‘Political risk’ seen as a credit weakness in Louisiana, S&P says

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S&P Global Ratings said that political risk has emerged as a credit weakness for Louisiana after lawmakers failed to address the budget deficit expected in fiscal 2019.

Lawmakers ended a special session March 5, two days earlier than scheduled, failing to pass any bills to address the state’s near $1 billion gap.

“In our view, political risk - as evidenced by the legislative gridlock during the special session - has emerged as a credit weakness, which has the potential to stunt what otherwise has been recent positive momentum in the state,” S&P analyst Oscar Padilla said in a comment Wednesday.

Louisiana’s budget imbalance led S&P a year ago to downgrade the state’s general obligation bond rating to AA-minus from AA. It also maintained a negative outlook.

Louisiana’s economy has seen improvement, which is expected to boost some state revenues particularly with the rebound in oil prices, Padilla said. The state also projects it will see more than $300 million stemming from enactment of the federal Tax Cuts and Jobs Act late last year.

Gov. John Bel Edwards said Monday, after the Legislature’s special session ended, that the state revenue estimating conference has not yet included projected funds from the federal tax bill in their estimates.

Edwards said the REC believes that the difference between forecasted general fund revenue in the current budget and the forecast for fiscal 2019 will be $994 million.

The June 30 expiration of a 1% sales tax increase is the biggest factor accounting for the drop in revenue for the coming fiscal year. Other revenue-raising measures will also terminate at the same time – a scenario that S&P called a “manufactured fiscal cliff.”

The sales tax and fee increases were approved by lawmakers to be in effect two years to counter the effects of a lagging economy, high unemployment and steep declines in oil prices. A significant portion of Louisiana’s budget comes from the sale of petroleum products.

Over the two years, lawmakers also said they expected to work on reforms to stabilize state revenues supporting the budget. That didn’t happen although several special sessions were called to deal with the issue, including the most recent one that ran from Feb. 19 to March 5.

In each session, bills never made it out of the Republican-led House, which is required to consider such measures first. A GOP majority also controls the Senate.

Louisiana’s constitution also prohibits lawmakers from considering revenue enhancements during their regular session in even years, which starts Monday.

Edwards, a Democrat, said he would renew discussions with House Speaker Taylor Barras, R-New Iberia, and Sen. President John Alario, R-Westwego about calling a second special session to deal with the budget in mid-May.

A spokesperson from Edwards office said Wednesday that “the governor, president and speaker all agree that ending the regular session early in order to have a special session that adjourns by June 4 is their intention.” A specific date has not been set.

Over the short term, S&P said it anticipates there will be continued modest improvements in economic and fiscal trends but “uncertainty about fiscal 2019 now looms” over the state.

“As the Legislature and governor work to find a path forward in crafting the state's next budget, we will continue to assess whether any measures provide for a sustainable framework to maintain long-term structural balance,” Padilla said.

In a September rating report, S&P said the negative outlook reflected its view that Louisiana’s reliance on nonrecurring measures to close previous budget gaps, coupled with shrinking reserves, makes the state vulnerable to further fiscal instability especially given the expiration of revenue enhancements on June 30.

“Without meaningful, long-term structural tax changes that could carry significant implementation risk, there is a one-in-three chance we could lower the ratings” within a year, the September report said.

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State budgets Deficits Bond ratings John Bel Edwards State of Louisiana Louisiana