Outlook is brighter for Louisiana’s bonds and budget
Significant improvement in Louisiana’s financial position led Moody's Investors Service to change its outlook to positive from stable, a move that could trigger a rating upgrade within the next two years.
Moody's also confirmed its Aa3 rating on $3.4 billion of outstanding general obligation bonds, while suggesting an upgrade could be in the offing if long term economic growth offsets volatility in the energy sector and the state continues a sustained trend of structural budget balance while strengthening reserves and liquidity balances.
“We expect the state to continue to balance its budget with a preponderance of recurring actions but we also expect its reserves to continue to fall short of a cushion commensurate with a volatile economic base,” said analyst Marcia Van Wagner.
Louisiana recently estimated it will have a $500 million surplus when the books on the current fiscal year close out, up from $300 million previously announced. Some $125 million of the surplus is expected to be used to boost the state’s rainy day fund.
The rainy day fund totaled $321 million as of June 30, 2018, and will be $407 million at the end of fiscal 2019, a low amount Moody’s said it viewed as a credit weakness.
Gov. John Bel Edwards, a Democrat running for re-election to a second term this year, lauded both the positive outlook from Moody’s and the anticipated surplus.
“A budget surplus is much better than the $2 billion budget deficit I inherited when I came into office,” said Edwards, who became governor in January 2016. “Louisiana is experiencing budget stability for the first time in a long time, its highest ever personal income, a record high GDP and an improving economy.”
In addition to putting some of the surplus into the rainy day fund, Edwards said the state will make repairs to bridges and roads, address deferred maintenance at colleges and universities, fund coastal and drainage issues and other critical projects across the state.
Edwards faces Republicans U.S. Rep. Ralph Abraham and businessman Eddie Rispone, both considered front-runners, on Oct. 12 primary ballot. Also on the ballot are Democrat Oscar "Omar" Dantzler, Independent Gary Landrieu, and Republican Patrick "Live Wire" Landry, according to the Secretary of State’s Elections and Voting Division.
If no candidate receives a majority of votes in the primary, the two top vote-getters face off in general election Nov. 16.
Both Abraham and Rispone, as well as other GOP members who control the state Legislature, have been critical of the expected budget surplus saying it shows that Louisiana residents are paying too much in taxes, including from a 0.45% sales tax increase Edwards’ negotiated with lawmakers to bolster the state budget in 2018.
The large surplus was due to personal income and corporate taxes coming in higher than anticipated, Division of Administration Commissioner Jay Dardenne told the Joint Legislative Committee on the Budget Sept. 13.
Edwards entered office facing state budget deficits rolled over from Gov. Bobby Jindal’s two terms in office, deficits that have been cured.
Edwards also pledged and accomplished during his tenure stabilizing the budget by ending annual fund sweeps to support the spending plan and disallowing the allocation of one-time revenues for continuing expenditures, measures that he called gimmicks.
“We appreciate that Wall Street is recognizing the progress we’re making and are hopeful that as our economy continues to grow and strengthen this will ultimately lead to an upgrade in our overall credit rating,” he said in a statement Tuesday.
Maintaining a stable budget could be difficult with the overall economy slowing.
Moody’s said in a credit opinion Wednesday that economic and revenue volatility will continue to challenge the state’s Louisiana’s finances and governance.
Historically a poor state, Louisiana’s personal income per capita was 77% of the US level in 2000. The state’s slow population growth, high poverty rate and low relative per-capita personal income create fundamental constraints to the economic base, which remains exposed to the gyrations of the energy sector, Moody’s said.
Louisiana also is a center of oil and gas production.
“The share of severance and royalty taxes in total state fund revenues including dedications [in the state budget] is projected at 5.9% in fiscal 2020 compared to 12.5% in fiscal 2014, reflecting both the decline in these revenues and the addition of new revenue sources to the budget,” said Van Wagner.
Van Wagner said the positive outlook on the state’s credit rating reflects its recent record of closing budget gaps with recurring solutions, and relative stabilization of the state’s economy.
Moody's downgraded Louisiana to Aa3 from Aa2 in February 2016, a month after Edwards took office, due in part to the prior “effects of years of structural imbalance on the state's reserves and liquidity.”
From that point, a negative outlook remained on the Aa3 credit rating until July 2018, when the outlook was returned to stable.
In addition to affirming the GO rating Tuesday, Moody’s also affirmed its Aa2 rating on the Louisiana Gas and Fuels Tax senior lien bonds and Aa3 rating on the gas and fuels tax subordinate-lien bonds.
The A1 rating remains the same on the state’s lease appropriation custodial receipts, the New Orleans Federal Alliance Project bonds, Capitol Complex Program bonds, Economic Development Project bonds, 1-49 north and south project bonds, Hurricane Recovery Program bonds and the toll road refunding bonds.
The A2 rating was confirmed on the lease appropriation LCTCS Facilities Corporation Project bonds, BRCC Facilities Corporation Project bonds, Millennium Housing L.L.C. bonds, and debt issued for the South Louisiana Facilities Corporation Project as was the A1 rating on the State Highway Improvement bonds.
Moody’s said the rating outlook on all the bonds has been revised to positive from stable, while the outlook remains stable for the senior and subordinate Gas and Fuels Tax bonds.