DALLAS - Louisiana's constitutional limit on annual debt service may derail Gov. Bobby Jindal's plans to use the proceeds from $400 million of revenue bonds to finance the proposed new $1.2 billion Louisiana State University teaching hospital in downtown New Orleans.

Louisiana's constitution limits the amount of net state tax-supported debt service to 6% of total state revenues. The state can exceed the cap only if the Legislature exempts a specific debt issue from the constitutional mandate with approval by two-thirds of the legislators.

Jindal has proposed funding the hospital with $300 million of federal Community Development Block Grant funds from the Louisiana Recovery Authority, $492 million in hurricane recovery funds from the Federal Emergency Management Agency as compensation for Charity Hospital, and approximately $400 million in bonds supported by hospital revenues.

FEMA determined it could provide only $23 million because of the poor condition of Charity Hospital before the hurricane. Negotiations with FEMA are continuing, but the state also hopes to obtain funding for the hospital through the proposed federal infrastructure renewal program.

The Jindal administration has maintained that debt service on the bonds for the hospital would not count against the constitutional cap because they would not be issued by the state nor supported with tax revenues. The bonds would be issued by a proposed nonprofit corporation, which will be established to operate the facility and support the debt service with hospital revenues from insured patients.

However, House Speaker Jim Tucker said bond underwriters in New York told a legislative delegation last week that the debt would be considered net state tax-supported debt.

The State Bond Commission has the authority to decide if the hospital debt is state-supported debt, but Tucker said the credit market will determine if hospital revenues are sufficient for debt service.

The lawmakers - including Rep. Jim Fannin, chairman of the House Appropriations Committee, and Rep. Hunter Greene, chairman of the House Ways and Means Committee - were told that the bonds could not be sold without a state guarantee, Tucker said. The group was in New York to meet with bond rating agencies, underwriters, and the state's financial adviser, Freda Johnson of Government Finance Associates Inc.

Health and Hospitals Secretary Alan Levine told a joint House-Senate committee in June that the new LSU hospital will not be profitable and will require state assistance.

Levine said a business plan developed by the state hospital department found that the New Orleans facility will require $105 million in state general fund support when it opens in 2012, with the required annual subsidy declining over time. If the teaching hospital is not built, Levine said, maintaining operations at the interim LSU hospital in New Orleans would require $184 million of state support each year by 2016.

Commissioner of Administration Angèle Davis, the governor's chief financial officer, said efforts are under way to structure the bond package to eliminate the likelihood that it would be considered state-supported debt.

"We are working with all parties to develop a financing structure to be able to successfully accomplish the remaining financing for the project, and in a manner that sufficient self-generated revenues support the debt so it doesn't impact net state tax-supported debt," Davis said.

According to a report presented to the State Bond Commission on June 30, debt service on the current outstanding state debt of $5.88 billion is $472.8 million in fiscal 2009, or 4.3% of the $11 billion in revenues. Debt service in fiscal 2010 is projected at $488.6 million, or 4.5% of an expected $10.8 billion in revenue.

The report said the state has some $200 million in capacity available under the constitutional cap based on the current outstanding debt, but that was based on the current outstanding debt, as of Dec. 31, 2007. The debt service report did not include anticipated general obligation bond sales of $500 million in fiscal 2009, $400 million in fiscal 2011, and $500 million of gasoline and fuel tax bonds in fiscal 2010.

Louisiana's revenues for fiscal 2010 could be even lower than expected in the June report, which would further reduce the capacity available under the debt service cap. The revenue estimating conference will meet this week to update the state's official revenue forecast amid signs that revenues are declining due to the economic slowdown.

The new 424-bed facility would be one of the 10 state hospitals that provide indigent care and serve as centers for medical education in Louisiana. The new hospital in downtown New Orleans would be the primary teaching center for medical students and post-graduate residents at LSU, Tulane University, and other New Orleans-area universities.

The proposed LSU New Orleans hospital would replace Charity Hospital, which was built in 1938 and has never reopened since it flooded as a result of Hurricane Katrina in 2005. The facility is to be built on a 75-acre site in downtown New Orleans adjacent to a planned Veterans Affairs hospital, with which it would share parking garages, a medical office building, laboratories, and other support functions.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.