Actions by Louisiana lawmakers to close a $500 million budget deficit amount to stop-gap measures, Fitch Ratings said in a comment.

BRADENTON, Fla. – Recent actions by Louisiana lawmakers to close a nearly $500 million budget deficit are stop-gaps that do not address "persistent" budget challenges, according to Fitch Ratings.

Any additional actions that result in new fiscal stress or further reductions in fiscal flexibility could lead to negative pressure on the state's rating, Fitch analysts have warned.

The rating agency's comments come as the state prepares to issue $350 million of debt that may be privately placed because of the state's unanswered budget questions.

Fitch rates Louisiana general obligation bonds AA with a stable outlook, neither of which is affected by the comment piece.

On Nov. 20, the Joint Legislative Committee on the Budget approved steps proposed by the Jindal administration to close a $487 million hole in the current general fund budget, created by a $117 million operating deficit at the fiscal 2015 and a $370 million revenue shortfall projected in fiscal 2016.

The plan calls for $150 million in cuts from 3% budget reductions at targeted agencies, using $31.7 million in funds from lawsuits and the federal government, dipping into the rainy day fund for $28.1 million, deferring Medicaid payments, and relying on $277.7 million in excess fund balances not appropriated in the fiscal 2016 budget.

Actions to close the gap do not address the continuing trend of budget imbalance that has characterized state financial operations the past several years, the Fitch analysts said in the Dec. 3 comment.

Some of those actions are expected to increase a projected fiscal 2017 deficit - currently estimated at more than $1 billion - or exacerbate the $516 million funding gap in the state's Medicaid program.

"Fitch believes these one-time actions do not address the persistent underfunding of the state's Medicaid program and other state expenditures, such as higher education tuition assistance," analysts said.

Governor-elect John Bel Edwards, a Democrat, is expected to discuss fiscal challenges with legislators after taking the oath of office on Jan. 11.

Edwards has said that he will call a special session to address budget problems before the regular legislative session starts March 14.

The new governor's budget proposals could result in replacing some of the stop-gap measures in fiscal 2016 with more policy-driven solutions that would also reduce the budget gap anticipated in fiscal 2017, according to Fitch.

"Fitch will look for concurrence on recurring measures that provide stability to financial operations," analysts said.

Because of uncertainties surrounding the state budget, Louisiana is currently evaluating the use of a limited public offering or private placement of bond anticipation notes in coming weeks to fund routine capital outlay needs.

The state is seeking proposals from firms for interim products, and plans to take into consideration the disclosure requirements because the "financing will take place in a period of potentially rapidly developing financial developments," according to the state's solicitation for offers.

The State Bond Commission is expected to evaluate proposals for the $350 million offering at its Dec. 17 meeting.

The short-term financing will be taken out with long-term state general obligation bonds likely sometime next year.

Moody's Investors Service and Standard & Poor's have negative outlooks on Louisiana due to its structural budget imbalance. Moody's assigns Aa2 ratings to the state's GO bonds, while S&P assigns AA to the debt.

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