Fitch Rates $185MM Louisiana Appropriation Bonds 'AA-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns 'AA-' ratings to the following issues of the state of Louisiana:
--$167.725 million Louisiana Public Facilities Authority (LPFA) revenue refunding bonds (Hurricane Recovery Program) series 2014;
--$17.71 million Industrial Development Board of the City of New Orleans, Louisiana, Inc. (IDB) revenue refunding bonds (New Orleans Federal Alliance Project) series 2014.
The bond issues, offered under separate official statements, are expected to sell via negotiation the week of July 21, 2014.
In addition, Fitch affirms the following ratings:
--Approximately $2.68 billion in outstanding Louisiana general obligation (GO) bonds at 'AA';
--Approximately $675 million in outstanding Louisiana appropriation-backed bonds issued by various issuers at 'AA-'.
The Rating Outlook is Stable.
SECURITY - Hurricane Recovery Program
The bonds are special obligations of the LPFA, payable from funds received by the LPFA from the state of Louisiana under a cooperative endeavor agreement signed by both parties. Such payments are received by the LPFA subject to annual appropriation of the state legislature. Source of payments are appropriations from the state's general fund.
SECURITY - New Orleans Federal Alliance Project
The bonds are special obligations of the IDB, payable from funds received by the IDB from the state of Louisiana under a cooperative endeavor agreement signed by both parties. Such payments are received by the IDB subject to annual appropriation of the state legislature. Source of payments are appropriations from the state's general fund.
KEY RATING DRIVERS
STATE APPROPRIATION: The rating on the bonds is based on the credit quality of the state (GO bonds rated 'AA' by Fitch) as bonds are secured by annual legislative appropriations from the general fund, pursuant to separate cooperative endeavor agreements.
COMMODITY-BASED ECONOMY: The state's commodity-based, cyclical economy, heavily linked to oil and gas production, has modestly diversified, although one-third of the state's gross state product continues to derive from the production and delivery of raw and intermediate goods.
PROACTIVE RESPONSE TO FINANCIAL CHALLENGES: The state has proactively responded to recent financial challenges such as budgetary gaps as well as a steep cut in federal support for the state's Medicaid program. Fiscal 2014 is expected to have ended with balanced operations although this is partly due to better than expected receipts from a tax amnesty program, offsetting shortfalls in other tax sources.
MODERATE DEBT SUPPORTED BY STRONG GO LEGAL PROVISIONS: 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 for debt service prior to operations.
WEAK PENSION FUNDING LEVELS: Funding of the state's two largest pension systems is below average and has been declining although recent reform efforts should contribute to some modest improvement.
The ratings are sensitive to shifts in the state's GO bond rating to which they are linked. Key fundamental credit characteristics include proactive management of its financial operations, an above-average liability position, and a commodity-based economy.
The LPFA and IDB's series 2014 bonds are separately issued pursuant to cooperative endeavor agreements between these entities and the state. The debt is authorized by Louisiana's statutes and the agreements provide for the state's payment, subject to annual appropriation, sufficient to secure payments equal to debt service on the bonds. Both the LPFA and the IDB have assigned their rights to receive such payments to their respective trustees for the benefit of bondholders.
The state has other such agreements in place that support debt obligations, primarily for economic development and higher education purposes. Oversight and control mechanisms are in place and the state division of administration, party to the agreement on behalf of the state, covenants to seek appropriations for debt service funds annually. Approval of the state bond commission, consisting of the state's major elected officials, is required and was obtained on June 19, 2014. The current issues refund for debt service savings, outstanding bonds of the LPFA issued in 2007 and outstanding bonds issued by the IDB in 2008.
Louisiana's 'AA' GO rating reflects the state's focus on spending control amidst challenged financial operations and an economy that, while heavily reliant on natural resources and the volatile energy industry, has shown steady growth since the recession. Financial operations are narrowly balanced and the state continues to employ one-time measures to close budget gaps, including a tax amnesty program for fiscal years 2014 and 2015. While state debt levels remain moderate, the funding levels for the state's two largest pension systems are below average.
PROACTIVE RESPONSE TO FINANCIAL CHALLENGES
Louisiana has responded proactively to forecast budget gaps, which the state has closed through both structural and non-recurring actions, as well as to the negative effects of steep cuts in its federal Medicaid reimbursement rates in fiscal 2013 based on increases in state income levels. The enacted fiscal 2013 $8.1 billion general fund (GF) budget ($25.7 billion on an all-funds basis, which includes federal aid) closed an earlier identified $1.2 billion gap; however, after enacting the budget, the state learned in July 2012 that its federal Medicaid matching rate (federal medical assistance percentage, or FMAP) for fiscal 2013 had been significantly reduced, necessitating $859 million in adjustments. The state implemented measures to close the gap; however, a midyear revenue reduction required additional midyear corrections. Improved personal income tax (PIT) collections boosted the state's year-end position and the year ended with a GF cash balance at $161 million, an increase of $48 million from the prior fiscal year.
