Fitch Rates Missouri Development Finance Board's $35MM Annual Appropriation Bonds 'AA '
The bonds are expected to be sold through competitive bid on or about March 3, 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are special obligations of the MDFB, 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. 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-determined 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 continued 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
LINKED TO IMPLIED GO RATING: The rating on Missouri's appropriation-backed debt is linked to changes in the state's GO rating of 'AAA', on which it is based.
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 rating also reflects the state's continued commitment to appropriation-backed debt, including bonds issued through the Regional Convention and Sports Complex Authority (RCSA) for a now-vacant football stadium. Missouri 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 the planning, design and construction of the State Historical Society building and museum.
PRUDENT FINANCIAL MANAGEMENT
Missouri's budgetary management has remained consistent and prudent through the last recession and subsequent recovery. Revenues declined during the recession, but the state consistently acted to maintain balance and preserved its fiscal flexibility with a fully funded reserve. After a modest decline in fiscal 2014 (largely federal tax-policy driven), growth accelerated in fiscal 2015 with 8.8% year-over-year (yoy) growth in general revenues. The state ended the year with reserves in its general fund balance and BRF totaling \\$820.4 million, covering a solid 9.4% of fiscal 2015 net general revenues.
Revenues continue to perform well in fiscal 2016, and are ahead of the most recent administration forecast. Through Jan. 31, net general revenues are up 3.4% versus the 2.8% gain assumed in the governor's fiscal 2017 executive budget. Personal income tax collections are the key driver with 6.5% yoy growth, including strength in withholding collections (5.5% according to the state) indicating solid underlying economic gains beyond volatile capital gains-related personal income taxes. Sales tax collections are up a more modest 2.7%. Together, these sources generally account for approximately 90% of Missouri's general revenues.
Actual revenue growth in fiscal 2016 currently exceeds the enacted budgeted forecast of a 0.4% yoy decline, and the state anticipates utilizing the revenue surplus to meet substantial supplemental spending needs in the current year. Medicaid accounts for \\$280 million of the governor's \\$300 million general revenues supplemental appropriation request for fiscal 2016. Increased enrollment of those previously eligible and not enrolled, as well as growing costs for specialty and generic prescription drugs were the main drivers. Fitch expects Medicaid will remain a primary budget challenge for Missouri in the near future.
MODEST INCREASES IN EXECUTIVE BUDGET
The governor's fiscal 2017 executive budget proposes a 5.1% increase (\\$470 million) in general revenue spending for operations from current year appropriations (inclusive of the governor's recommended supplementals). Medicaid represents the majority (\\$250 million) of the increase due to continuing pressures from prescription drug prices and to some extent, increased caseload forecasts. K-12 and higher education both see modest increases in the budget proposal, with the higher education increase tied to a commitment from public institutions to again freeze tuition. The executive budget also includes \\$54.1 million for a two percent pay increase for state employees.
Revenue growth assumptions in the executive budget appear achievable, particularly given the solid performance in fiscal 2016 to date. Overall, the proposal assumes 4.1% growth in net general revenue from fiscal 2016 with personal income tax collections growing 4.8% and sales tax collections up 3.1%. The projection incorporates the downward effect of an income tax reduction scheduled to become effective on Jan. 1, 2017.
RCSCA DEBT REMAINS STATE PRIORITY
Fitch anticipates the state's final budget for fiscal 2017 will incorporate the full appropriation for outstanding debt associated with the stadium that formerly hosted the St. Louis Rams. Last week, the House General Administration Appropriations Committee (a sub-committee of the Select Committee on Budget) voted to eliminate a \\$12 million appropriation used to pay the state's share of maintenance costs and debt service (\\$10 million) on bonds first issued in 1991 and 1993 to construct a stadium for the National Football League's (NFL) St. Louis Rams franchise. Earlier this year the NFL announced an immediate relocation of the team to Los Angeles. This week, the House's Select Committee on Budget introduced a version of the bill that includes the full appropriation. The bonds fully mature in August 2021 and Fitch views the bonds (issued by the RCSCA) as appropriation-backed debt of Missouri. Any failure to appropriate for the bonds would trigger negative rating action for the bonds, other appropriation-backed debt, and the state's GO rating.
INCOME TAX CUT COULD REDUCE OUT-YEAR REVENUES
A significant income tax reduction package enacted in 2014 (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 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.
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.
Results in 2015 through December indicate a continuation of a slower trend of employment growth at levels well below the U.S. Missouri's quarterly moving average for yoy monthly employment gains through December of 1% were below the U.S. rate of 2%. Overall, Missouri has regained just three-fourths of its jobs lost during the recession through December, while the nation as a whole has nearly 60% more jobs than it lost. The state's unemployment rate has historically been in line with the national rate, reaching 4.4% in December versus the nation's 5% rate. Missouri's slightly lower rate is despite its more robust labor force growth of 1.5% yoy in December versus the national rate of 1.1%.
LOW LONG-TERM LIABILITIES BURDEN
Missouri's combined burden of net tax-supported debt and adjusted unfunded pension obligations of 4.1% of 2014 personal income was well below the median for U.S. states (as reported in Fitch's 2015 State Pension Update). The state's debt burden is low, with net tax-supported debt equal to 1.4% of 2014 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 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.
Under the new GASB 67 standard for pension systems, the state's largest pension plan (Missouri State Employees' Plan, or MSEP) reported a 72.6% ratio of pension assets to liabilities as of June 30, 2015. On an actuarial basis, MSEP reported a 75% funded ratio versus 75.1% in the prior year. Using Fitch's more conservative 7% discount rate assumption rather than the system's 8%, the funded ratio falls to 67.5%. The state has consistently funded its actuarially determined employer contributions to MSEP with any weakening in the funded ratio due mainly to market volatility which is smoothed in over five years.
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