BRADENTON, Fla. — Cash-strapped Louisiana will borrow up to $400 million to bridge a mismatch between incoming bills and revenues.
The State Bond Commission approved the revenue anticipation notes Thursday, which will be structured as draw-down products so that the state can borrow only the amount necessary.
The commission selected proposals submitted by U.S. Bank and JPMorgan. Each bank will provide up to $200 million that must be repaid in a year.
The state intends to draw from U.S. Bank first because it offered the best interest rate at 70 basis points, said Louisiana's financial advisor, Renee Boicourt.
After the first $200 million, the state anticipates using up to $100 million from JPMorgan and keeping $100 million in reserve, said Boicourt, who is with Lamont Financial Services.
It is the first time in 30 years that Louisiana will use RANs at the state level, and it will be costly.
If the state uses $300 million of the notes, costs will be around $1.25 million. Issuance costs will be about $200,000 more. The state can trim expenses by prepaying the debt before maturity.
When the bond commission's chairman, Treasurer John Kennedy, asked what would happen if the debt is not repaid in a year, Boicourt said the state would default and be subject to a penalty interest rate that has yet to be negotiated with the banks.
"It's going to be paid back within a year," said Jay Dardenne, a member of the commission and budget chief for Gov. John Bel Edwards.
The commission initially approved up to $500 million of RANs, but there was no discussion Thursday about why the amount was cut by $100 million.
The state historically relied on interfund borrowing to account for the mismatch between revenue collections and bills that must be paid each fiscal year.
Large reserves built up in Treasury accounts since Hurricane Katrina were swept to cure budget shortfalls in prior years instead of increasing revenues in other ways.
The RANs will only be used to cover appropriations in the current budget, and cannot by law be used to pay for new expenses.
The bond commission did not talk about severe floods that hit the state last month, or how it might impact the budget.
The state has told the Obama administration that preliminary damage estimates are more than $8.7 billion.
Edwards has been in Washington this week to request $2 billion from the Community Development Block Grant Disaster Recovery Program.
Some 55,000 homes in 26 parishes were damaged or destroyed after several days of torrential rains last month, an event that weather experts consider a 1,000-year flood.
Damages incurred in areas never known to flood, and more than 80% of homes did not have federal flood insurance. Some 6,000 businesses were damaged.
The Joint Legislative Committee on the Budget likely will be updated on damages at Friday's meeting.