenue estimate of 3.3% growth and the enacted budget estimate of a 0.2% decline.
The state attributes the weakness primarily to a much sharper than anticipated decline in capital gains related collections after last fiscal year's acceleration of income due to federal tax increases. Gross personal income tax revenues (usually between 55%-60% of general revenues) declined 0.2% in fiscal 2014 versus the January estimate of 3.2% growth. Gross sales tax revenues (generally 17%-18% of general revenue funds revenues) increased 3.8% yoy, which was slightly below the January estimate of 4.2%. The ending general fund balance of $222 million was down from $447.1 million the prior year, but the budget reserve fund remained fully funded at $557.2 million, or 7.5% of prior year net general revenue collections.
The unanticipated shortfall in fiscal 2014 pressured the fiscal 2015 budget which the legislature built on an estimate of 2% yoy growth in fiscal 2014. The enacted fiscal 2015 budget assumed 4.2% growth on the legislature's estimate for fiscal 2014 net general revenues, and increased spending in key categories including K-12 and higher education. Given the yoy revenue decline in fiscal 2014, the 2015 budget required unrealistic 11% yoy growth. To address the likely revenue gap, the governor implemented spending restrictions and vetoes on the fiscal 2015 budget. The governor released a portion of the spending restrictions, leaving $502.4 million in holdbacks in place as of Jan. 22 on the enacted fiscal 2015 general revenue fund operating budget of $8.7 billion. Revenue growth through the first eight months (February) has been 5% yoy, slightly ahead of the recently adopted consensus 4.6% estimate.
MODEST INCREASES IN EXECUTIVE BUDGET
The governor's fiscal 2016 executive budget relies on the consensus estimate of 3.6% and includes modest increases in K-12 and higher education operating funds, and between $200 million-300 million in new bond authorizations. The capital proposals include the state's first GO issuances in several years, for water and stormwater control projects. As in prior years, the governor is also advocating for Medicaid expansion under the federal ACA, estimating over $100 million in additional revenues and savings from enactment. The governor also proposes several other more modest revenue generating legislative measures including a tax amnesty package and reform of collections efforts, which combined with Medicaid expansion could yield an estimated $178 million for additional funding primarily for education and healthcare. To date, the legislature has not been supportive of Medicaid expansion.
INCOME TAX CUT COULD REDUCE OUT-YEAR REVENUES
A significant income tax reduction package enacted this year (over a gubernatorial veto) could reduce out-year revenues absent economic growth, and Fitch expects the state will take appropriate action to maintain fiscal balance largely through expenditure management. Under Missouri's Hancock Amendment constitutional provision, the state's ability to raise revenues beyond a generally narrow limit is subject to voter approval or a gubernatorial emergency declaration and approval by two-thirds of the each house of the legislature. The tax cut legislation reduces income tax rates beginning Jan. 1, 2017 with full implementation over five years, with the legislative goal of spurring economic growth. A revenue trigger requiring $150 million in revenue growth in the prior fiscal year to implement each phase of the tax cuts, provides a measure of budgetary protection, but would not account for a rapid current year revenue decline as occurred during the last recession. The legislature estimates that once fully implemented, the tax cut package will cut $620 million from net general revenues on a baseline basis.
In his veto message, the governor raised concerns regarding the statutory language in the tax cut package which could significantly weaken Missouri's fiscal flexibility. Based on an independent legal opinion, the governor asserts the language of the legislation could be interpreted to eliminate all income taxes on incomes above $9,000. If confirmed, that language could jeopardize $4.8 billion, or 97%, of personal income tax revenues. The legislature, citing its own independent legal analysis, disputes that claim. The governor's veto letter further states that a legislative attempt to modify the statutory language could be subject to the state's Hancock Amendment requiring voter approval. Fitch's analysis relies on the official legislative estimate of a $620 million revenue effect, but the agency will closely monitor any developments regarding interpretation of the language cited in the veto letter. Validation of the governor's concerns could trigger negative rating pressure.
BROAD, GROWING ECONOMY
Missouri's economy is broad based and similar in makeup to that of the nation, and the state's recession recovery trailed the U.S. While national employment grew 1.2% and 1.7% in 2011 and 2012, respectively, state employment grew just 0.2% and 0.5% in those years. In fiscal 2013, that gap narrowed with state gaining 1.5% versus the national rate of 1.7%. In December, the state's three month moving average yoy gain of 1.7% lagged the national gain of 2.2%. Overall, Missouri regained 90.1% of the jobs lost during the recession through December, while the nation as a whole was 22.8% ahead of its pre-recession peak. The state's unemployment rate has historically been in line with the national rate, reaching 5.4% in December versus the nation's 5.6% rate. One reason for Missouri's slightly elevated rate could be its robust labor force growth - 1.8% yoy in December versus the national rate of just 0.7%.
LOW LONG-TERM LIABILITIES BURDEN
The state's debt burden is low, with net tax-supported debt equal to 1.4% of 2013 personal income. Debt levels reflect borrowing for transportation needs, including bonds issued under voter-approved Amendment 3 and grant anticipation revenue vehicle (GARVEE) bonds. Approximately 70% of outstanding tax-supported debt has been issued for transportation purposes. GO bonds constitute only 8.5% of outstanding debt, with the remainder consisting of appropriation-supported issues.
As of June 30, 2013, the reported funded ratio of the state's largest pension plan (Missouri State Employees' Plan, or MSEP) was 72.7%. Using Fitch's more conservative 7% discount rate assumption rather than the system's 8%, the funded ratio falls to 65.5%. The state has consistently funded its actuarially calculated required contributions to the system with the declining funded ratio due mainly to market volatility which is smoothed in over five years. As of May 2014, the combined burden of net tax-supported debt and the state's adjusted unfunded pension obligations of 4.5% of personal income was well below the 6.1% median for U.S. states.
Under the new GASB 67 reporting standard for pension systems, as of June 30, 2014, MSEP's reported ratio of assets to liabilities was 79.5; the system reports no depletion date given a long track record of actual contributions equivalent to the actuarial recommendation.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report 'U.S. State Government Tax-Supported Rating Criteria', this action was additionally informed by information from IHS.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981083
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