NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' ratings to the following special obligation refunding bonds of the Mississippi Development Bank:
--$34.765 million series 2016A (Walnut Grove Youth Correctional Facility);
--$32.1151 million series 2016 B taxable (Walnut Grove Youth Correctional Facility);
--$26.575 million series 2016 C (East Mississippi Correctional Facility);
--$24.9 million series 2016D taxable (East Mississippi Correctional Facility).
The bonds are expected to sell via negotiation on or about July 19, 2016.
In addition, Fitch has downgraded the following ratings:
--the state of Mississippi's Long-Term Issuer Default Rating (IDR) to 'AA' from 'AA+';
--$4 billion outstanding state GO bonds to 'AA' from 'AA+';
--$201 million of appropriation-backed bonds issued by the Mississippi Development Bank (Dept. of Corrections) to 'AA-' from 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by loan payments made by the Mississippi Department of Corrections (MSDOC), subject to state legislative appropriation. MSDOC covenants to include in its annual budget under the line item of contractual services the principal and interest on the bonds. MSDOC's obligation under the loan agreement and note is absolute and unconditional irrespective of any rights of set-off, recoupment or counterclaim against issuer or financing participants.
KEY RATING DRIVERS
The downgrade of Mississippi's IDR and GO ratings to 'AA' from 'AA+' reflects a combination of weaker than expected operating performance since the revision of the States Rating Outlook to Stable from Negative in November 2015 and application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016 and includes consideration of more focused key rating factors. The 'AA' rating reflects the state's strong control over spending and revenues and generally conservative financial practices, providing significant financial resilience. Liability levels are moderate, albeit well above average for a U.S. state, while economic growth is likely to be below average.
Security for the special obligation bonds ultimately rests with the state of Mississippi for the annual legislative appropriation of sufficient funds to operate the Department of Corrections, including payment of debt service from the trust estate. Corrections are an essential state function. As such, the bonds are rated one notch below the state's IDR at 'AA-'.
Economic Resource Base
Mississippi's economy continues to diversify beyond its historic concentration in manufacturing and some successful economic development initiatives should bolster employment in the coming years. The state's socio-economic profile is relatively weak for a U.S. state, with wealth and educational attainment indicators that significantly lag national levels.
Revenue Framework: 'aa' factor assessment
Mississippi's broad based revenues, including sales and incomes taxes, reflect its economy and the expectation of a relatively slow rate of growth. The state has complete control over its revenues.
Expenditure Framework: 'aaa' factor assessment
Spending growth is expected to be at or slightly above relatively slow annual revenue growth in the absence of policy action, reflecting the primary drivers of education and Medicaid. The state has ample ability to control expenditures and carrying costs for debt service and retiree benefits are low.
Long-Term Liability Burden: 'aa' factor assessment
Mississippi's liabilities are above average for a U.S. state but still moderate, with the combined ratio of debt and unfunded pension liabilities representing 12.2% of 2015 personal income.
Operating Performance: 'aa' factor assessment
Strong control over spending and maintenance of reserves provide the state with ample capacity to address a moderate downturn scenario. Mississippi's budget performance during this period of economic expansion has been uneven, with slow return to budgetary balance.
RATING SENSITIVITIES
The State of Mississippi's IDR is sensitive to continued maintenance of financial flexibility consistent with the 'AA' rating.
CREDIT PROFILE
Mississippi's employment base, when compared nationally, is overweight in the more volatile manufacturing sector. The state lost jobs in the recession generally in line with the U.S. experience; however, Mississippi has lagged the U.S. in the recovery and employment growth has not been consistent. Manufacturing employment is modestly growing, but service sector employment, which is a source of growth nationally, is relatively weak in Mississippi. The state has invested in economic development projects designed to diversify and expand the economy, and Fitch expects continued moderate growth in line with recent trends.
Revenue Framework
Mississippi's revenue structure is diverse, relying on sales taxes (37% of fiscal 2015 state general fund revenues), personal income taxes (32%) and corporate income taxes (13%).
Historical revenue growth through 2014, adjusted for the estimated impact of tax policy change, was slightly above GDP growth, exceeding what economic output would imply; population, employment, personal income, and state GDP growth have all lagged the U.S. over this time period. Several factors contributed to stronger revenue growth during the measurement period, including spending post-Hurricane Katrina in the last decade, better collection mechanisms, and more recently, reported employment outside of the state in the oil and gas industry that is captured in tax revenues but not necessarily in a local economic impact. Fitch believes future revenue growth is likely to be more in line with inflationary growth, reflecting the slower state economy and reduced employment in the oil and gas industry.
As with most states, Mississippi has an unlimited legal ability to raise revenues.
Expenditure Framework
As with most states, education and social welfare spending are Mississippi's largest operating expenses. Education, including public and higher education comprises more than half of general fund spending, while health and social welfare adds another approximately 20%. Medicaid is a key driver to social welfare spending.
Spending growth, absent policy actions, will likely be in line with to above expected revenue growth, driven in part by Medicaid spending, and will require continued budget management to achieve balance. The fiscal challenge of Medicaid is common to all U.S. states and the nature of the program as well as federal government rules limit the states' options in managing the pace of spending growth. Medicaid spending has increased in Mississippi despite the state not opting to expand the program under the Affordable Care Act and despite the state receiving a very high federal matching rate due to its comparatively low income levels.
Mississippi has ample expenditure flexibility. The state has reduced spending when necessary to maintain budgetary balance, even in core spending areas. The state's carrying costs for debt and retiree benefits are just below the state median and are expected to remain low.
Long-Term Liability Burden
Mississippi's liabilities are well above average for a U.S. state but still moderate, with the combined ratio of debt and unfunded pension liabilities (adjusted by Fitch for a 7% return assumption) representing 12.2% of 2015 personal income as compared to a median of 5.8%. The state is ranked 42nd by this measure.
As reported under the new reporting requirements of GASB 67/68, the PERS fiduciary net position as a percentage of the total pension liability was 61.7% as of June 30, 2015. The state has a history of making its full actuarial contribution and recently tightened actuarial assumptions to increase the likelihood of making progress on funding, assuming asset returns match the lowered assumption. Fitch notes that the demands of debt and pensions on the state's operating budget continue to be manageable.
Operating Performance
Mississippi has a strong framework to address a moderate downturn scenario. The governor has the authority to draw $50 million from the rainy day fund without requiring legislative action. A larger withdrawal requires legislation, as happened at the end of fiscal 2016, when a budget gap developed late in the fiscal year. Further, the governor can also make budgetary reductions up to 5% per agency and transfers between funds without legislative action, providing a great deal of flexibility to address revenue shortfalls. By statute, the state only appropriate 98% of prior year revenue; however, in Fitch's view, repeated suspension of the set-aside lessens its value as a budget control mechanism.
Mississippi took several actions to balance the budget through the recession, relying most heavily on spending reductions, but also incremental usage of the rainy day fund, uses of balances in other funds, and an increase in tobacco taxes. The gradual draw-down of the rainy day fund, which had reached $362 million in fiscal 2008 (7.5% of general fund revenues), allowed the state to manage reductions in tax revenue associated with the recession. Fitch expects the state would take similar actions to maintain balance in future downturns.
Mississippi's budget performance during this period of economic expansion has been uneven. As revenues began to rebound following the recession, the state continued to use balances in the rainy day fund for budget balancing purposes, while also actively controlling spending, in part to cover increased expenses related to Medicaid growth. As stronger revenue growth took hold, the state reinstated 98% budgeting, and began to replenish reserves, including rebuilding the diminished rainy day fund. This was notable in fiscal 2014 when the state was able to forgo an expected draw on the rainy day fund and instead, made a sizeable contribution. Fiscal2015 performance was in line with budget, and the state ended the year with its rainy day fund at its statutory maximum of 7.5% of appropriations.
The fiscal 2016 budget assumed continued modest revenue growth and funded increases in the two main spending categories, both K-12 education and social welfare (primarily Medicaid). The budget as enacted was narrowly balanced and utilized a small unappropriated fund balance but otherwise did not rely on one-time revenues. As was the case in fiscal 2015, the state suspended its 98% budgeting policy for fiscal 2016, citing its fully funded rainy day fund. As revenues began to underperform during the fiscal year, the state took repeated action to achieve budgetary balance, including reducing expenditures and drawing on the rainy day fund. The state utilized $45 million of rainy day reserves prior to the end of the fiscal year and expects additional usage as spending is finalized in the lapse period.
The state is beginning fiscal 2017 with an enacted budget that, while assuming slower revenue growth, may face similar pressure to remain in balance. A reported mistake in revenue estimation has opened in immediate $57 million gap, which, while only 1% of anticipated revenues, does point to the need for ongoing budget management to sustain balance. The enacted budget again suspends the 98% budgeting mechanism.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
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