NEW YORK--(BUSINESS WIRE)--Actions planned to solve the state of Louisiana's $487 million shortfall are largely stop-gap measures, according to Fitch Ratings, and will not address the state's persistent budget challenges.
The state recently announced a $370 million General Fund (GF) budget gap in fiscal 2016 (4% of GF expenditures), which came on the heels of a $117 million GF operating deficit for the fiscal year ended June 30, 2015. The combined $487 million shortfall continues a trend of budgetary imbalance that has characterized state financial operations over the past several years. Further, several actions are expected to increase a projected fiscal 2017 GF budget gap, estimated at more than $1 billion under current baseline assumptions, or exacerbate the funding gap in the state's Medicaid program, estimated at $516 million as of October 2015 (inclusive of federal match dollars).
The newly elected governor will take office on Jan. 11, 2016, and Fitch anticipates the governor and legislature will take up a discussion of the state's budgetary challenges shortly thereafter, in concert with consideration of a fiscal 2017 budget. These discussions could result in replacing some of the stop-gap measures in fiscal 2016 with more policy-driven solutions that would also reduce the budget gap anticipated in fiscal 2017. Fitch will look for concurrence on recurring measures that provide stability to financial operations. Actions that result in additional fiscal stress or further reductions in fiscal flexibility could lead to negative pressure on the state's rating. Fitch currently rates Louisiana's general obligation bonds 'AA' with a Stable Outlook.
The state attributes the fiscal 2015 operating deficit to higher-than-expected corporate tax refunds and credits that were filed late in the fiscal year in anticipation of the state's adjustment to several tax credit programs enacted to support the fiscal 2016 budget. The forecast of a current year budget gap results from the state revenue estimating conference's (REC) November adjustment to the revenue forecast. The adjustment lowered anticipated sales, corporate income, and natural resource driven taxes, largely as a result of protracted weakness in oil and natural gas prices that has extended beyond the forecast underpinning the enacted budget.
Fitch believes the state's newly revised oil price per barrel forecast, at $48.02 per barrel, is a reasonable expectation for fiscal 2016 given current oil price trends. The state estimates that 13% of its revenues are derived from production of its oil and natural gas resources; however, this figure is not inclusive of economically-sensitive revenue sources such as personal income and sales taxes. These revenue sources have been impacted by the current downturn in these industries that has increased unemployment and reduced consumer purchases.
One-time measures to close the identified GF budget gap in fiscal 2016 include fund balance sweeps, Medicaid payment deferrals, application of retroactive federal disproportionate share reimbursements, and an expected $28.2 million appropriation from the state's rainy day fund (RDF); the RDF currently totals $514 million (6% of fiscal 2015 expenditures). Fitch believes these one-time actions do not address the persistent underfunding of the state's Medicaid program and other state expenditures, such as higher education tuition assistance.
Additional information is available on www.fitchratings.com.