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Mississippi edges back into good graces of bond raters

By TED CARTER

Mississippi’s $100 million in raids on its rainy-day fund and cuts of over $200 million in department and agency budgets the last two years showed bond raters the state can be serious about offsetting sagging revenue collections.

The reward is a pair of ratings upgrades on around $350 million in 10-and-20-year general obligation bonds, as well as continuation of a stable outlook from a third rating agency, Fitch Ratings.

“The state has reduced spending when necessary to maintain budgetary balance, even in core spending areas,” Fitch said in an Oct. 8 report affirming Mississippi’s ratings outlook at AA stable for the $350 million in new bonds and $4 billion in outstanding GO bonds.

The ratings generally influence how much the state must pay in interest on the bonds.

While cutting budgets and drawing on reserves have offset diminished revenue collections in recent years, the governor and legislative leaders could face bigger tests with the current phasing in of $450 million in business and personal tax cuts that extend over the next 10 years. Legislators passed those tax cuts in 2016 after approving $350 million in business tax reductions during the previous four years.

For now, though, Mississippi’s fiscal policy makers can toast the upgrades to “stable”  they have received this month from Moody’s Investor Services and Standard & Poor’s Global Services and the “stable” affirmation from Fitch.

In erasing negative ratings on the general obligation debt, S&P and Moody’s sounded especially impressed that legislators have returned over $60 million to the working cash stabilization fund. The raters said they are also encouraged that legislators resumed earmarking at least 2 percent of the state budget for the reserve fund after dropping the practice three years ago.

Further strengthening of the outlook, according to the rating agencies, came from legislators agreeing to raise state contributions to the public worker retirement fund by 1.9 percentage points starting in July.

The pace of the replenishing of the working cash stabilization fund has well exceeded the 2 percent floor of state revenues set for the fund.

S&P cited the achievement in its debt-repayment assessment. Money going into the rainy-day fund represents “a good 6.5 percent of budget in 2018,” S&P said in putting an AA/Stable rating on the GO bonds.

S&P also noted it expects Mississippi legislators could further fatten reserves “given conservative budgeting practices and new revenue stream.”

The state’s Working Cash Stabilization Fund ended the 2018 legislative session with $310 million. It had been at over $400 million before the revenue troubles started.

Moody’s emphasized that Mississippi’s debt burden is one of the largest in the nation compared to the size of the state’s economy. However, it praised the state’s “high level of financial reserves.”

On the other hand, a resumption of the rainy-day draws of recent years could cause another ratings downgrade, Moody’s warned. It also noted economic underperformance and persistent growth in retirement liabilities could also cause downgrades.

Under Mississippi law, the governor must make budget cuts if revenues are 2 percent below forecasts, a familiar circumstance in recent years. The governor is also authorized to pluck $50 million at a time from the cash stabilization fund.

Mississippi’s revenue structure relies on sales taxes (37 percent of fiscal 2018  general fund revenues), personal income taxes (32 percent) and corporate income taxes (10 percent).

In citing economic underperformance, Moody’s stressed that Mississippi’s Gross Domestic Product has yet to return to its pre-recession 2008 peak of $977 billion. GDP between 2000 and 2017 grew by 0.9 percent, well below the 1.7 percent U.S. rate.

Moody’s said state revenue growth since 2014 has returned to historically low levels, growing by 1.4 percent in fiscal 2018 after drop-off periods that forced the raids on reserve funds.

Still, said S&P Global, the state’s current fiscal picture is a “marked turnaround from where the state was only one year before.”

As future budget pressures arrive via the phasing in of the new tax cuts, Mississippi is expected to continue a “demonstrated practice of making budget adjustments to maintain balance,” S&P said.

But just how far Mississippi can take austerity is unclear, the rating agencies say.

The go-to-strategy of steeply cutting budgets to offset revenue declines is weighing “on the provision of some services, including infrastructure,” Moody’s noted.

If asked, Gov. Phil Bryant and his Republican allies in the legislature will say the hundreds of millions in tax cuts to businesses, including elimination of the business franchise tax and phasing out of an inventory tax, will eventually juice revenue collections through increased commercial spending.

Democrats in the legislature don’t think so. They predicted in spring 2016 that business tax reductions would result in a $150 million annual drop off in tax collections in the years ahead.

“This simply sets off a booby trap, a time bomb, to go off down the road,” said Sen. Hob Bryan, D-Amory, in an Associated Press report at the time.

So far, no booby trap, but the DOR put $11.8 million less into the state’s general fund in August. If declines continue at August levels or higher, they could come close to approximating the yearly revenue losses Democrats warned of.

The August drop off marked a decrease of 2.97 percent from August 2017.

Most of the August decline — $11.3 million – came in corporate income tax collections.

Back in April 2016 as lawmakers put the tax-cut legislation together, House Ways and Means Committee Chairman Jeff Smith, R-Columbus,

urged the House to “swallow hard” and approve the tax cut, the AP reported.

The cuts were the only way Lt. Gov. Tate Reeves would approve a state bond issue that year, Smith said.

According to the AP, Smith suggested that because revenue won’t begin to be affected until 2018, House members would have two more sessions to realign the tax structure and potentially raise taxes to replace the lost revenue.

A little more than a year ago, state economist Darrin Webb warned of a softening in general fund transfers and noted that as calendar year 2017 neared its end, year-over year tax collections were down 0.6 percent.

One reason, said Webb in an AP report, is diminished revenue collections caused by tax cuts. Whether the cuts will bring in more revenue in the long term is uncertain, he said.

Meanwhile, state Treasurer Lynn Fitch hailed the actions on all three of Mississippi’s ratings as “strong and positive.”

Fitch conceded that the rating agencies will closely watch state tax revenues.

“I wouldn’t say she isn’t concerned about the potential for a dip in revenues, particularly one of that size,” said Michelle Williams, Fitch chief of staff, referring to the full $750 million in cuts spread over much of the next decade.

“But, for now, the rating agencies, and the treasurer, are taking a wait-and-see approach as to whether that expectation materializes and whether the State can find ways to take care of State needs even with that pressure on the budget,” Williams said in an email.

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