Fitch Rts Mississippi's $240MM Taxable Var Rate GOs 'AA/F1+'

NEW YORK--Nov. 14, 2003--Fitch Ratings assigns a rating of 'AA/F1+' to the $240 million State of Mississippi's taxable variable-rate general obligation bonds (Nissan North America, Inc. Project) consisting of $140 million series 2003A and $140 million series 2003B.

The 'AA' long-term component of the ratings is the state's general obligation rating. The 'F1+' short-term component of the ratings is based on the standby bond purchase agreement (SBPA) provided by Bank of America, N.A. with respect to the series 2003A bonds and the SPBA provided by Dexia Credit Local, New York Agency, with respect to the series 2003B bonds.

Fitch also expects to assign a 'AAA' rating to $83.5 million of auction rate bonds, which are to be insured by Financial Guaranty Insurance Company. The bonds are expected to be delivered on or about Nov. 25, 2003 by Citigroup Global Markets Inc. Fitch also assigns a 'AA' underlying rating to the auction rate bonds and affirms the 'AA' rating on $2.67 billion outstanding general obligations.

The $363.5 million in total bond issuance for the Nissan project will finance long term $305 million in short term debt issued to date with the remaining $58.5 million allocated to project costs. Approximately 40% of the state's contribution represents a direct contribution to the $1.4 billion project, with the balance funding related infrastructure, training and other costs. The plant opened in June employing 4,000 increasing to 5,300 in the Spring of 2004 when a June 2002 announced expansion is completed.

The new bonds are entirely in variable/auction rate modes, although such type of debt will represent less than 12% of tax supported debt. The short-term ratings assigned to the series 2003A and 2003B bonds will expire on Nov. 2, 20035, 2006, the expiration dates of the SBPAs unless the SBPAs are extended or earlier terminated in accordance with their terms. The series 2003A and 2003B bonds will be issued in the weekly rate mode but may be converted to the daily, bond interest term, auction rate or long-term modes. Holders may tender their bonds while the bonds bear interest in the daily or weekly modes.

Net tax supported amounts to about $3.3 billion, or $1,161 per capita and 5.1% of personal income, above average ratios but still within the moderate range. Much of the state's debt is related to its economic development efforts and this new issue is entirely for that purpose.

The state's institution of financial mechanisms and controls establishes a firm framework for stable financial operations and has been tested during the economic slump of the past few years. In response to disappointing revenue collections, continuing expenditure reductions have been made as well use of the reserve and other non-recurring measures. While available balances remaining in the stabilization reserve and the tobacco settlement trust fund represent a safety valve, a return to operational balance will be important to future credit considerations. The state's agricultural and manufacturing economy diversified with the introduction of gaming, but its influence has reached a plateau. The manufacturing sector has experienced employment declines beginning in 2000.

Total employment declined 2% in 2001 with manufacturing losing nearly 10%. The declines appears to be leveling off with 2002 and September 2003 (compared to the same month the previous year) declining 0.3% and 0.1%, respectively. Manufacturing is still down about 5%, despite the opening of the Nissan plant in June. The unemployment rate, however derived from a separate methodology using household surveys, has improved dramatically, down to 5% in September compared to 7.7% in June.

Revenues have underperformed estimates each year since fiscal 2000. While expenditures have been reduced, the stabilization reserve declined from $246.5 million at the beginning of fiscal 2001, to $110.6 million at the end of fiscal 2002.

The trend continued through fiscal 2003. Tax revenues for 2002-03 were below estimates by $119 million, or 3.3%, with the individual income tax off by the same amount by 10.5%. In response, agency budgets were cut by $46.8 million. Also $26.7 million of new federal funds from the stimulus package was allocated to 2002-03 with the balance of $210 million in new federal funds allocated to fiscal 2004. The ending general fund balance was $20 million on June 30, 2003. The stabilization reserve Balance is reported at $72 million as of Sept. 1.

The fiscal 2003 budget also utilized $180 million from a budget contingency fund, which was derived primarily from a sales tax acceleration accrual and Medicaid funding shortfalls were filled from tobacco settlement payments and from the trust fund to which such payments previously flowed.

Non-permanent funding sources continue to be utilized in fiscal 2004. The budget allocates approximately $365 million from the budget contingency fund, which derives its resources largely from sweeping other funds balances and by elimination of the 2% general fund budget cushion. The current tobacco settlement payment was allocated again to Medicaid and will be supplemented with $114 million of the new federal stimulus package. Nevertheless, ample balances remain including over $600 million in the tobacco trust fund. Through October of fiscal 2004, the tax revenue short fall was $18.6 million, or 1.75%, a lesser magnitude than previous years.