Governor Jay Nixon

CHICAGO — Rating agencies affirmed Missouri's triple-A ratings but warned they are watching to see how the state deals with income tax cuts and a looming ballot measure that could hurt the governor's power to cut spending when revenues falter.

"We believe this amendment could potentially weaken the state's strong governmental framework to make midyear budget adjustments, which in our view, could potentially lower the rating to a level in line with our indicative rating under our state scoring methodology," Standard & Poor's wrote.

The proposed constitutional amendment would allow lawmakers to reconsider any spending changes made by the governor through his strong statutory withholding powers.

"How Missouri plans to balance its budget through a recent income tax reduction that will incrementally reduce revenues by 6% over five years beginning in fiscal 2017 will be a key rating consideration going forward," Moody's Investors Service.

The rating reviews come ahead of a $94 million refunding of special obligation bonds slated for sale on Tuesday. The reviews are the first since lawmakers ended their 2014 session during which the battle lines were drawn with Gov. Jay Nixon over tax issues.

The deal will sell competitively.

"The savings on the Board of Public Building refunding is currently expected to be 7 or 8 %" said Stacy Neal, director of accounting in the state's office of administration.

Columbia Capital Management is advising the state and Gilmore & Bell PC is disclosure and bond counsel.

The state is working on a rare new money issue for $100 million of appropriation-backed debt that would sell through the Missouri Development Finance Board in the spring to fund the new Fulton State Hospital, a maximum security mental health facility.

Lawmakers approved the borrowing, proposed by Nixon. An additional $100 million will be sold 12 to 18 months later, depending on the construction progress, Neal said.

Lawmakers separately approved $600 million in additional borrowing authority for state buildings and public university projects. Nixon signed the legislation authorizing the borrowing this week but there are no immediate plans to tap any of it.

Ahead of the deal, Moody's and Standard & Poor's affirmed the triple-A general obligation marks and the special obligation credit rating notched one degree lower to reflect appropriation risks.

"We view Missouri's very strong budget management framework and strong reserves as key credit strengths," said Standard & Poor's analyst Henry Henderson.

The state closed out fiscal 2014 June 30 with revenue collections of about $8 billion, down 1% from the previous year, and slightly below projections, but Standard & Poor's noted that reserves remain fully funded at $557 million. The state also held a general fund reserve of $222 million.

As in other states, the shortfall was due mostly to a decline in income tax from capital gains that were accelerated in fiscal 2013.

The state's $26 billion fiscal 2015 budget assumes 7.4% revenue growth "which may prove difficult to achieve," Standard & Poor's said.

The Democratic governor vetoed $146.6 million of general revenue expenditures and restricted another $641.6 million of general revenue expenditures through his withholding authority. The governor attributed his action to concerns that lawmakers will override this fall his veto of various tax breaks approved by Republicans in the final hours of the session, which were not built into the budget.

Lawmakers overrode the governor's veto of a phased in $600 income tax break. It won't impact fiscal 2015 or 2016 but its future impact 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.

The Nixon administration has raised concerns 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 have no merit and the fiscal impact would be limited to $620 million per year once the tax rate reductions are fully implemented.

Lawmakers could address the concern with clarifying legislation but a statewide referendum would be needed.

"In our view, it is unlikely that the state would leave in place a mechanism that would make such a drastic decrease in its revenue structure, and there is sufficient time to clarify the intent of the tax cuts, but we will continue to closely monitoring the situation due to the potential magnitude," Standard & Poor's said.

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