Wednesday, 06 April 2016 13:09

Fitch sacks Louisiana, and so, the finger-pointing--tax, no, budget cuts, continue

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Sure, as shooting, when it was announced that Fitch was lowering Louisiana's credit rating, the blame-game went in full gear.

Republican Treasurer John Kennedy and US Senate candidate announced the bad news and said, "This is what happens when you spend more than you take in for seven years running. It's disappointing but not surprising," said Treasurer Kennedy. "The rating agencies are tired ofLouisiana's accounting gimmicks and spending practices."

His press release further noted that "Moody's Investors Service downgraded Louisiana's credit rating earlier this year. Fitch's action comes just days before Louisiana goes to market on up to $600 million in general obligation bonds."

Then, Democrat John Bel Edwards followed:

“This news further illustrates the severe budget crisis Gov. Jindal’s administration left us. We had hoped the special legislative session would have produced the results we needed to avoid another credit downgrade. Unfortunately, some members of the legislature refused to work with me to stabilize our budget. We will continue working to address the budget challenges before us, and I am hopeful that during the next special session the legislature will come together in the spirit of cooperation to restore prosperity to our state.”

So, who's to be blamed might depend upon what Fitch actually said?  And, of course, social media has it say too.  See below

What did Fitch say

Fitch Rates Louisiana's $495MM GO Bonds 'AA-'; Downgrades Outstanding Bonds

Fitch Ratings-New York-05 April 2016: Fitch Ratings has assigned an 'AA-' rating to the following general obligation (GO) bonds of the state of Louisiana:

--$430.09 million GO refunding bonds, series 2016-B;
--$65.14 million taxable GO refunding bonds, series 2016-C.

The bonds are expected to sell via negotiation on or about April 20, 2016.

In addition, Fitch downgrades the following ratings:

--Approximately $3 billion in outstanding GO bonds to 'AA-' from 'AA';
--Approximately $732 million in outstanding Louisiana appropriation-backed bonds issued by various issuers to 'A+' from 'AA-'.

The Rating Outlook is Stable.


The bonds are general obligations of the state of Louisiana, whose full faith and credit are pledged. The bonds are payable from the bond security and redemption fund (BSRF), on parity with outstanding general obligations, and have a first lien on the fund, which receives all money deposited in the state treasury not otherwise dedicated.


PERSISTENT BUDGETARY IMBALANCE LEADS TO DOWNGRADE: The enacted budget for the current fiscal year relied upon a long-standing trend of overly-optimistic revenue expectations, a reliance on one-time actions for budgetary solutions, and insufficient appropriations for the state's Medicaid program. These issues were deepened by mid-year revenue underperformance corresponding with a prolonged plunge in crude oil prices. While the state has proactively responded to these challenges, spending pressures from education and Medicaid remain and sizable budget gaps continue to be forecast. 

WEAKENED COMMODITY-BASED ECONOMY: The price drop for crude oil has delayed economic investments in the state, reduced resource-related and economically-sensitive revenues, and led to consecutive months of state employment declines. Unemployment rates through February 2016 are trending higher year over year (yoy) as the natural resources slowdown is incorporated, and remain above the national average. Almost one-third of the state's gross domestic product (GDP) is derived from oil and gas production and petrochemical manufacturing.

MODERATE DEBT SUPPORTED BY STRONG GO LEGAL PROVISIONS: Debt levels are moderate though above average for a U.S. state and debt issuance is well controlled by policy. There are strong legal provisions for GO debt, with all non-dedicated revenues flowing into the bond security and redemption fund to provide for debt service prior to operations.

WEAK PENSION FUNDING LEVELS: Funding of the state's two largest pension systems is below average. Recent reform efforts contributed to modest improvement in fiscal 2015, as boosts in contributions above actuarially-calculated levels improved funded levels.


The state's rating is sensitive to shifts in key fundamental credit characteristics including continued proactive management of its challenged financial operations. The Stable Outlook incorporates Fitch's expectation that the state will proactively respond to its fiscal and economic challenges.


The downgrade of Louisiana's GO rating to 'AA-' from 'AA' reflects persistently imbalanced financial operations, and the state's reliance on one-time measures for immediate gap-closing, which along with overly optimistic revenue projections, have resulted in the need for successive years of mid-year budget corrections. Although the state recently approved recurring measures in its mid-year session to close an identified $940 million fiscal 2016 budget gap, a large portion of the newly enacted revenue rolls off after fiscal 2018 and almost half of the solutions are one-time in nature. The state also made significant progress in closing an identified $2 billion budget gap in fiscal 2017 but $750 million remains to be solved and is expected to be addressed in the current legislative session. After repeated reliance on non-recurring revenues, the state's overall financial position is no longer consistent with an 'AA' rating, in Fitch's view.

While GF cash position has narrowed in recent years, accessible cash in other operating funds remains considerable and the state's BSF, expected to equal 4.4% of General Fund (GF) revenues at the end of fiscal 2016, can be applied to financial shortfalls with legislative consent. Louisiana's overall liability burden is high for a state, with moderate debt and higher than average pension liabilities.


Louisiana's financial operations have been characterized by continual budget stress in the last decade, with recurring budget gaps that the state has closed through both structural and non-recurring actions. Factors affecting the state included steep cuts in its federal Medicaid reimbursement rates based on higher state income and the ending of additional federal reimbursement related to Hurricanes Katrina and Rita. 

