DALLAS — Louisiana will enter the new-money market Tuesday for the first time since 2009 with a competitive sale of $300 million of general obligation bonds.
Proceeds from the sale will replenish the state's comprehensive capital-outlay escrow fund, which finances projects on a list developed by Gov. Bobby Jindal and the Legislature. The state typically pays for the construction of such projects with a line of credit, which is reimbursed with bond proceeds when the facility becomes operational.
The state's general obligation credit israted Aa2 by Moody's Investors Service and AA by Fitch Ratings. Standard & Poor's has not released a rating report, but state officials said contract negotiations are continuing, and a new report is expected before the bonds are issued.
Standard & Poor's provided an AA-minus rating for Louisiana GO bonds issued last year.
Co-bond counsels on the issue include Foley & Juddell LLC, Phelps Dunbar LLC, and Louisiana Attorney General James Caldwell.
State Treasurer John N. Kennedy said the $300 million issue is a compromise between some officials who wanted a larger sale to take advantage of low interest rates and others who urged caution until a calmer market prevails.
"I think it is enough right now," the treasurer said. "I know we have a backlog of projects totaling more than $1.5 billion, but we'll take care of it. The reason we're going ahead now is that the conventional wisdom is that interest rates will rise later this year."
The state has issued new-money bonds only once since 2006, Kennedy noted.
"We had the good fortune for a couple of years when we were able to finance the capital projects with budget surpluses," he said. "Now, all the hurricane-related recovery efforts are over or winding down, and state revenues are returning to a more normal level."
Kennedy also said he expected a quick sale with good results.
"We'll start the competitive bidding at 10 a.m., and we'll get all the bids by 10:29," he said. "We will have a good sale. The municipal market has been choppy lately, and a lot of that is due to adverse and, I believe, overrated advice. This is a good credit, and we anticipate a good sale for the state."
In 2009, Louisiana issued $325 million of GOs, including $200 million of new-money bonds for state capital outlay projects and $124.8 million of refunding bonds. The last time the state went to market with a strictly new-money offering to finance capital outlay projects was a $500 million GO bond sale in September 2006.
Freda Johnson, president of the state's financial adviser, Government Finance Associates Inc., said the sale was set for March 1 because several projects have been completed, and because interest rates were attractive.
"The state has certain commitments to replace the lines of credit on completed projects, and because of the general consensus that interest rates are gradually going to rise," she said.
In recent years, Louisiana issued GO bonds in the fall, but a sale earlier in the calendar year has some advantages, according to Johnson.
"For many years, the state issued bonds in the first or second quarters, and then the sales shifted to the fall," she said. "My advice is for a sale when the comprehensive annual financial report is fresh. With a sale in the fall, you have no recent financial update."
Also, there tends to be a more receptive seller's market earlier in the year, Johnson said. "Many bond maturities fall between Jan. 1 and Jan. 15. There is often money around in the first and second quarters that needs to be invested."
With the sale, Louisiana will have $2.4 billion of outstanding GO debt and $449.1 million of outstanding appropriation-backed debt.
Only $200 million of the outstanding GO debt has a variable rate, and the state is planning to refund it as floating-rate debt based on 70% of the one-month London Interbank Offered Rate.
Net state tax-backed debt is limited to what can be supported by 6% of expected annual revenue. In fiscal 2010, debt service of $483 million was 5.43% of anticipated revenue.
This year, the state's debt sales are expected to include $71 million of bonds for facility improvements in the Louisiana Community and Technical College System, $28 million of revenue bonds for the construction of a juvenile corrections facility, and $30 million of revenue bonds for infrastructure associated with a major economic development project.
Kennedy said the Louisiana economy is vibrant but fragile after being battered by a series of natural and man-made disasters over the past six years.
"I'm happy for Louisiana and sad for the other states. We have a budget shortfall next year of $1.6 billion, but I believe that is manageable without raising taxes," the treasurer said. "Our unemployment is now inching above 8%. The oil spill in the Gulf of Mexico last year and then the drilling moratorium were shocks to the economy."
On the bright side, Kennedy added, "The good news is that the oil and gas industry is reviving, along with petrochemical demand for product from Louisiana refineries."
In December, Jindal outlined plans to generate $800 million of one-time revenue to address an estimated $1.6 billion hole in the fiscal 2012 budget.
The state could generate an up-front payment of $400 million by selling several state-owned office buildings in downtown Baton Rouge while continuing to occupy them under a lease-purchase agreement, the governor said.
Another $250 million could be raised by selling bonds supported by future increases in state lottery earnings. Lottery revenue is currently dedicated to public education.
Other options include privatizing the state's health plan for government workers — Jindal said that could generate $100 million — and selling two state-owned but privately operated prisons for up to $60 million.
One problem that could affect state finances is the significant underfunding of Louisiana's pension system.
As of June 30, the state employee pension plan was funded at 57.7% of liabilities, and the teacher retirement system was funded at 54.4%.
In fiscal 2010, the state did not fund the systems at their required actuarial rate of $851 million.
