DALLAS — Louisiana is rapidly running out of general obligation bond proceeds to finance state capital projects and can’t issue enough additional debt to pay for projects already on the books.
That’s the dilemma facing an executive committee authorized Feb. 21 by the State Bond Commission. The commission set up the blue-ribbon panel after receiving a bleak report from Whit Kling, director of the commission, on the state’s dwindling capital-outlay escrow account.
The panel charged with finding a solution to the situation includes Treasurer John N. Kennedy, Gov. Bobby Jindal, Attorney General James Caldwell, House Speaker Charles Kleckley and Senate President John Alario, or their representatives.
The Bond Commission authorized the panel to seek assistance from finance professionals including bond counsel and financial advisors. The executive committee is expected to make its recommendations before the Legislature convenes April 8.
The capital-outlay escrow account is the funding source for the myriad of construction projects proposed each year by the Legislature and selected by the governor. The escrow account includes bond proceeds and general fund revenues.
Louisiana provides construction financing for approved projects with cash lines of credit from the account controlled by the state treasurer. When the projects are completed and operational, the capital-outlay escrow account is reimbursed for the project financing with proceeds from state tax-supported general obligation bonds.
The money in the capital outlay escrow account will be depleted within a matter of months unless the state issues GO bonds, Kling said.
The capital-outlay escrow fund contained a balance of $283.1 million on Feb. 5, Kling said, including $69.5 million for state facilities and $38 million for Department of Transportation and Development projects. The total account balance includes $219.4 million of proceeds from GO bonds issued for specific projects.
Louisiana’s $2.4 billion of outstanding GOs are rated double-A by all three major credit rating agencies.
“We are currently averaging around a $55 million to $60 million dollar per month burn rate,” Kling said.
“We have a liquidity issue with the escrow account,” he told the commission. “It’s still liquid, but it’s getting close.”
Monthly draws on the escrow account have averaged $53 million since July 2012, according to Kling.
But declining tax revenues and a constitutional provision that caps annual debt service at 6% of annual revenues doesn’t provide enough capacity to issue sufficient debt for capital outlay projects, he said.
The Legislature in 1992 limited GO sales for capital outlay needs at $200 million a year, with a 2% annual increase for inflation.
The annual debt-service cap is set at 6% of the collections expected for the next five fiscal years by the Revenue Estimating Conference, with an assumed revenue growth of 2% each year afterward. The Bond Commission is prohibited from approving new state tax-supported debt that would exceed the constitutional limit at any time during the term of the bonds.
The state is under the 6% cap now, Kling said, but the margin is small. The maximum debt service for fiscal 2014 is $605 million, with only $50 million of remaining capacity after the $555 million needed to serve the current outstanding debt.
“However, the limitation test is for any year in which a debt issue is outstanding,” Kling said. “Each year would be different with the lowest capacity year controlling, assuming a level debt service environment.”
The two stipulations out of sync, Kling said, and have created a structural imbalance in the state’s ability to fund capital projects.
“The two are not correlated,” he said. “When revenues drop there is no corresponding offset to the amount of additional capacity that has or will be added each year.”
The Revenue Estimating Conference adopted an outlook in December 2012 of $7.07 billion in general fund revenues in fiscal 2013, down from $8.07 billion collected in fiscal 2012. Approximately $8.2 billion of revenues are expected in fiscal 2014.
A solution needs to be found quickly, declared Kennedy, the treasurer, who chairs the Bond Commission.
“We have maybe five months of money left in the escrow account. I’ve only got $37 million in the account for the highway department. We can’t continue at this rate,” he said. ”If we don’t do something, nothing will get built, and that will hurt all the projects, the good and the bad and the ugly. We’re living in a fool’s paradise; we over-promise and we over-spend.”
The 2012 Legislature gave Jindal a multi-year list of capital outlay projects totaling more than $4 billion. Too many nonessential projects are put on the capital outlay list, Kennedy complained.
“The governor has complete control to decide what happens to projects on the list he gets from the Legislature,” he said. “There are hundreds of capital projects that come out of the Legislature, far too many to ever be funded, and everyone knows it.”
Jindal, a Republican, reformed much of the capital outlay system in 2008 shortly after being elected to his first term as governor, but Kennedy said more reforms are needed.
“The process needs to be fully transparent,” he said. “There must be explanations and reasons why some projects are given a higher priority.”
One recent request for a line of credit was for a fence around a private subdivision, he said.
“We are not able to issue enough debt for capital outlay, and when we do, the money is too often spent for projects that are not a state priority,” Kennedy said. “They may be fine projects by fine organizations, but they are not state priorities.”
Another root cause of the liquidity issue is the assumption that state revenue will go up 2% annually to sustain steady growth in Louisiana’s debt capacity.
“That assumption may not be correct,” Kennedy said. “Revenues have been flat or declining for the past seven years. We can’t continue to borrow money and build projects as if revenue was going up and up while clearly it is not. That’s why we developed a debt problem.”
Kennedy said a variety of legislative and regulatory reforms would be considered by the committee, but the constitutional limit on annual debt service is not in play.
“That amendment is one of the best constitutional protections enacted in my lifetime,” Kennedy said. “We had a huge debt problem, with previous governors and legislators using state debt like a credit card they never had to repay.”