Fitch Rates Louisiana's $374MM GO Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following state of Louisiana general obligation (GO) bonds:

--$212,835,000 GO refunding bonds, series 2010A;

--$161,390,000 GO refunding bonds, series 2010B.

The bonds are expected to sell through negotiation the week of Oct. 11, 2010.

In addition, Fitch affirms the following ratings:

--Approximately $2.5 billion in outstanding Louisiana GO bonds at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Louisiana has made progress toward increased economic diversification, although the state's economy remains energy reliant. Flood protection in the New Orleans area has been enhanced; however, the state remains vulnerable to severe storm activity.

--Financial management has been solid. The state took prompt action to address projected shortfalls following the severe impact of hurricanes Katrina and Rita in 2005 and in the current downturn.

--Debt levels are moderate 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 first for debt service.

KEY RATING DRIVERS:

--Continued timely action to address budget shortfalls and maintenance of solid financial balances.

--Ongoing progress toward economic diversification.

SECURITY:

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, 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.

CREDIT SUMMARY:

Louisiana's 'AA' GO rating reflects the sound financial management demonstrated by the state since the hurricanes of 2005, including a focus on spending control and maintenance of still solid reserves. State debt levels remain moderate, while the funding of the state's two largest pension systems is below average. There are strong legal provisions for GO debt, with all non-dedicated revenues flowing into the bond security and redemption fund to provide first for debt service. The rating also recognizes the state's economic concentration in the volatile energy industry. Louisiana's economic recovery will be hampered by the impact of the gulf oil spill which is expected to slow oil production and development, and have a ripple effect on related industries.

With prudent fiscal management following the devastation caused by Hurricanes Katrina and Rita in 2005, the state maintained sizable financial balances and realized exceptionally strong revenue collections, bolstered by high oil & gas and hurricane recovery-related revenues. State revenues then began to return to more normal baseline levels. More recent steep revenue declines have reflected the impact of the economic downturn and significant tax cuts enacted in prior years. Revenue forecasts for fiscal 2009 were reduced mid-year, which the state addressed through expenditure reductions. After several years of large operating surpluses, which were used for one-time purposes, fiscal 2009 ended essentially in balance with general fund revenues down 7% from the prior year.

The general fund budget for fiscal 2010 was based on a revenue estimate of $8 billion; $1.3 billion, or almost 14%, below fiscal 2009 estimates, with all major revenue sources projected to decline. The budget was balanced with federal stimulus funds, spending cuts, and, initially, use of $86 million from the state's rainy day fund as well as about $105 million in other fund balance transfers. Revenues underperformed the estimate significantly throughout the year. Revenue forecast revisions in April and June 2010 alone reduced the estimate by almost 10%, or approximately $777 million, to $7.3 billion. The final forecast had state-source general fund revenues down 22% year-over-year, with personal income tax revenues down 22% and sales tax revenues down 18%, including the impact of tax cuts enacted in prior years. The resulting shortfall was resolved through additional spending control, a larger draw ($198 million total) from the rainy day fund, and receipts from a tax amnesty program.

In fiscal 2011, which began on July 1, revenue is projected to increase 6% to $7.7 billion, with most major tax revenues expected to see improvement. The budget for the year, which was passed on time, was balanced with federal stimulus funds and spending reductions; there were no revenue raising measures taken. The rainy day fund balance at the end of fiscal 2011 is estimated at $644 million, with no planned draw for the year. The fiscal 2012 deficit has been estimated at $2 billion, reflecting the expiration of the federal stimulus program, with revenues projected to grow another 6% over fiscal 2011 levels.

Louisiana's economy is resource-based as a major producer of oil and gas, and much of its manufacturing is also based on petroleum and chemical production. Tourism is also important, and the port system among the largest in the world. Following the 2005 storms, state employment dropped in 2005 and 2006; however, growth at above the national rate was recorded in 2007 and employment rose to above pre-Katrina levels in 2008. As the national economy slowed in 2008, Louisiana continued to add jobs. State employment dropped 2% in 2009, as compared to the nation's 4.3% loss for the year, and was up 0.7% year-over-year in August 2010, above the 0.2% growth for the U.S. Louisiana's unemployment rate has been well below that of the U.S. since the 2005 storms and remains so at 7.6% in August 2010, although it is up from the prior year. The state's personal income per capita was 91% of the U.S. level in 2009, ranking 33rd of the states. This is a high level for Louisiana and reflects the impact of hurricane recovery. The state has had some recent success with economic development efforts that support diversification.

Before Hurricanes Katrina and Rita, the 1.3 million people residing in the New Orleans metropolitan area made up nearly 30% of the state's population and about one-third of state employment. Following the hurricanes, there were large population losses in New Orleans and some growth elsewhere in the state. The 2009 population estimate for the state is 0.5% above the level in 2000, compared to 9.1% growth for the U.S. population in this period. The state's population has been growing at a rate well below the U.S.'s for many years, with significant outmigration.

State debt levels remain moderate, equaling about 3.5% of personal income. By policy, debt issuance is well controlled. Funding of the state's two largest pension systems is below average and declining at 60.8% (state employees) and 59.1% (teachers) as of June 30, 2009.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 16, 2010.

--'U.S. State Government Tax-Supported Rating Criteria', Dec. 28, 2009.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.