S&P Global Ratings said it has lowered its issuer credit rating (ICR) on the State of Wyoming to AA-plus from AAA, and lowered its associated school district guarantee program rating on Fremont County School District No. 1 to AA-plus from AAA.
"The downgrade follows weaker pension funded levels, and an economic downturn, triggered by lower energy prices, which have affected mining-related revenue," said S&P Global Ratings credit analyst David Hitchcock.
Wyoming ran up large operating surpluses and fund balances when energy prices were high; now it is budgeting for a substantial drawdown in operating fund balances in the 2017-2018 biennium budget ending June 30, 2018, albeit leaving fund balances at levels that S&P still views as very high.
It believes balances could remain high for years to come at current drawdown rates, which supports our stable outlook, although the state eventually will have to either find new revenue, or cut spending, absent a substantial rise in energy prices. Current state energy price projections, used during its recent mid-biennium budget adjustments, are reasonable, S&P said.
The ICR reflects what S&P views as:
• An economy based on mining, tourism, agriculture, and governmental employment that is now experiencing a downturn as the result of a decline in energy prices, following a previous energy-related economic boom;
• The governor's strong statutory ability to make mid-biennium cuts in the event of revenue shortfalls, and regular consensus revenue forecasting;
• Wyoming's maintenance of very large operating fund balances, despite the cyclical components of the state's economic base and currently budgeted drawdowns, enhanced by the existence of a permanent fund, whose interest and capital gains earnings, up to 5% of principal, are available for general fund expenditures;
• Mid-biennium budget adjustments that have left projected biennium-end June 30, 2018 fund balances close to originally budgeted levels, despite interim declines in energy prices; and
• Low overall debt and low other postemployment benefit (OPEB) liabilities.
Offsetting factors include:
• Recent fund balance drawdowns, tied to a decline in energy prices and lower mining-related revenue; and
• Annual retirement contributions that have been somewhat less than the actuarial annually determined contribution (ADC), combined with a somewhat aggressive return assumption, that has contributed to a relatively low three-year average pension funded ratio of 78%.
The stable outlook reflects its belief Wyoming can maintain the pace of current fund balance drawdowns for a number of years beyond the current biennium, while it has a history of making structural budget adjustments even while carrying large fund balances.
However, should structural budget pressures significantly accelerate the pace of fund balance drawdowns in the current biennium beyond budgeted levels, or the next biennium budget shows significant structural budget imbalance without a credible plan to eventually return to structural budget, S&P said it could lower its rating or revise its outlook to negative during our two-year outlook horizon.
If the state appears to be returning to near-structural budget balance following next year's budget deliberations for the 2019-2020 biennium budget, or its pension funding situation improve, it could have positive credit implications.