State Politics

Moody’s. S&P. What do these ratings mean? Sometimes, it’s savings

Mississippi is about to borrow hundreds of millions of dollars for roads, bridges, junior colleges and universities and economic development projects.

And, had the state not made a series of often painful budget cuts the previous fiscal year, those loans might have cost millions of dollars more in interest, the head of the Department of Finance and Administration said.

“For the past several years, when we were coming out of the recession, both Moody’s and S&P changed our outlook from stable to negative,” said Laura Jackson, executive director and chief fiscal officer at the DFA. “If your outlook changes from stable to negative, that’s sort of a shot across the bow so to speak. They’re warning you that if you don’t turn some things around there’s a downgrade coming.

“We’ve been working the last couple of years to try to correct some of the things those two rating agencies were concerned about.”

She said the two ratings agencies liked that the state was able to make cuts and had money to draw on in the rainy day fund to keep the budget balanced.

“They have always given the state credit for our strong budget,” she said. “While our economy may still be struggling to come out of the recession, when they say you have a strong budget framework, you have a framework in place to adjust to bad times.

“For instance, you’ve read it, you’ve heard it, you’ve written about the budget cuts the state had to make the year before last. The revenues weren’t coming in the way we estimated and so the governor had to make four budget cuts in one fiscal year. And he had to make some draws on the rainy day fund in order to get through that fiscal year.”

The downside

But those cuts came with a downside. Hundreds of state employees lost their jobs, as agencies dealt with the mid-year cuts. Democratic lawmakers unsuccessfully sued Gov. Phil Bryant, arguing that he violated the separation of powers when he cut the budget approved by lawmakers.

But, Bryant didn’t have a choice.

“By law, we cannot end the year with a deficit,” said Jackson. “The ratings agencies like the fact that we can’t do that.”

Knowing they were about to take out sizable loans in the form of general obligation and revenue bonds, Jackson and DFA made the case for keeping Mississippi’s rating at double A.

“We took an update on the state budget,” she said. “We took an update on the state retirement system. We took all that information to them. As a result both of those agencies, both Moody’s and S&P, have restored our outlook back to stable.”

In the fiscal year that ended June 30, Bryant didn’t make any budget cuts and didn’t draw out of the rainy day fund.

“We were trending up out of the recession, the spending was under control, the revenues were meeting the estimates that the revenue estimating group and the Joint Legislative Budget Committee adopted,” she said. “Things were beginning to turn around. That’s what we got credit for when we were restored to stable.”

The upside

“Now, all three of Mississippi’s credit ratings are strong and positive (Fitch is the third),” said Treasurer Lynn Fitch, who is a member of both the State Bond Commission and the Public Employees’ Retirement System Board of Trustees. “Taxpayers will benefit from recent efforts to meet economic challenges head-on, such as putting money back into the rainy day fund and strengthening PERS’ funding policy. Better ratings mean the bond issuances currently in the works for capital and transportation improvements across the state will yield better deals for taxpayers.”

The state ended up with a $113 million surplus. Half of that will go to the rainy day fund, which brought it up to around $346 million. The other half will go to the capital expense fund.

“The ratings agencies give us credit that were about to make a really large deposit into the rainy day fund,” Jackson said. “When that deposit is made, the balance in the rainy day fund will be about $345 million or $346 million.”

Jackson said dodging the downgrade would have added at least 1 percent to the cost of borrowing.

Why ratings matter

“The ratings matter because the better your rating ... the cheaper it is to borrow money,” she said. “If you were to be downgraded, it would cost you more money. Probably a hundred basis points (about 1 percent) difference in the interest rate.

“It depends on the market, OK? But generally, when we borrow money, we’re around the 2 percent interest rate, 2 to 4 percent. It just depends on how long the maturity is or whether it’s tax exempt debt or taxable debt. But, if we were to be downgraded, I would imagine that number would push to 3 percent to 5 percent that it would cost us to borrow.

“We issue bonds over a 20 year period, so when you start calculating that interest over 20 years, it certainly adds up.”

Like Bryant’s budget balancing, a downgrade would have swept through the budget.

“The Legislature had to appropriate money for debt service,” he said. “If we were to be downgraded ... it would have affected the state’s overall budget. Somebody else would have to suffer. Some other agency would have to suffer because they put the money into debt service. (Nonpayment) is not an option.

“If the cost of borrowing goes up somebody else suffers along the way.”

The revenue bonds will be tied to the money the state receives from gambling taxes, money that was originally earmarked for roads leading to gambling destinations — primarily the Coast and Tunica County. This year, the DFA will issue $300 million in revenue bonds for the road and bridges as part of a far-reaching infrastructure bill passed in the recent special session. The state expects to get that money in January.

They also will be selling taxable and tax-exempt bonds in October. Taxpayers will be on the hook for those, with the money to repay them coming from the general fund. The taxable bonds will be used for economic development projects: $90 million for the ongoing upgrade to Ingalls Shipbuilding and $34 million for the Continental Tire plant being built in Clinton.

The tax-exempt bonds will pay for projects at community colleges, universities and state agencies. The general obligation bond money should be available in November, Jackson said.

But the state is hardly out of the woods financially. Truth in Accounting, a bipartisan organization that calls out states for accounting tricks and inaccuracies in financial reporting, gives the state a D on finances. It says truthful accounting shows that Mississippi’s budget isn’t balanced and that when all the state’s debt is taken into account, each taxpayer owes about $11,300.

The good news, that debt is down $600 from last year. But, it is also more than double the 2009 debt of $4,900.

“Mississippi’s elected officials have made repeated financial decisions that have left the state with a debt burden of $8.3 billion,” it’s latest report says. “Mississippi’s financial problems stem mostly from unfunded retirement obligations that have accumulated over many years. Mississippi’s financial condition is not only alarming but also misleading as government officials have failed to disclose significant amounts of retirement debt on the state’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of the state government’s finances.”

Paul Hampton: 228-284-7296; @jpaulhampton