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Louisiana Bond Commission Approves 'Scoop-and-Toss' Deal

BRADENTON, Fla. - The Louisiana State Bond Commission approved a scoop-and-toss bond restructuring Thursday to help the state through its current fiscal crisis.

The commission gave the go-ahead for a $600 million general obligation refunding, after hearing warnings about negative impacts from past bond restructurings the state used to bridge budget gaps.

The deal is designed to delay $81.6 million in bond payments this fiscal year and $30 million in fiscal 2017.

The offering, expected to price by mid-April, will be a typical 20-year financing that matches the final maturity of the refunded bonds.

The deal will bump the state closer to its borrowing cap when higher debt service payments come due in later years.

Louisiana has employed tactics such as using higher premiums and applying nonrecurring funds to short-term defeasances to relieve budget deficits over the past six years.

Those measures cost the state $231 million in extra interest, said Edward Seyler of the Legislative Auditor's office.

No one could recall if the state had previously done a scoop-and-toss deal, in which new bond proceeds are used to pay off maturing bonds.

Such deals are like a homeowner going from a 20-year mortgage to a 30-year mortgage, said State Treasurer John Kennedy.

State Rep. Cameron Henry, R-Metairie, a bond commissioner, asked if rating agencies look negatively at scoop-and-toss restructurings.

"Yes," said financial advisor Renee Boicourt of Lamont Financial Services. "I recommend that you don't do this again."

However, Boicourt said the state has few options to generate $81 million this late in the fiscal year to help close the deficit, and analysts are likely to view the refunding as a transitional measure as part of a longer-term plan to repair the budget.

Boicourt warned that states that have used scoop-and-toss multiple times have been downgraded multiple times.

Boicourt was also asked how much of a penalty the state should expect from last month's GO rating downgrade to Aa3 from Aa2 by Moody's Investors Service. Louisiana's fiscal problems have been widely known, she said, adding that penalties already have been "baked into" the state's borrowing costs.

The commission voted to approve the scoop-and-toss plan, with Kennedy dissenting.

After the meeting, Kennedy said that he opposed such "gimmicks" under former Gov. Bobby Jindal, and he opposes them under Gov. John Bel Edwards, who proposed the scoop-and-toss as part of his recent legislative package to deal with the budget deficit.

"I'm tired of the three-card Monte," Kennedy said, comparing the plan to a street con game.

Kennedy also said that he planned to meet with analysts from Fitch Ratings and Standard & Poor's Thursday to discuss the state's borrowing plan. They also will meet with Gov. Edwards.

The restructuring deal, proposed by JPMorgan, was adopted in the recently concluded special legislative session that Edwards called to deal with budget shortfalls this year and in 2017.

As a result of the bills that were passed, Louisiana now expects deficits to be $70 million this year and $750 million in 2017, according to a revenue estimating conference Wednesday.

Bills included short-term revenue measures, including a one-cent sales tax increase that will expire in 27 months.

The bond commission was warned Thursday that because of the temporary infusion of new revenue, the state will exceed its debt capacity limit in fiscal 2019 unless the new revenues are extended or become permanent.

In addition to the GO refunding, commissioners also authorized staff to evaluate whether to take out $255 million of bond anticipation notes with long-term debt at the same time.

The BANs sold in February at a true interest cost of 0.52%, and are held by JPMorgan, which will be the book-runner for the refunding.

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