Louisiana’s general obligation bonds were downgraded to AA-minus by Fitch Ratings on Tuesday because of the state’s persistent budget imbalance.

BRADENTON, Fla. – Louisiana’s general obligation bonds were cut one notch to AA-minus at Fitch Ratings as the state prepared to refund debt as part of a deficit-reduction plan.

Fitch dropped the ratings on $3 billion of outstanding general obligation bonds to AA-minus from AA, and lowered the ratings on $732 million of appropriation-backed bonds to A-plus from AA-minus. The outlook is stable.

Louisiana’s persistent budget imbalance and measures adopted recently to close massive deficits were cited by Fitch as reasons for the lower ratings.

“The enacted budget for the current fiscal year relied upon a long-standing trend of overly-optimistic revenue expectations, a reliance on one-time actions for budgetary solutions, and insufficient appropriations for the state's Medicaid program,” said Fitch analyst Marcy Block.

The state’s fiscal problems have worsened because of mid-year revenue underperformance primarily as a result of the prolonged plunge in crude oil prices, she said.

“While the state has proactively responded to these challenges, spending pressures from education and Medicaid remain and sizable budget gaps continue to be forecast,” Block said.

The AA-minus GO rating was assigned to $430 million of GO refunding bonds and $65 million of taxable GO refunding bonds the state expects to sell around April 20.

The refunding is part of a deficit reduction plan adopted by the Legislature in mid-March to address budget shortfalls in the current year and in fiscal 2017.

State officials said they hope the refunding will bring $80 million in savings that would go toward eliminating the deficits in both years.

On Feb. 26, Moody's Investors Service downgraded the state’s GOs to Aa3 from Aa2, citing some of the same concerns as Fitch.

Moody’s also lowered the state’s lease appropriation bond ratings by one notch to A1, A2 and A3, depending on the individual credit.

The Louisiana Legislature met in special session last month to close an anticipated $940 million gap in the current budget, and a $2 billion shortage next year.

Measures adopted by lawmakers included a short-term one-cent sales tax increase that went into effect April 1. However, their actions failed to fully address the deficit.

 

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