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Gas Tax Coming Up Short for Louisiana Bonds

DALLAS — Bonds supported by a 4 cents-a-gallon gasoline tax will not be sufficient to complete Louisiana's $4.9 billion Transportation Infrastructure Model for Economic Development program as gas tax revenues fail to keep up with inflated construction costs.

As things stand now, the state will have exhausted its bonding capacity dedicated to the TIMED program with a planned sale in 2010 and funds will not be sufficient to complete at least two major projects.

Whitman J. Kling Jr., director of the State Bond Commission, said Louisiana will issue $485 million of the gas tax revenue bonds for TIMED projects in a pre-sold deal that is set to occur no later than Dec. 1. Another $500 million issue is planned for 2010.

"The sale in 2010 is the last issue that can be supported by the dedicated tax," Kling said. "By that point we will have issued $3.3 billion of bonds for TIMED ... unless there are some legislative changes, it will be the last debt that can be issued for the TIMED program."

The state bonds supported by the 4-cent per gallon gasoline tax have underlying ratings of Aa3 from Moody's Investors Service, AA-minus from Standard & Poor's, and A-plus from Fitch Ratings.

On Dec. 21, 2006, the Bond Commission authorized a forward purchase delivery contract for the 2008 bonds with Morgan Keegan & Co. as senior managing underwriter and Citigroup Global MarketsInc., now Citi.

The state at the time entered into a swap to lock in a rate of 3.602% for the gasoline and fuels tax revenue bonds. The rate was 110 basis points lower than the 4.7569% true interest cost for the November 2006 TIMED bond sale.

Morgan Keegan Financial Products submitted the winning bid and was awarded 50% of the swap. Merrill Lynch Capital Services, the next lowest bidder, received 25% of the swap after it matched Morgan Keegan's bid. Two other bidders, Citibank NA and JPMorgan Chase Bank, were tied for third. Each was awarded 12.5% of the swap after agreeing to match the Morgan Keegan rate.

Under the existing plan, insurance policies on components of the swap are to be provided CIFG Assurance North America Inc. for $372 million and from XL Capital Assurance Inc. for $93 million. CIFG also is to insure $372 million of the 2008 bonds with XL Capital providing insurance for $113 million of the bonds.

Those insurers recently have seen their ratings downgraded in the wake of the subprime mortgage crisis, in some cases to junk status.

Kling said the State Bond Commission will need to decide what changes to make for the final structure of the deal. "As it stands right now, the bonds are set to be issued as adjustable-rate debt but I believe that whole structure will change," he said.

Government Finance Associates Inc. serves as the Bond Commission's financial adviser. Bond counsel is Foley & Judell LLP.

Dana Newsome, a spokeswoman for Louisiana TIMED Managers, said not only are bond proceeds apparently insufficient for the program, gasoline tax revenues could dip as motorists cut back their travels due to increases in the price of gasoline.

Although bond proceeds provide most of the financing for the TIMED projects, annual gasoline tax revenues are still an important component.

"We are facing a lot of challenges," Newsome said. "We are at risk of not having enough funds to complete the projects at their current scope and schedule."

Newsome said managers are keeping a close eye on month-to-month gasoline tax revenues.

"We're anticipating a decline in gas tax revenues," she said.

The Louisiana Department of Revenue reported $606 million in revenues from the 20 cents/gallon tax in fiscal 2006, an increase of 4% from the $581.9 million collected in fiscal 2005. Collections in fiscal 2007 totaled $612.7 million, an increase of only 1% from fiscal 2006.

Newsome said Louisiana TIMED Managers, which oversees the program as a consultant to the Louisiana Department of Transportation and Development, "is committed to completing the 16 projects with TIMED tax revenue and bond proceeds."

Previous bond sales for the TIMED effort include an initial $264 million in 1990, followed by a $275 million issue in 2002, $548 million in 2005, and $1.1 billion in 2006.

Another source of revenue must be found to complete at least two big ticket, high-visibility projects in the New Orleans area, Kling said.

"It looks as if the road projects will all be completed by 2012, but the concern is really with two of the three bridge components that were on the original project list," he said.

The two projects are the widening of the Huey P. Long Bridge that spans the Mississippi River in Jefferson Parish and the new Florida Avenue Bridge between St. Bernard and Orleans parishes over the Inner Harbor Navigational Canal in east New Orleans.

The widened Long Bridge is scheduled to be completed in 2013. The five-mile-long Florida Avenue Bridge, which is still in the design phase, is expected to cost $475 million. It will serve areas severely affected by Hurricane Katrina in late August 2005.

The new James J. Audubon Bridge being built across the Mississippi between Pointe Coupee and West Feliciana parishes in south-central Louisiana is not at risk due to the funding shortfall, Kling said, but it is behind schedule.

Construction material price increases were a problem before hurricanes Katrina and Rita devastated portions of Louisiana in 2005, Kling said, which made the situation even worse.

"Price inflation on these projects was running above the growth factor even without the run-ups caused by the two hurricanes," he said.

Newsome said estimated total cost of the TIMED program has gone up $1.2 billion due to post-hurricane construction inflation.

"Most of that is the increase in the price of steel," she said. "The cost for the Long Bridge, which is mostly steel, has gone from an original $413 million to more than $1 billion."

Louisiana voters approved the 4-cent increase in the gasoline tax, from 16 cents to 20 cents per gallon, in a statewide referendum in 1989. The original program, which included specific projects, was financed primarily with annual revenues, with a small bond component.

The law was amended in 1998 to extend the tax until all bonds issued for TIMED have matured.

The TIMED program originally included more than 550 miles of roadway widening and construction as well as three bridges and improvements to both the Port of New Orleans and Louis Armstrong New Orleans International Airport.

The port and airport projects financed with the gasoline tax revenue bonds have been completed, as have most of the road projects.

The entire program was expected to cost $3 billion and was to be completed by 2004. However, by the late 1990s the TIMED program was far behind schedule due to the funding constraints. At one point the completion date for the final projects was pushed back to 2031.

"It didn't work as a pay-as-you-go effort," Kling said. "The tax revenues were growing at 0.5% to 2% a year, which wasn't keeping up with inflation. We wouldn't be in this situation if the tax had been based on a percentage of the price of a gallon of gasoline rather than a fixed amount per gallon."

In 2000, the Department of Transportation and Development developed a plan to speed up the work by issuing debt supported by the gasoline tax. The August 2002 bond sale was the first debt issued for the revamped program.

The Legislature adopted a transportation bill in 2006 that allowed the state to issue bonds using the TIMED dedicated portion of the fuel tax through Dec. 31, 2012. Without the bill, Louisiana would have been required to cease issuing debt backed by the tax after Jan. 1, 2010. The legislation also changed the maximum term of the gasoline tax revenue bonds to 35 years.

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