BRADENTON, Fla. - Louisiana plans to price the first of two general obligation bond deals this week as gatekeepers of the budget continue to question the health of the state's finances.
A public spat between State Treasurer John Kennedy and the administration of Gov. Bobby Jindal had threatened to torpedo the deal entirely after Kennedy called the state's financial reporting into question.
While the situation bears watching, Louisiana's fiscal affairs are unlikely to affect the negotiated pricing of Thursday's refunding or a new money GO deal scheduled to price competitively on Nov. 20, according to Municipal Market Advisors managing director Matt Fabian.
For several weeks, Kennedy and administration officials have publicly disputed whether the state ended 2014 in the red or black.
In recent days, attention turned to Louisiana's fiscal 2015 budget status.
"To ensure the state can continue to operate responsibly, an expenditure freeze will go into effect immediately and will remain in effect through June 30, 2015," Jindal's Division of Administration announced Friday.
Kennedy announced Monday that the state's general fund is running a historically high deficit of $925 million just four months into the fiscal year.
"I'm concerned," Kennedy said. "This negative balance is evidence that we are spending more than we're taking in. We've been doing it for a while, but this historically large negative balance demonstrates that it's getting worse."
Louisiana's financial struggle isn't likely to affect how this month's GO deals price because the state's bonds have strong legal protection and overcollateralization, Fabian said Tuesday.
"Analysts are paying more attention to these kinds of disputes, but it's a stretch to say that they will have a meaningful price impact in a market like this," he said. "States have been vulnerable to budget deficit surprises at the end of fiscal 2014, and headed into this year, so Louisiana isn't alone in this."
On Thursday, Louisiana plans to price $258.2 million in GO refunding bonds by negotiation. JPMorgan is the senior underwriter, while co-managers are First Southwest Co, Jefferies LLC, and Loop Capital Markets.
The deal could be upsized to $475 million if market conditions warrant, state officials said.
Bond proceeds will refund certain maturities of outstanding 2006A, 2009A, 2011A and 2012A GO bonds.
The larger deal was projected to have net present value savings of about $26.6 million, or 20.4% of refunded par depending market conditions, the State Bond Commission was told in mid-October.
Lamont Financial Services Corp. is the state's financial advisor. Foley & Judell LLP is bond counsel. Underwriters counsel is Breazeale, Sachse, & Wilson LLP.
Louisiana plans to be back in the market on Nov. 20 for the competitive sale of $200 million in new money GOs to fund various capital projects.
Both the refunding and competitive bonds are rated AA by Fitch Ratings and Standard & Poor's, and Aa2 by Moody's Investors Service. All have stable outlooks.
Rating agency analysts said the state's economy has continued to improve since being devastated by a series of hurricanes and the Gulf oil spill.
Louisiana also has strong governance practices, reacts quickly to make budget cuts when needed, and the state's budget stabilization fund totaled $445 million at the end of fiscal 2014, the analysts also said.
Challenges facing the state include rising Medicaid expenses, underperforming revenues, and large unfunded pension liabilities, analysts added.
All three rating agencies also included in their reviews information about recent events leading to uncertainty about the fiscal 2014 year-end results.
That uncertainty led Kennedy to refuse to sign bond documents out of concern that incorrectly expressing the state's financial situation to prospective investors could violate the anti-fraud provision of the U.S. Securities and Exchange Act, he said.
The treasurer, who is elected in his own right, has long had an antagonistic relationship with the Jindal administration.
Last week, Kennedy announced that language for the preliminary official offering statement had been prepared so that the GO bonds could be issued.
The POS for Thursday's refunding contains three pages describing the state's potential 2014 year-end results, as well as more recent information about the general fund's negative cash flow.
The document states that actual expenses exceeded revenues by $140.6 million. It also said that the Division of Administration used cash carryover balances not historically included in fiscal calculations to report a positive year-end balance of $178.5 million.
In addition to those results, Fitch said lower mineral production-related taxes, fees, and royalties that were premised on an oil price per barrel of $96.69, which is much higher than current prices, could result in declining revenues.
"While the state reports that its average oil price per barrel in the beginning months of fiscal 2015 ran much closer to the forecast, it seems likely that the current turmoil in crude oil prices will result in a lowering of the price forecast at the time of the next Revenue Estimating Conference meeting, contributing to a negative reversion in expected revenue for fiscal 2015," said Fitch analyst Marcy Block.
Fitch believes Louisiana will take action to close any budget gaps should they be identified, she added.
While some states have encountered budget issues in 2014 and 2015, Fabian said the oil price issue could be a distinguishing factor to watch for Louisiana because of its dependency on revenues from crude production.
"Louisiana is maybe a bit more of a concern because the drop in oil prices may mean a budget deficit is harder for [the state] to correct in the near term," he said.
However, Fabian also said that the concern about the state's finances is not about default risk with respect to the upcoming deals since the state's bonds have "particularly strong legal protection and overcollateralization.
"The current market has a hard time differentiating between shades of credit risk, so in the end this is unlikely to affect the pricing much," he added.
Administration Commissioner Kristy Nichols scheduled a meeting Friday of the Revenue Estimating Conference to review and revise the official revenue forecasts for fiscal years 2015 and 2016, as well as the long-range revenue forecast.
"As we prepare to start the budgeting process for fiscal year 2016, it will be helpful to meet with the REC to discuss where we are now financially and what we can be prepared for going forward," Nichols said at the same time she announced a spending freeze through the end of the current year.
"We will, as always, develop a balanced budget for the state," she added.
