Fitch Rates $321MM Mississippi GO Bonds 'AA+'; Outlook Revised to Stable
Fitch Ratings has assigned an 'AA+' rating to the following State of Mississippi general obligation (GO) bonds:
--$204.67 million GO bonds series 2015F (tax-exempt);
--$116.3 million Taxable GO bonds series 2015G.
The bonds are expected to sell via negotiation on or about of Nov. 17, 2015.
In addition, Fitch has affirmed the 'AA+' rating on the state's $4.14 billion in outstanding GO bonds and the 'AA' rating on $201 million of appropriation-backed bonds issued by the Mississippi Development Bank (Dept. of Corrections).
The Rating Outlook has been revised to Stable from Negative.
The bonds are general obligations of the state, with its full faith and credit pledged.
KEY RATING DRIVERS
FISCAL IMPROVEMENT: The revision of the Rating Outlook to Stable from Negative reflects the steps the state has taken toward achieving structural budgetary balance, with two years of positive financial results, an enacted fiscal 2016 budget that is balanced, and a fully funded rainy day fund.
CONSERVATIVE FINANCIAL MANAGEMENT: Mississippi's financial management is generally conservative and action to maintain balance at times of revenue weakness has been prompt. Stringent budget control mechanisms exist and reserve levels remain sound.
MANUFACTURING BASED ECONOMY: The state's socio-economic profile is relatively weak, with wealth and educational attainment indicators that significantly lag national levels. The economy continues to diversify and some successful economic development initiatives should bolster employment in the coming years; however, the manufacturing concentration well exceeds national levels.
COMPARATIVELY HIGH LIABILITIES DUE TO PENSION UNDERFUNDING: Mississippi's debt burden is moderate, but above average, and is largely in the form of GO debt. Unfunded pension liabilities, measured as a percent of personal income, are among the highest of the states.
The State of Mississippi's GO rating is sensitive to economic performance that significantly diverges from the national trend and stabilization of funding for pension liabilities.
Mississippi's long-term GO rating of 'AA+' reflects the state's history of conservative financial practices and established reserves in the context of a comparatively weak socio-economic profile and high long-term liabilities. The revision of the Rating Outlook to Stable from Negative reflects the stabilization of the state's financial operations, as reflected in consecutive years of balanced budgets and a fully funded rainy day fund.
Fiscal operations have stabilized, supported by solid revenue growth since emerging from the recession, allowing the state to eliminate the use of one-time revenues and fully fund its rainy day fund (the Working Cash Stabilization Fund). The gradual draw-down of the rainy day fund, which had reached a peak funding level of $362 million in fiscal 2008, allowed the state to manage reductions in tax revenue associated with the recession. Revenue performance has been solid and has exceeded expectations, notably in fiscal 2014 when the state was able to forgo an expected draw on the rainy day fund and instead, made a sizeable contribution.
Fiscal 2015 performance was in line with the enacted budget. Revenues increased 2.5% on a year-over-year basis and were 1.2% higher than forecast, led by strong corporate and insurance premium taxes. Spending was marginally under budget, incorporating continued growth in Medicaid spending. The rainy day fund, as of the end of fiscal 2015, was funded at its statutory maximum of 7.5% of appropriations at $412 million.
The enacted budget for fiscal 2016 relies on continued modest 2.4% revenue growth to fund a 5.1% increase in K-12 education and a 9% increase in social welfare (primarily Medicaid) spending. The budget as enacted is narrowly balanced and utilizes the small unappropriated fund balance but otherwise does 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. Repeated suspension of the set-aside lessens its value as a budget control mechanism, in Fitch's view.
MANUFACTURING BASED ECONOMY
Mississippi's economic and demographic profile is relatively weak. The employment base, when compared nationally, is overweight in the more volatile manufacturing sector. Wealth levels are very low for a U.S. state - per capita income is ranked 50th among the states and the poverty rate is the highest among the states.
The state lost jobs in the recession generally in line with the U.S. experience, with employment down 5.3% between 2007 and 2010 compared to a 5.6% loss for the nation. However, the state has lagged the U.S. in the recovery and employment growth has not been consistent. Non-farm employment growth has consistently lagged the U.S. over the past year; the state has regained only 69% of jobs lost in the recession. Manufacturing employment is modestly growing, increasing 1.0% year-over-year in September 2014 but service sector employment, which is a source of growth nationally, is relatively weak in Mississippi. The unemployment rate has fallen from its peak of 11% in February 2010, but remains above the U.S. rate at 6.1% in September 2015, compared to 5.1% for the U.S. 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.
ABOVE AVERAGE LIABILITIES
The state's net tax supported debt of approximately $5.9 billion represents a moderate but above average burden on resources at 5.7% of 2014 personal income. However, overall liabilities are quite high for a U.S. state, with the combined ratio of debt and unfunded pension liabilities (adjusted by Fitch) representing 12.7% of 2014 personal income. This ranks the state 42nd of U.S. states and is well above the median of 5.8% (as of Fitch's October 2015 State Pension Update).
The state utilizes a funding methodology that employs a fixed contribution and variation of the amortization period for its unfunded accrued liabilities. Despite having raised employer contributions to 15.75% of payroll and employee contributions to 9% of payroll, the funding of the state's Public Employees' Retirement System declined to 57.7% as of June 30, 2013 and its amortization period increased to 32.2 years. However, with positive investment returns and five-year asset smoothing that now fully incorporates the deep losses of 2009, pension funding increased slightly as of June 30, 2014 to 61%, and the amortization period dropped to 26 years. As reported under the new reporting requirements of GASB 67, the PERS fiduciary net position as a percentage of the total pension liability was 67.2% as of June 30, 2014. Fitch notes that the demands of debt and pensions on the state's operating budget continue to be manageable.
The current offerings finance various capital improvements.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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