HobbsOnline

Steaming hot commentary on journalism, Tennessee, politics, economics, the war and more...

Name:
Location: Nashville, Tennessee, United States

7/19/2002

What S&P Really Said
Here is the full text of Standard & Poor's July 12 ratings update on Tennessee's General Obligation (GO) bonds.

Tennessee's GO Bond Rating Removed From CreditWatch; 'AA' Rating Affirmed, Outlook Negative
Analyst: Kenneth A Gear, Washington D.C. (1) 202-383-3540; Alexander M Fraser, Dallas (1) 214-871-1406

WASHINGTON, D.C. (Standard & Poor's) July 12, 2002-Standard & Poor's said it affirmed its double-'A' rating on Tennessee's outstanding GO bonds and removed the rating from CreditWatch, where it was placed Jan. 25, 2002, reflecting the increase in new revenues that effectively balance the fiscal 2003 budget. The outlook has been changed to negative.

Standard & Poor's also affirmed its single-'A-1'-plus rating on Tennessee's outstanding general obligation commercial paper series A and B and its double-'A'-minus rating on Tennessee State Veteran Homes Board's outstanding appropriation debt, issued for Tennessee.

The negative outlook is based on reserves and financial cushion that have been weakened and uncertainty surrounding the ability of the 1% sales tax increase to provide sufficient resources to balance budgets in fiscal 2004 and beyond. Also of concern is the ongoing political inertia that has impaired the state's ability to address its financial challenges in a timely manner.

"The legislature's July 4 adoption of a revenue-raising bill and a balanced 2003 budget provides some near-term comfort," said credit analyst Kenneth Gear. "The budget includes $923.2 million of new tax revenues, a projected $600.3 million of which is from a 1% increase in the state sales tax to 7%. The local portion of taxes adds 2.48%. The increase in revenue eliminates a projected $800 million revenue gap," added Mr. Gear.

Recent financial operations were best characterized by the state Legislature's inability to eliminate a fiscal imbalance that has required the state to use onetime revenues, along with spending cuts, to balance its budgets in fiscals 1997-2002. A weakened economy and weak revenue collections created a $475 million shortfall at fiscal year-end 2002. The decline in sales tax collections is the primary culprit in the shortfall, which could increase depending on June revenue collections. The fiscal 2002 shortfall would be larger if not for the availability and use of about $413.5 million, of which $244 million was an accumulated balance and $170 million was tobacco settlement money paid in fiscal 2002.

The state's cupboard will be relatively bare to start fiscal 2003, with just $135 million in reserve or cushion remaining, including $85 million in the revenue stabilization fund and $50 million in a federal contingency fund. These reserves could decline if June collections are weaker than anticipated, and more has to be appropriated to close the gap. This thin reserve position represents about 0.02% of budgeted fiscal 2003 revenues.

Although the state's reserves are at very low levels in 2003, Standard & Poor's expectation is that an economic recovery, coupled with continued efforts to control expenditures, will prevent the state's finances from deteriorating further. Future revenue-raising actions are limited barring use of an unused revenue source.

Approximately $1.1 billion of debt is affected.

- end S&P report -

Note: Nothing in that report says the state must adopt an income tax to restore its bond rating. Indeed, the report's most significant criticism is that the legislature used "one-time revenues" and "spending cuts" to balance the budgets in five successive fiscal years (FY 1997-2002). We're not sure what spending cuts S&P is referring to - Tennessee's spending has grown by around $1 billion a year since 1997 – but blame for using one-time revenues properly rests primarily on Gov. Sundquist, who proposed spending increases large enough to require the use of one-time funds and reserves to balance them.