BRADENTON, Fla. – The way Louisiana addressed a $487 million mid-year deficit with one-time budget cuts exacerbates credit pressures facing the state, according to Moody's Investors Service.
Moody's, which rates the state's general obligation bonds Aa2 with a negative outlook, is the second rating agency to warn Louisiana about continuing to take actions that do not solve the state budget's structural imbalance.
Lawmakers' actions to balance the budget in November rely almost entirely on the use of fund sweeps, payment delays, and other nonrecurring actions such as dipping into the rainy day fund, Moody's analysts said in a Dec. 11 comment.
"The balancing plan does not address years of unresolved structural budget deficits that have collided with a weakening state economy and a sharp drop in revenues from oil and gas extraction taxes," they said. "State reserves and liquidity remain adequate for now, but they will continue to trend toward narrow levels unless timely action is taken to achieve credible structural balance going forward."
Louisiana Treasurer John Kennedy said the state must stop spending more than it takes in, and should stop relying on one-time fixes to plug holes in the budget.
"Moody's is giving us the game plan for how to avoid a credit downgrade," he said.
Kennedy also said that state spending is creating a cash-flow problem, and that so far this fiscal he has approved nearly $200 million in budgetary loans so state agencies can pay their bills.
"At some point, I'm going to run out of borrowable funds," he said.
Kennedy's comments come as the State Bond Commission prepares to approve issuing $254.92 million of bond anticipation notes through a limited or private offering because of uncertainty about the budget.
The commission, which Kennedy chairs, will be asked to approve the BANs at its Dec. 17 meeting to provide short-term financing for routine capital outlay needs. The vote will include selecting the underwriter to refinance the BANs within a year by issuing 20-year GO bonds.
Typically, the state would issue long-term debt first to finance cash flow needs for capital projects.
However, the Bond Commission opted to use a short-term structure first because of the budget and the recent election of a new governor.
Gov.-elect John Bel Edwards, who will take the oath of office Jan. 11, has said that he will call a special session in February to address the budget.
Louisiana's general fund has suffered from mid-year deficits for two consecutive years stemming from revenue underperformance relative to forecasts, according to Moody's.
The use of one-time funding has doubled from an average of $500 million during fiscal 2012-2014 to a total of $1 billion in fiscal 2016, analysts said. The collapse of oil prices since mid-2014 has contributed to the state's woes.
"While we have cited Louisiana's ability and willingness to respond quickly to mid-year budget imbalances, the recurring need for such action both symbolizes and exacerbates the credit pressure facing the state," Moody's analysts said.
On Dec. 3, Fitch Ratings said it had similar concerns about the state's quick budget fixes, and warned that additional fiscal stress could negatively pressure the state's AA GO rating. Fitch maintained its stable outlook.
Standard & Poor's assigns AA ratings and a negative outlook to Louisiana's GOs.
