BRADENTON, Fla. – All of Louisiana's bonds were slapped with one-notch downgrades by Moody's Investors Service Thursday as the state grapples with a combined $3 billion budget shortfall in the current year and fiscal 2017.
Moody's said its action impacts $7.3 billion of outstanding debt. The outlook remains negative.
Louisiana's general obligation bonds were downgraded to Aa3 from Aa2, while lease appropriation bonds were cut one notch to ratings of A1, A2 and A3, depending on the individual credit.
"The Aa3 GO rating reflects the state's rapidly deteriorating revenue collections due in part to the continuing low oil price environment, a looming fiscal 2017 gap that could be as large as 20% of general fund revenues, and the effects of years of structural imbalance on the state's reserves and liquidity," said Moody's senior credit analyst Marcia Van Wagner.
State officials recently increased the anticipated budget gap for the current year to be $940 million, from $750 million a month ago, and estimated a $2 billion shortfall for fiscal 2017, up from $1.9 billion.
Moody's, which has placed a negative outlook on Louisiana's debt for a year, said that outlook was maintained to reflect continued budget risks and the likelihood that movement toward structural balance is likely to take time, especially in a low oil price environment.
The uncertain outlook also reflects revenue forecasting risks, Medicaid cost containment implementation risks, and uncertainty over attainability of budget balancing initiatives.
The downgrade will make it more expensive for the state to borrow money for construction projects, said State Treasurer John Kennedy.
"You can't spend more taxpayer money than you take in for seven years in a row and not expect a downgrade to your credit rating," Kennedy said.
Kennedy criticized Gov. John Bel Edwards and other state officials for "scaring the daylights out of the credit rating agencies" and investors by making public statements that the budget crisis could lead to suspending payments on the state's scholarship program, ending football at Louisiana State University, and closing other higher institutions as well as prisons.
"Acts have consequences," said Kennedy, a Republican who recently announced a bid for the U.S. Senate seat being vacated by David Vitter. He regularly sparred with Edwards' predecessor, Bobby Jindal, over the state budget.
The hit to the state's credit comes with state lawmakers in a special session to deal with the fiscal crisis,
Edwards, who took office in January, said he was disappointed in the rating downgrades because he believed Moody's would wait until after the special session to take action.
"Unfortunately, the downgrade confirms what we've been saying about the structural imbalance of our budget," Edwards said in a statement. "The overuse and abuses of one time money and fund sweeps by the Jindal administration were a major factor in this decision."
Edwards also said the downgrades also reflect the global concern about the decline of oil prices and its impact on producing states.
"It is more important than ever for the Legislature to work with me during this special session to stabilize our budget and repair the damage of the last eight years," he said, adding that the state can address its budget imbalance by transitioning to a new tax structure that conforms to best practices promoted by organizations such as the Tax Foundation.
To help with the immediate funding crunch, Edwards, a Democrat, has proposed a one-cent sales tax increase.
Serious disagreement has arisen between Democrats and Republicans in the state legislature over whether to severely cut the budget or raise revenue.
Moody's on Thursday also downgraded the state's gas and fuels tax senior lien bonds to Aa2 and from Aa1, the gas and fuels tax subordinate lien bonds to Aa3 from Aa2, and State Highway Improvement Fund bonds to A1 from Aa3.
Although the transportation-related bonds are backed by related taxes that do not require appropriation to pay debt service, Van Wagner said the state's weakening economic and financial environment had lowered the credit quality of the bonds.
On Monday, Moody's placed eight Louisiana public universities – including the A1-rated flagship Louisiana State University - on review for possible downgrade amid the current budget crisis, which could target them once again for budget cuts.
Higher education faces between $70 million and $200 million in cuts in the current year, depending on how lawmakers revise the current budget, and the cuts could be larger in fiscal 2017.
Moody's said Louisiana's four-year universities have endured a severe 47% decline in operating appropriations between 2010 and 2014, compared to a median of 9% for its other rated U.S. public universities.