Fitch Ratings assigns an 'AA' rating to the following general
obligation (GO) issue of the state of Louisiana:
--$263.475 million GO bonds, series 2015-A;
--$71.515 million GO bonds, series 2015-B.
The bonds are expected to sell via competitive bid on May 6,
2015.
The Rating Outlook is Stable.
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 (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.
KEY RATING DRIVERS
COMMODITY-BASED ECONOMY: The state's commodity-based, cyclical
economy, heavily linked to oil and gas production and petrochemical
manufacturing, has modestly diversified but almost one-third of the
state's gross domestic product (GDP) continues to be derived from
these economic sources. Fitch notes that the current low price for
crude oil has delayed economic investments in the state, reduced
expected resource-related revenues to the state, and led to
declines in associated employment. The state has twice revised its
revenue forecast for the current fiscal year largely due to the oil
price plunge.
PERSISTENT BUDGETARY IMBALANCE: Financial operations for the
current fiscal year that began on July 1, 2014 continue a
long-standing trend of revenue under-performance, reliance on
one-time actions for budgetary solutions, and spending pressure
from education and Medicaid, deepened by sharp cuts in the state's
federal Medicaid reimbursement rate. The state applied cash
balances in fiscal 2014 to fund operations in that year and has
been challenged by a loss of mineral-related revenues in fiscal
2015. These issues have coalesced to create a forecast continuing
budget imbalance of $1.6 billion for fiscal 2016 for which the
governor has proposed a variety of measures by which to close the
gap in his executive budget. The legislature is currently
considering the budget proposal.
PROACTIVE STATE RESPONSE: The state has responded proactively to
the revenue loss in fiscal 2015 and has twice adjusted expenditures
to meet the revised revenue estimates, but these actions were in
addition to various fund sweeps and the recognition of revenue that
would otherwise be available to fund operations in fiscal 2016,
growing the shortfall in that year. The state has recently
estimated a $56 million budget gap in fiscal 2015 due to higher
than anticipated expenditures that it intends to close during the
current legislative session. The state's budget stabilization fund
(BSF) is expected to reach $514 million (4.9% of general fund [GF]
revenue) at the end of fiscal 2015 from an enacted appropriation to
the fund and a partial application of cash surplus from fiscal
2014, based on current budget assumptions.
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. Recent
reform efforts may contribute to some modest improvement, although
contributions have not met actuarially-calculated levels for all
major plans.
RATING SENSITIVITIES
The state's rating is sensitive to shifts in key fundamental
credit characteristics including continued proactive management of
its challenged financial operations. Emergence of more severe
fiscal and structural challenges or evidence of reduced fiscal
flexibility without a proactive response could lead to a Negative
Outlook.
CREDIT PROFILE
Louisiana's 'AA' GO rating reflects the state's focus on
repeatedly returning to budget balance amidst challenged financial
operations and an economy that remains heavily reliant on natural
resources and the volatile energy industry. The economy has shown
slow and steady growth since the recession, but Fitch believes the
current turmoil in oil prices is likely to reverse some of those
gains. Financial operations are persistently imbalanced, with the
state relying on one-time measures for immediate gap-closing, which
along with overly optimistic revenue projections, have resulted in
the need for successive years of improvised mid-year budget
corrections. While GF cash position has narrowed in recent years,
accessible cash in other operating funds remains considerable and
the state's BSF can be applied to financial shortfalls with
legislative consent. State debt levels remain moderate, and the
funding levels for the state's two largest pension systems are
below average.
CONTINUING 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 based on higher
state income levels and the ending of additional reimbursement
related to Hurricanes Katrina and Rita. The enacted $8.4 billion GF
budget ($25.4 billion all-funds) for fiscal 2014 eliminated a
projected 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.
In October 2014, the state reported that the GF recorded net
revenues that were $140.6 million less than its spent
appropriations in fiscal 2014, incorporating $121 million less in
tax revenue than had been forecast by the REC. The state chose to
close the revenue shortfall in fiscal 2014 by applying $319 million
in cash balance that had not been recognized previously as a GF
resource, leaving a balance of $178.5 million that had been
considered as part of the GF's free cash as available to fund
certain expenditures under state statute.
The enacted $8.6 billion fiscal 2015 GF budget ($24.6 billion
all-funds) increased GF spending by 3% ($250 million) from the
enacted fiscal 2014 budget while all-funds spending was budgeted to
decrease by about $800 million. A large share of the decrease in
the all-funds budget reflected about $500 million from the falloff
of federal funding for hurricane restoration expenditures as that
effort continues to wind down. Net GF revenues in support of the
fiscal 2015 budget were forecast to grow by 4.4%, incorporating
4.3% growth in the personal income tax (PIT), 25.5% growth in
corporate taxes (CIT), a modest 1.1% growth in sales tax
collections, $100 million in receipts from the second year of the
tax amnesty program, and a 6.1% falloff in mineral production tax
revenue. As actual revenue results for fiscal 2014 fell below
preliminary estimates, stronger 5.9% growth in GF revenues was now
required in fiscal 2015 in order to reach the forecast; a target
that Fitch believe the state would find difficult to achieve.
The REC's forecast for mineral production-related taxes, fees,
and royalties in fiscal 2015 was premised on an average oil price
per barrel of $96.69; a level now twice revised by the REC to a
current low of $69.36 per barrel. In total, the state currently
anticipates receiving $287 million less in energy-related taxes
than its original forecast. Other variances from the forecast used
to enact the budget include lower PIT receipts (down 2.1% from
forecast for projected growth of 4.3% from fiscal 2014) offset by
2.6% additional growth in sales tax receipts (increased to 3.2%
growth from fiscal 2014), contributing to a net total estimated
revenue shortfall of $274 million (down 3.2% from forecast). In
response to the revenue shortfalls, the state recommended about $95
million in net expenditure reductions while allocating about $179
million in fund sweeps and revenue reallocations to the GF.
