Fitch Rates Missouri Board of Public Buildings $60MM Special Obligs 'AA '; Outlook Stable
The bonds are expected to be sold through competitive bid on or about Aug. 25.
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, 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 LONG-TERM LIABILITY LEVELS: The state's debt burden is low with most outstanding debt issued for transportation purposes. Similarly, pension obligations are well-funded with consistent full funding at the actuarially-recommended level. Missouri's combined burden is well below the median for U.S. states.
STABLE ECONOMIC PROFILE: While the state's economy generally tracks the nation's, employment gains since the recession have lagged the U.S. recovery. The most recent data indicates continued growth, but further negative divergence from the national trend. 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.
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 management of a significant multi-year income tax reduction planned for implementation during fiscal 2017, while maintaining fiscal balance and a stable reserve position. An indication that the governor's concerns about the statutory ambiguity of the tax reduction legislation are valid would result in negative rating pressure.
CREDIT PROFILE
Missouri's 'AAA' GO rating reflects a low long-term liability 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, a power which he has 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 down during the recession. Proceeds of the bonds will be used to pay for various capital improvements for state facilities, the capitol building, and public higher education institutions.
PRUDENT FINANCIAL MANAGEMENT
Missouri's revenues were negatively affected during the recession, but the state consistently acted to maintain balance and preserved its fiscal flexibility with a fully funded reserve. 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. The fiscal year 2013 budget included several minor one-time budget solutions, but solid revenue performance added to reserves. 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, 2014) performance trailed the state's January 2014 revenue estimate with weakness in the key revenue sources of personal income and sales taxes. The state primarily attributed the weakness to a much sharper than anticipated decline in capital gains related collections after the fiscal 2013 acceleration of income due to federal tax increases. 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.
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. Combined, the state retained 9.7% of net general revenues in reserves.
The unanticipated shortfall in fiscal 2014 pressured the fiscal 2015 budget, but robust revenue growth and prudent management ultimately enabled the state to maintain structural balance. Given the yoy revenue decline in fiscal 2014, the 2015 budget required unlikely 10% yoy growth. To address the likely revenue gap, the governor implemented nearly \\$600 million in spending restrictions on the enacted \\$8.7 billion general revenue fund operating budget. Tax revenues, particularly from the personal income tax (PIT), outperformed the administration's expectations when the governor implemented the restrictions. By the end of the year, the governor released all but \\$67 million in restrictions. Revenues increased nearly 9% in fiscal 2015 yoy. PIT revenues (approximately 70% of general revenue fund revenues) increased 8.5% yoy to \\$6.9 billion. Withholding increased a healthy 6.6% yoy reflecting strong economic improvement in the state, in conjunction with a sharper uptick in the more volatile estimated and final tax payments. Missouri ended the year with \\$542.8 million in its BRF and \\$277.6 in ending balance, for a combined \\$820.4 million or 9.4% of net general revenues in reserves.
MODEST INCREASES IN ENACTED BUDGET
The enacted fiscal 2016 budget increases spending modestly in key areas such as K-12 education and relies on a now-conservative general revenue fund revenue estimate (given fiscal 2015's strong results) of a 0.4% yoy decline. Fitch anticipates additional spending pressure, particularly for Medicaid and related areas, will require supplemental appropriations. The administration estimates 2% yoy revenue growth will be necessary to support likely spending needs for the current year. Fitch views this rate of growth as achievable given the state's stable economic environment. Unlike last year, the governor did not veto any portion of the budget, nor were any spending restrictions enacted.
INCOME TAX CUT COULD REDUCE OUT-YEAR REVENUES
A significant income tax reduction package enacted last 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 amendment would thus limit the state's ability to revisit the changes should circumstances warrant. 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 protection against unforeseen revenue weakness, but would not account for a rapid current year revenue decline as had occurred during the last recession. The legislature estimates that once fully implemented, the tax reduction 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 PIT 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, and 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, SLOWLY 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% versus the national rate of 1.7% but widened in 2014 with state growth of 0.9% falling further behind national growth of 1.9%.
Results in 2015 to date indicate continuation of the trend of growth at levels well below the U.S. Missouri's quarterly moving average for yoy monthly employment gains through June 0.6% compared to the U.S. rate of 2.2%. Overall, Missouri has regained just two-thirds of its jobs lost during the recession through June, while the nation as a whole had fully recovered over a year ago and now has nearly 40% more jobs than it lost. The state's unemployment rate has historically been in line with the national rate, reaching 5.8% in June versus the nation's 5.3% rate. One reason for Missouri's slightly elevated rate could be its more robust labor force growth - 1.3% yoy in June versus the national rate of just 0.9%.
LOW LONG-TERM LIABILITIES BURDEN
Missouri's combined burden of net tax-supported debt and adjusted unfunded pension obligations of 4.5% of 2013 personal income was well below the median for U.S. states. The state's debt burden is low, with Fitch-projected net tax-supported debt equal to 1.6% of 2014 personal income. Fitch's debt projection includes outstanding debt and \\$463 million in authorized but unissued bonds that the state anticipates issuing over the next two years. The ratio solely for outstanding debt as of July 1, 2015 is 1.4%, which is down from 1.9% five years ago.
Debt levels reflect borrowing for transportation needs, including bonds issued under voter-approved Amendment 3 and grant anticipation revenue vehicle (GARVEE) bonds. Approximately 60% of outstanding net tax-supported debt has been issued for transportation purposes. GO bonds constitute only 6.5% of outstanding debt, with the remainder consisting of appropriation-supported issues.
As of June 30, 2014, the reported funded ratio of the state's largest pension plan (Missouri State Employees' Plan, or MSEP) was 75.1%. Using Fitch's more conservative 7% discount rate assumption rather than the system's 8%, the funded ratio falls to 67.7%. 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. 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.
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.
Комментарии