DALLAS – Louisiana will extend its dwindling capital outlay escrow account for another few months with Tuesday’s competitive sale of $300 million of state general obligation bonds.
The issue includes a $169.3 million taxable GO tranche and $130.7 million of tax-exempt GO bonds.
Proceeds from the taxable bonds include $100 million earmarked for the general highway program of the Department of Transportation and Development and $65 million for education.
The tax-exempt bonds will reimburse the state for a variety of state projects that have been funded through the comprehensive capital outlay escrow account.
Louisiana GO bonds are rated Aa2 by Moody’s Investors Service and AA by Fitch and Standard & Poor’s. The state’s current outstanding debt includes $2.64 billion of GO bonds and $1.1 billion of notes, obligations, and appropriation debt.
Breazeale, Sachse and Wilson LLP serves as the state’s co-bond counsel with Breithaupt, Dunn, DuBos, Shafto & Wollosen.
Lamont Financial Services Corp. is financial advisor to the state.
The State Bond Commission will meet May 7 to accept bids for the bonds. The Bond Commission will also consider a $200 million GO refunding and a $303 million refunding of gasoline and fuel tax revenue bonds at the special meeting.
Proceeds from Tuesday’s sale will keep the capital outlay escrow account solvent through the first few months of fiscal 2014, but won’t buy much time, said Whit Kling Jr., director of the Louisiana State Bond Commission. Without more GO bonds to replenish it, the account will run dry.
“The lines of credit are IOUs against the bond proceeds,” Kling said.
Louisiana finances the construction of approved capital projects with cash lines of credit. When work is completed, the state issues general obligation bonds to reimburse the comprehensive capital outlay escrow account for the construction financing,
Depletion of the escrow account could mean a halt to capital outlay projects under construction, including highway projects. Attorney General James D. “Buddy” Caldwell has been asked to provide guidance on the contract situation, Kling said.
The escrow account held approximately $236 million at the end of April, sufficient for barely four months of draws that average $55 million to $60 million each.
“The $300 million will provide funds to carry the program through the end of fiscal 2013 and a portion of 2014,” Kling said. Fiscal 2014 will begin July 1.
With the $300 million realized with next week’s sale added to the $236 million current balance, the escrow fund should remain solvent for another six to eight months, he said. But without more bond proceeds into the fund, he said, the escrow account would evaporate before the end of fiscal 2014.
“It is anticipated an additional sale will be needed to meet the projected $600 million-plus in expenditures that will be occurring in fiscal 2014,” Kling said.
However, debt sales in 2014 will be constrained by the state constitutional debt limit that caps net state tax-supported debt service at 6% of annual general fund and dedicated fund revenues.
Debt service payable on net state tax-supported debt for fiscal 2012 was $540.6 million, or 5.45% of the estimated general fund and dedicated fund revenue expected in the official forecast by the Revenue Estimating Conference.
Debt service in fiscal 2014 is estimated at $554 million from expected revenues of $10.1 billion, leaving little capacity for additional debt.
The combination of the limited capacity for new debt service and the $600 million in capital outlay expenditures that will be due in fiscal 2014 will require a creative approach, Kling said.
“It is highly probable that alternative structures will have to be considered in order to meet the stated need and stay within the debt capacity,” he said.
The Bond Commission in February established an executive committee find to solution to a dwindling capital outlay account without busting the cap on state tax-supported debt.
At that time, Treasurer John Kennedy said a long-term solution is needed that balances capital outlay expenditures with GO bond sales.
A total of $3.9 billion in projects have been put onto the capital outlay list of bond-financed projects since fiscal 1999, but bond sales since then have totaled $2.8 billion.
“We can look at this until we’re blue in the face,” he said. “If we don’t do something, we’re going to have a huge problem.”
The committee will make some suggestions for a solution to the 2013 Legislature now sitting in Baton Rouge, but no action will be requested this year. Many of the recommendations hinge on legal questions currently under review by the attorney general’s office.
The request by the Louisiana Community and Technical College System for legislative approval for $251 million of bonds that would be stipulated as non-state tax supported debt could further muddy the waters for a GO bond issue next year, Kennedy said.
The Legislature can designate the bonds as outside the cap limit with a two-thirds vote in each chamber, Kennedy said, but that could affect the ratings on state debt and the interest paid by the state.
“The whole situation is very troublesome,” Kennedy said. “The rating agencies won’t care if the $250 million is on the books as tax-supported debt. It will be on the books, and the rating agencies won’t be fooled by a two-thirds vote.”
If the ratings are lowered, the state would pay a higher interest rate on its tax-supported debt, Kennedy said, which would further limit capacity under the 6% debt service cap.
The community college bond plan is “an end run around” the capital outlay program by the college system and Gov. Bobby Jindal, who supports the proposal, Kennedy said.
“I know the community colleges need the facilities, but if they get permission to issue off-the-books debt, we’ll have to also let LSU and all the other schools do it too,” he said. “They will come back in 2014 with more than $1 billion in requests for off-book debt, and how can the Legislature tell them, ‘No’?”
The Senate is expected to consider Senate Bill 204, which authorizes the bonds as non-tax supported debt, on May 2. The measure has been recommended by the Senate finance and revenue committees.
Sen. Robert Adley, R-Benton, who sponsored the college bond bill, doubted the proposed college bonds would result in a rating downgrade. Adley called the likelihood of a downgrade as “slim and none.”
“We never know what the rating agencies are going to do until we ask them,” he said.
The unanimous objection to the bonds by state university regents is irrelevant, Adley said.
“None of them are elected,” he said.
Funding the community college facilities with the limited amount of available capital outlay financing would take too long when trained workers are needed now, Adley said.
“The way to get us out of this mess is to grow out of this mess,” he said.
Joe May, president of the technical and community college system, said proceeds from the requested bonds would fund new buildings and other facilities. The capital outlay system is better suited for maintenance and upgrades than for new facilities needed to provide technical training, he said.