In April 2015, the state identified an additional $56 million
budget gap for this fiscal year, created by higher than expected
expenditures in K-12 education, Medicaid, the state's higher
education tuition assistance program (TOPS), and corrections. The
state intends to close this new gap during the current legislative
session with no interruption to planned deposits to the BSF. The
state budgeted for a $25 million deposit to the BSF, which will be
increased by $44.6 million from the fiscal 2014 surplus cash
allocation that is required by the state's constitution and
statutes. If this plan remains on track, the BSF's balance would
total $514 million at the end of fiscal 2015, equal to 4.9% of GF
revenues.
The governor's proposed $24.6 billion operating budget for the
fiscal year beginning on July 1, 2015 reduces appropriations by
$1.2 billion (4.8%) from fiscal 2015 to close a projected
continuing budget gap of $1.6 billion. Proposed GF operations would
total just over $9 billion; a $309 million increase from fiscal
2015. The governor has proposed various measures to eliminate the
budget gap including: refundable tax credit reform; agency
reductions, including a $211.3 million (8.1%) direct cut to higher
education funding; as well as a multi-year plan to securitize the
state's remaining 40% share of tobacco settlement proceeds with
proceeds applied to funding the TOPS program.
In the enacted budget for fiscal 2016, Fitch will be looking for
actions that contribute to recurring budget balance, particularly
as the falloff of past one-time measures are large contributors to
the budget gap. Recent one-time measures include a tax amnesty
program and the sweep of the Medicaid Trust Fund for the Elderly to
fund operations. One-time measures to solve for its budget
imbalances have ranged far beyond the end of the recession,
creating budgetary issues that have peaked with the decline in oil
and natural gas prices. In support of the budget, the REC has
forecast $8.5 billion in GF revenue in fiscal 2016 would be
available for appropriation, a level that is 1.3% above the current
estimate for fiscal 2015. The forecast incorporates the expectation
of 4.1% growth in the PIT, 2.6% growth in sales tax revenues, and a
further 11.4% decline in energy-related taxes. To the extent that
the downturn in crude oil prices has a long-term and widespread
impact on the state's economy, Fitch believes the PIT forecast may
not be fully realized.
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; combined, the state's petroleum and coal
products manufacturing and chemical products manufacturing
contributed $45.5 billion (20.3%) to the state's GDP in 2012. The
state was ranked ninth highest among the states in 2013 for crude
oil production when not including its section of the federally
administered Outer Continental Shelf and is ranked second among the
states for natural gas production. In total, the state's mining
activity (includes oil, gas, and coal) contributed $28 billion
(12.5%) toward the state's GDP in 2012 and the state maintains 19
operating refineries that process 20% of the nation's crude oil.
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 exposed to the impacts of a
long-term downward price spiral. Baker Hughes, a large oilfield
service company, reported on April 24, 2015 that the number of
rotary rigs in the state has dropped by almost 34% year-over-year
(yoy), from 112 to 74, incorporating actions by domestic oil
companies to pull back on new well drilling and reduce their
workforces as profit margins have shrunk. While the state's monthly
employment continued to show modest 0.8% yoy growth through March
2015, compared to national 2.3% growth, Fitch expects some
weakening as the slowdown in the state's natural resource industry
is incorporated. Fitch believes the labor impacts of the slowdown
are captured in initial unemployment claims for the week of April
18, 2015 that is up 41.8% yoy compared to the same period in 2014
and continuing unemployment claims that are up 16.4% yoy.
The state's annual unemployment rate has trailed that of the
nation since 2006 and the rate in 2013 was 6.2% compared to a
national rate of 7.4%. Although there was good yoy employment
growth in March, the strong 4% yoy growth in the state's labor
force as more entrants sought employment increased the state's
unemployment rate in March to 6.6% as compared to 5.5% 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 is 92% 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. In response, the governor signed an
executive order prohibiting any agency in fiscal 2015 from
initiating or approving any debt that would exceed the debt limit
as previously calculated. The state bond commission, which approves
all issuance of debt in the state, resolved in August 2014 that it
would not approve any issuance of debt that would exceed the 6%
limit determined under the previously calculated method in
perpetuity.
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. Under the new GASB 67 standard for
pension systems, the state employees' retirement system (LASERS)
reported a 65% ratio of pension assets to liabilities in fiscal
2014 with a net pension liability of $6.3 billion borne by the
state; the teachers' retirement system (TRS) report a ratio of
63.7% and a net pension liability of $10.2 billion. Using Fitch's
more conservative 7% discount rate assumption, the funded ratio for
the plans declines to 60.1% and 58.8%, respectively. While not
directly comparable, the actuarially determined funded ratio for
LASERS was 59.3% in fiscal 2014, while TRS' ratio was 57.4%.
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 and 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. Annual contributions to LASERS have
been consistently below the actuarially-calculated level.
On a combined basis, the burden of the state's net tax-supported
debt and adjusted unfunded pension (UAAL) obligations was over 16%
of 2013 personal income, well above the 6.1% 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. That ratio is expected to decline in
2015 due to the lowering of the systems' unfunded liabilities from
strong investment returns in fiscal 2014.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983769
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. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD
ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE
ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Fitch RatingsPrimary AnalystMarcy BlockSenior Director+1
212-908-0239Fitch Ratings, Inc.33 Whitehall StreetNew York, NY
10004orSecondary AnalystEric KimDirector+1 212-908-0241orCommittee
ChairpersonDouglas OffermanSenior Director+1 212-908-0889orMedia
Relations:Elizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com