The sharp drop in crude oil prices since late 2014 has further affected budgetary performance. Although the state's revenue estimating committee (REC) repeatedly reduced GF revenue expectations for fiscal 2015, actual collections underperformed even as higher needs emerged in K-12 education, Medicaid, higher education tuition assistance, and corrections. The state responded with reduced agency expenditures, fund sweeps and revenue reallocations; the state estimates one-time revenue in support of the budget totaled $1 billion (12% of GF appropriations). The state ended fiscal 2015 with a BSF balance of $470 million, 5.6% of GF revenues, and a cash deficit of $117 million that was intended to be resolved in fiscal 2016. 


The fiscal 2016 enacted budget increased appropriations by $930 million (3.9%) from fiscal 2015, while closing a gap projected at $1.6 billion. Several recurring revenue measures supported the enacted budget, although $338 million in formula-driven growth in the department of health and human services (DHH) was not funded and additional expenditure needs were identified soon after the fiscal year began. 

These issues were compounded by a revised REC forecast in November 2015 that lowered revenue available to the GF by $370 million; largely sales, corporate income, and natural resource driven taxes. The REC's oil price per barrel (bbl) forecast for fiscal 2016 was lowered to $48.02/bbl from the earlier $61.70/bbl forecast. 

Although the new administration which took office in January 2016 estimated a $750 million current year budget gap, a February 2016 REC revision expanded the gap to $940 million, and a $2 billion gap was forecast for fiscal 2017. The REC again lowered the oil price forecast to $37.12/bbl for fiscal 2016 and $30/bbl for fiscal 2017. The current oil price forecast is, in Fitch's view, more reasonable than previous expectations. 

The legislature responded with a series of tax increases and enhancements, including increasing sales, tobacco, alcohol, and auto rental excise taxes. While most tax initiatives are permanent, the one-cent sales tax increase, which provides $214 million in revenue in fiscal 2016 and $880.6 million in fiscals 2017 and 2018, will sunset on June 30, 2018 and the state will have to address this revenue loss in future years.

In addition to the tax increases, which are estimated to have contributed $300 million to closing the fiscal 2016 gap, the state approved a further $128.5 million BSF draw, redirected $200 million of BP settlement monies for economic damages to the GF, and authorized a debt refunding to provide approximately $81.6 million in relief to the GF in fiscal 2016 and about $30 million in relief for fiscal 2017. The governor closed a remaining $70 million budget gap through additional cost savings and expenditure cuts. The BSF is expected to total $358.4 million at fiscal year-end, equal to 4.4% of GF revenue.

A $750 million budget gap is estimated to remain for fiscal 2017 following actions in the special session that reduced the gap by $1.34 billion. Fitch expects additional expenditure cuts or further revenue enhancements to be approved prior to the start of the fiscal year on July 1, 2016. 


Louisiana's economy is resource-based as a major producer of oil and gas, and much of its manufacturing is dominated by petroleum and chemical production; combined, the state's mining, petroleum and coal products manufacturing and chemical products manufacturing contributed $45.6 billion (21.6%) to the state's GDP in 2013. In 2015 the state was ranked ninth highest for crude oil production (excluding federal offshore production) and fourth for natural gas production, and the state's 19 operating refineries process 20% of the nation's crude. Tourism is also important, and the port system is among the largest in the world. Flood protection in the New Orleans area has been enhanced since the hurricanes in 2005, but Louisiana remains vulnerable to severe storm activity.

Given the concentration in the development and processing of crude oil, the state's economy is particularly exposed to the impact of a long-term downward price trend. Baker Hughes, a large oilfield service company, reports an average of 46 rotary rigs in the state in February 2016, down from a peak average of 115 in September 2014. The cutbacks have significantly affected monthly year-over-year (yoy) employment trends, with seven consecutive months of losses through February 2016. The February 2016 yoy monthly employment loss was 1.1% compared to national 1.9% growth. The state has recovered 141% of its jobs lost in the recession as compared to 156% for the U.S. 

The state's annual unemployment rate had trailed that of the nation from 2006 through 2013 but has moved ahead in 2014 and 2015. The 2015 rate was 6.2% compared to a national rate of 5.3%. The rate improved in February 2016 compared to one year prior; however, the improvement incorporates a 1.8% yoy decline in the state's labor force as compared to 1.3% growth for the nation. Quarterly personal income trends have been positive, although the state's growth rates tend to trail both the region and nation. Personal income per capita in the state was 90.7% of the U.S. average in 2015, down from 92% in 2014.


State debt levels remain moderate but above-average; equaling about 3.7% of 2015 personal income, and debt issuance is well controlled by policy. Funding of the two largest pension systems is below average and the state has initiated various reform measures to improve the funded ratios. Under GASB 67 standards for pension systems, the state employees' retirement system (LASERS) reported a 62.7% ratio of pension assets to liabilities in fiscal 2015; the teachers' retirement system (TRS) reports a ratio of 62.5%. While not directly comparable, the actuarially determined funded ratios for LASERS and TRS, as adjusted by Fitch to reflect a 7% return assumption, was 57.4% and 56.3% in fiscal 2015, respectively. 

Reform efforts in 2014 included changing how cost of living increases are granted and how excess investment earnings are applied to address the unfunded liabilities, as well as re-amortizing unfunded liabilities. The reforms modestly improved the systems' ratios in fiscal 2015. 

On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations was over 16% of 2014 personal income, well above the 5.8% average for U.S. states as calculated by Fitch in 2014. The calculations include 100% of the liability for both LASERS and TRS, which are both the responsibility of the state. 



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