CHICAGO — Missouri will offer its first new-money sale in seven years with its top ratings intact, as analysts say it's too early to tell whether a newly approved constitutional amendment or tax cut package will undercut state finances.
The ratings reports are the first since voters approved a constitutional amendment that undercuts Gov. Jay Nixon's broad authority to withhold budgeted funds when revenues fall short. The amendment gives lawmakers the opportunity to override the governor's actions with a two-thirds vote. Rating agencies have long noted the withholding power as a key credit strength.
Standard & Poor's raised concerns over the impact of the constitutional amendment pushed by Republicans who control the Legislature. "We will assess whether this change will make the budget adjustment process less effective or timely, so as to materially affect state finances," analysts wrote. "If we conclude that the process for intra-year rescissions no longer provides the strengths that existed previously, we could lower the rating to a level in line with the indicative credit level."
The $86 million appropriation-backed issue of 25 year bonds will sell competitively Wednesday through the Missouri Development Finance Board. Proceeds will finance a replacement state mental hospital. Columbia Capital Management LLC is advising the state and Gilmore & Bell PC and Fields & Brown LLC are bond counsel.
Lawmakers backed $220 million in state supported borrowing at Gov. Jay Nixon's behest during their session earlier this year.
"This is the first of two, or three at the most, transactions for the Fulton State Hospital project," said Stacy Neal, director of the Division of Accounting.
The state would return to the market in the spring of 2016, although it could do a smaller transaction before that if construction is ahead of schedule, Neal said. The project is expected to be completed in 2017.
After years of rejecting new borrowing, the state legislature approved the Fulton project and another $600 million including $400 million for state projects and $200 million for repairs and renovations to existing higher education facilities.
"The project has been talked about for some time so it's exciting to get underway with the financing," Neal said. The new Fulton facility will replace one that was facing extensive repairs and maintenance, making construction of a new facility more attractive.
The state expects to tap about $38 million of the university bonding authorization next year for a new engineering building.
Ahead of the sale, Fitch Ratings and Standard & Poor's affirmed the state's AA-plus appropriation backed rating and AAA general obligation rating while Moody's Investors Service affirmed its Aa1 appropriation rating and Aaa GO rating. The state has $4.1 billion of tax supported debt and enjoys a stable outlook.
"We view Missouri's very strong budget management framework as a key credit strength," said Standard & Poor's analyst Henry Henderson.
The credit benefits from strong state reserves totaling 7.5% of the prior year's revenues with limited access, a diverse economic base, and moderate debt burden.
The state's largest pension system is 72.7 % funded, and the state makes an actuarially required contribution.
Rating agencies also are monitoring the impact of a tax cut package enacted this year and a dispute between the governor and legislature over language in the legislation.
Lawmakers overrode the governor's veto of a phased-in $600 income tax break. It won't affect fiscal 2015 or 2016 but the future impact of the break is being debated. The top income tax rate would drop beginning in 2017 if net general revenue is at least $150 million over previous years. The cuts would be fully phased in by 2022. Missouri's neighbor, Kansas, has had its ratings lowered as revenues fell following to tax cuts.
The Nixon administration has raised concern that the legislation's language could be interpreted to eliminate the top tax bracket and tax liability for anyone making more than $9,000, resulting in the loss of $4.8 billion in revenue. The legislature's Republican leadership believes Nixon's concerns are unwarranted.
"Fitch will closely monitor the state's ability to manage the revenue implications of a significant multi-year income tax reduction planned for implementation during fiscal 2017 while maintaining fiscal balance and a stable reserve position," analysts wrote. "Further, any indication that the governor's concerns about the statutory ambiguity of the legislation are valid would trigger negative rating pressure."
How the state balances its budget after the income tax cut will be a "key rating consideration going forward," Moody' said.
Due to weaker-than-projected revenues in fiscal 2014, the state needs to see revenue growth of 11% this year. That's much higher than the administration estimate of 5.2% and the actual first quarter growth rate of 3.8%. Nixon has withheld some spending and used his veto powers to cut some costs to keep the $35 billion budget balanced.