BRADENTON, Fla. — Louisiana plans to use non-recurring revenue to defease $210 million of general obligation bonds to help close a deficit in the 2015 budget even though it will create a shortfall in 2016.
Instead of using recurring general fund revenues, the state will use non-recurring income to make the GO payment, and provide cash flow relief by removing the debt from the state's books, State Bond Commission Director Lela Folse told the SBC Thursday.
The state Attorney General provided a legal opinion saying that the procedure is legal, according to Folse, who also said similar action was taken in 2005.
The Bond Commission gave preliminary approval to the maneuver with state Treasurer John Kennedy voting against it.
Using non-recurring revenue to pay debt service will leave the state $210 million "in the hole" in fiscal 2016, Kennedy said.
The plan depends on using state budget surplus, as well as non-recurring revenues that have not yet been received such as over-collections that should be available by the end of the current fiscal year, commission staff said.
The non-recurring funds will be used to buy Treasuries that would be placed into escrow to pay principal and interest on the $210 million of bonds maturing July 1, 2014 through June 30, 2015, according to state documents.
After the so-called prepayment, the state would resume debt payments on remaining obligations in 2016.
Surplus funds cannot be used to address an operational deficit, which the state is facing, said Commission member Rep. Joel Robideaux, R-Lafayette, who is also a member of the Joint Legislative Committee on the Budget.
"By doing this we are freeing up this year's debt service to use in next year's [operating] budget," he said. "I'm being told the constitution allows for it."
Kennedy, who is chairman of the SBC, questioned if the transaction met the "spirit" of the state's constitution, which requires recurring payments to be made with recurring revenue. He said the state would be making a bond payment, but not paying off the entire debt.
Staff members agreed with Kennedy's assessment that the $210 million payment would put the state behind in funds available for the 2016 budget.
Since next year's debt would be paid off, it could be considered a non-recurring payment satisfied with non-recurring revenues, commission members said.
The SBC's approval on Thursday authorized bond counsel to be hired and bond documents to be prepared. The deal must come back to the SBC for final approval before the bonds can be defeased.
The defeasance was part of Gov. Bobby Jindal's $25 billion executive budget proposal for 2015. The spending plan includes $8.6 billion for the state's general fund, which is an increase of around 2% over the current year.
Louisiana has about $3.5 billion of outstanding GO bonds rated AA by Fitch Ratings and Standard & Poor's, and Aa2 by Moody's Investors Service.
In a report earlier this year, S&P warned that the state should find structural solutions to its budget challenges, which include operating deficits the past five years and a low, 58% funding level of the state's four pension plans for a liability of $19 billion.