Budget and economic improvements land Louisiana an outlook boost

Louisiana’s stabilized economy and recent legislative approval of revenue to close a large structural budget gap prompted Moody's Investors Service to return the state’s rating outlook to stable from negative.

At the same time, Moody’s affirmed Louisiana’s Aa3 general obligation bond rating as well as the Aa2 ratings on the state’s gas and fuels tax senior lien bonds, the Aa3 rating on the and fuels tax subordinate lien bonds, and the A1 rating on the state highway improvement fund bonds.

Louisiana Gov. John Bel Edwards

In addition, Moody’s confirmed the A1 ratings on the state’s lease appropriation custodial receipts, and bonds issued for the New Orleans Federal Alliance Project, the capitol complex program, economic development projects, the Interstate 49 North and I-49 South Projects, the hurricane recovery program, and the toll road refunding.

Also affirmed were Moody’s A2 ratings on bonds issued for the Delta Community College Project, the Louisiana Community and Technical College System Facilities Corp., the Baton Rouge Community College Facilities Corp., and the South Louisiana Facilities Corp.

The stable outlook reflects the recent stabilization of the state's economic base and approval of recurring, although time-limited, revenue supporting the state budget, said Moody’s analyst Marcia Van Wagner.

“We expect the state to continue to balance its budget with a preponderance of recurring actions but do not anticipate significant near- or medium-term improvements in its reserves, which will continue to fall short of a cushion commensurate with a volatile economic base,” Van Wagner said.

State lawmakers adjourned their third special session of the year on June 24 after approving a bill setting the state sales tax rate at 4.45%. It was signed by Gov. John Bel Edwards on June 25, became effective July 1, and is estimated to generate about $460 million in fiscal 2019.

The bill approved by lawmakers avoided a so-called “fiscal cliff” in which the state faced losing a number of revenue enhancements that were scheduled to expire June 30, including a 1% state sales tax. Lawmakers allowed 0.45 cents of the previous 1% sales tax to remain in effect through 2025, avoiding massive budget cuts in the near term.

“Thanks to the bipartisan compromise achieved during the last special session, Louisiana is no longer on the negative watch list,” Edwards said, referring to Moody’s outlook change to stable. “By working together, for the first time in a long time, Louisiana’s budget will have the kind of stability and predictability we need to bring new business opportunities to our state and grow our economy.”

Louisiana State Treasurer John M. Schroder said Moody’s stable outlook is good news, but the state has more work to do to implement structural budget changes.

“The fiscal cliff was mainly solved on the revenue side, now it's time to get to work on the spending side of the problem,” Schroder said. “Extending temporary taxes for the next seven years with no real structural reforms doesn't sit well with me.”

State officials have not said when, or if, they plan to resume budget reform talks. Temporary revenues enacted several years ago were designed to provide a cushion while changes to the budget process were considered, but none panned out due in part to political gridlock.

Van Wagner said economic and revenue volatility will continue to challenge Louisiana’s finances and governance.

She said the state’s slow population growth, high poverty rate at the third-highest among states, and low relative per capita personal income create fundamental constraints to the economic base, which remains exposed to the "gyrations of the energy sector."

The state’s rainy day fund is capped at 4% of total revenue receipts from the previous year, can only be accessed with approval by two-thirds of each house of the Legislature, and use of the fund is limited to one-third of the balance in one year.

“The targeted level of reserves is substantially lower as a percent of budget than in most other states that are dependent on oil and mineral extraction for economic activity and operating revenues,” Van Wagner said.

The state used the rainy day fund in fiscal years 2015 through 2017 to address mid-year budget gaps, leaving a balance of $287 million as of June 30, 2017, Moody’s said.

Louisiana has about $7.6 billion in net tax-supported debt outstanding. Of that, about 48% is general obligation debt, 37% is backed by dedicated taxes, and the remainder is secured by state appropriation.

Louisiana’s constitution guarantees pension benefits to retirees, although this requirement is limited to four state systems: the Louisiana State Employees’ Retirement System, the Louisiana State Police Retirement System, the Teachers’ Retirement System of Louisiana, and the Louisiana School Employees’ Retirement System.

For fiscal 2016, the state’s Moody’s-adjusted net pension liability was $12.2 billion, or 5.2% of gross state product. The other post-employment benefits actuarial accrued liability was $5.3 billion, which Louisiana pays on a pay-as-you-go basis.

Louisiana’s GOs are rated AA-minus with a negative outlook by S&P Global Ratings, and AA-minus with a stable look by Fitch Ratings.

Edwards said he expects the rating agencies to take notice of the Legislature’s recent actions to stabilize the budget.

“I’m grateful to every legislator who worked to get the job done and put the people of our state before politics,” he said. “We look forward to continued good news for Louisiana and hope we will merit a bond upgrade as our overall fiscal situation and economy continue to improve.”

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