The enacted $8.4 billion GF budget ($25.4 billion all-funds) for fiscal 2014, which ended on June 30, eliminated an all-funds continuing budget gap of $1.28 billion through expenditure reductions as well as an estimated $780 million in savings on an all-funds basis from privatizing most of the state's public hospitals. The budget also included an allocation of $200 million in one-time receipts from a tax amnesty program, scheduled to occur again in fiscal 2015, and $16 million from certain bond reimbursements to the state's Medicaid program. The Jan. 15, 2014 meeting of the revenue estimating conference (REC) reduced expected receipts to the GF in fiscal 2014 by $34.7 million to $8.3 billion, which the state was able to fill with better than anticipated receipts from fiscal 2014's tax amnesty program. The state believes fiscal 2014 will end with balanced financial operations and the budget stabilization fund (BSF) is expected to be maintained at $445 million.
The January 2014 REC's projections were affirmed in a June 2014 meeting, providing the forecast for revenues in fiscal 2015 upon which the enacted fiscal 2015 budget is based. The forecast projects net receipts to the GF in 2015 of $8.6 billion; a 4.4% increase from the current estimate for fiscal 2014. Pursuant to the provisions of Act 419, which passed in 2013 legislative session, the forecast now includes a projection of statutory dedications (revenues required to be deposited for statutorily designated expenditures) as well as a projection for departmental self-generated revenues. Act 419 also requires the forecast to specify revenue flows as recurring or nonrecurring in nature. Revenue for fiscal 2015 includes the second year of the tax amnesty program, expected to bring in $100 million.
The enacted $8.6 billion fiscal 2015 GF budget ($24.6 billion all-funds) increases GF spending by 3% ($250 million) from the current budget while all-funds spending is budgeted to decrease by about $800 million. A large share of the decrease in the all-funds budget reflects about $500 million from the falloff of federal funding for hurricane restoration expenditures as that effort continues to wind down. The FMAP rate is budgeted to decline further, although more modestly; the K-12 education funding formula is reported to increase by $153 million from direct state funding; and there is a $148 million increase in higher education although $88 million of the increase comes from tuition increases. The BSF is expected to increase to $469.5 million at the end of the fiscal year.
STEADY ECONOMIC GROWTH IN RESOURCE-BASED ECONOMY
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. The state reports ranking first in crude oil production in the U.S. when including production from the Outer Continental Shelf (OCS) and ranking second in the nation in natural gas production when including the OCS. The state's $68 billion petrochemical industry accounts for 27% of the state's economy and with 27,000 employees, is the largest single employer in the state's manufacturing sector. The state estimates that approximately one-third of the state's gross state product is connected to the production and delivery of raw and intermediate goods. 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.
Louisiana's economic recovery has been solid, with fairly steady year over year (yoy) employment gains since December 2010 and the state has fully recovered employment lost during the recession. Employment growth of 1% in May 2014 trailed that of the nation at 1.7% yoy but the state's 4.9% unemployment rate remains solidly below that of the U.S. at 6.3% in May 2014. Leisure and hospitality experienced the largest yoy increase in May at 3.7%, followed by professional and business services at 3.4%. 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 is about 91% of the U.S. average.
MODERATE DEBT LEVELS WITH WEAK PENSION FUNDING
State debt levels remain moderate; equaling about 3.7% of 2013 personal income and debt issuance is well controlled by policy. The state had been approaching its constitutional debt limit of annual debt service equal to 6% of GF and dedicated fund revenue; however, a law passed in the 2013 legislative session expanding the base of revenues forecasted by the REC inadvertently increased the state's debt issuance capacity. The governor signed an executive order prohibiting any agency from initiating or approving any debt that would exceed the debt limit as calculated excluding the dedicated funds, but as the order only applies to fiscal 2015, the state may address this issue in the 2015 legislative session.
Funding of the state's two largest pension systems is below average and the state has initiated various reform measures to improve the funded ratios. On a reported basis, the state employees' pension system had a funded ratio of 60.2% and the teachers' system was at 56.4% as of June 30, 2013. Using Fitch's more conservative 7% discount rate assumption, funded ratios for the plans decline to 54.2% and 50.8%, respectively. Reform efforts in the 2014 legislative session included the passage of Act 399 that instituted reforms to how cost of living increases are granted to retirees; how excess investment earnings are to be applied to address the unfunded actuarially determined liabilities (UAALs), as well as the re-amortization schedule of the UAALs at various funded levels. The reforms are expected to reduce employer contributions and modestly improve the funded ratios of the systems.
On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations approximated 16.3% of 2013 personal income, well above the 6.1% median for U.S. states. The calculations include 100% of the liability for both state employees (LASERS) and the teachers' retirement system (TRS), which are both the responsibility of the state.
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. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria