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Fitch Rates Board of Public Buildings, MO's $94.2MM Special Ob Rfdg Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the $94.21 million Board of Public Buildings of the state of Missouri (BPB), special obligation refunding bonds, series A 2014.

The bonds are expected to be sold through competitive bid on or about July 15.

In addition, Fitch affirms the following ratings:

--State general obligation (GO) bonds at 'AAA';

--Certificates of participation, series A 2011 refunding at 'AA+';

--BPB special obligation and state building bonds at 'AA+';

--Missouri Development Finance Board leasehold revenue bonds at 'AA+';

--Missouri Health and Educational Facilities Authority (University of Missouri-Columbia Arena Project) educational facilities revenue bonds at 'AA+';

--Regional Convention & Sports Complex Authority (RCSCA) state appropriation bonds at 'AA'.

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 including recently following 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 remained fully funded throughout the recession.

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 that of the nation as a whole.

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.

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. Fiscal 2012 ended with net general revenues up 3.2% year-over-year, versus a budgeted forecast of 4%. The ending cash balance for fiscal 2012 was $205 million.

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. Final results for the year were strong with net general revenues growing 10.1% year-over-year to $8.8 billion, well ahead of the budgeted 4.8% growth. Personal income tax revenues led the way, up 9% for the year (gross basis), while sales and use tax revenues underperformed by increasing just 1.3% (also gross basis). The state ended the year with reserves in its general fund balance and BRF totaling $948 million, covering a solid 11.7% of final fiscal 2013 net general revenues.

REVENUE SHORTFALL CHALLENGES CURRENT YEAR

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, though revenues were in line with the originally enacted budget (thereby mitigating any need for significant balancing actions) and the state's reserve remains fully funded. Missouri currently estimates 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. Net of refunds, fiscal 2014 general revenues declined a slight 1% yoy versus the Governor's 2.8% January growth estimate, a shortfall of $307 million.

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. 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 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 projected ending general fund balance of $222 million is down from $447.1 million the prior year, but the budget reserve fund remains fully funded at $557.2 million, or 7.5% of prior year net general revenue collections.

The shortfall in fiscal 2014 pressures the fiscal 2015 budget which the state built on the January revenue estimate and slightly more conservative legislative 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 now requires robust and likely unrealistic 7.3% yoy growth. In late June, the governor implemented $641.6 million in spending restrictions ($136.8 million of which was technically for fiscal 2014 capital spending) and $144.6 million in vetoes on the fiscal 2015 budget. The administration reports that spending cuts primarily address several deficiencies including a series of unfunded statutory tax changes. The governor vetoed those tax changes but restricted spending in the event the legislature overrides his vetoes in the September legislative session.

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 January 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, SLOW-GROWTH ECONOMY

Missouri's economy is broad based and similar in makeup to that of the nation, with recent state employment growth nearing national rates. The state's economic trends have historically moved in line with U.S., though usually at a lesser pace. Missouri's recession recovery has been slower than the U.S., though recent trends indicate some improvement. While the nation saw annual employment gains of 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%. Monthly yoy data for 2014 indicates that Missouri's performance remains close, but still slightly below, national growth. In May, the state's yoy gain of 1.4% trailed the national gain of 1.8%. Missouri's unemployment rate has historically been in line with the national rate recently ticked higher than the U.S. rate reaching 6.6% in May versus the nation's 6.3% rate. Part of the increase could be attributed to slight growth in Missouri's labor force (0.6% yoy in May) while the national labor force remained flat.

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.

2014 legislative actions will increase the state's debt issuance going forward, but will not materially affect the debt profile. During the fiscal 2014 session, the legislature acted on a gubernatorial request and authorized $200 million in appropriation-backed debt to support construction of a new state mental health institution in Callaway County. In addition, the legislature also added a referendum question to the November ballot requesting voters approve a 10-year one-cent sales tax increase to provide $639 million annually to the state's department of transportation, as well as an additional allocation to local governments. While not specifically related to debt authorization, Fitch believes approval of the sales tax increase could support limited future transportation debt issuance. Given the state's currently low debt burden, Fitch views the effect of a limited amount of additional debt as very manageable.

State GO bonds carry a full faith and credit pledge. Security for Missouri's GO bonds is very strong, with a constitutional provision requiring debt service payments be transferred to a sinking fund one year in advance of the required payment. Certificates of participation, BPB bonds, the Health and Educational Facilities Authority (University of Missouri-Columbia Arena Project) bonds, and the RCSCA state appropriation bonds are all secured by annual legislative appropriations. The RCSA state appropriation bonds are rated one notch below the other appropriation ratings due to the non-essentiality of the funded project, a sports, entertainment and convention facility.

As of June 30, 2013, the reported funded ratio of the state's largest pension system 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. On a combined basis, the burden of net tax-supported debt and the state's adjusted unfunded pension obligations of 4.5% is well below the 6.1% of personal income median for U.S. states.

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:

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838385

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1 212-908-0241
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
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Senior Director
+1 212-908-0889
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Committee Chairperson
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Media Relations, London
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peter.fitzpatrick@fitchratings.com