Fitch Rates Louisiana Local Govt Environmental Facil & Comm Devel Auth's $71MM Revs 'A+'.
--$71.045 million authority revenue bonds (LCTCS [Louisiana Community and Technical Colleges System] Act 360 Project) Series 2018.
The bonds are scheduled to be sold via negotiation on or about Dec. 6, 2018.
In addition, Fitch has affirmed the following ratings on the state of Louisiana:
--Issuer Default Rating (IDR) at 'AA-';
--$3.4 billion in outstanding state general obligation (GO) bonds at 'AA-';
--$207 million in outstanding authority bonds at 'A+';
--$430 million in outstanding annual appropriation bonds issued by various other issuers of the state at 'A+'.
The Rating Outlook is Stable.
Act 360 bonds are supported by funds received by the authority through the LCTCS Facilities Corporation (the corporation) from the Board of Supervisors of the LCTCS (the board) under the enabling financing documents. The source of board funds is annual legislative appropriations from the state's General Fund (GF) pursuant to a cooperative endeavor agreement between the state, the board and the corporation.
State Appropriation: The rating on the bonds, secured by annual legislative appropriation to the board from the state's GF pursuant to a cooperative endeavor agreement, is one notch below the state's IDR, reflecting the greater optionality for annual appropriation obligations. The bonds will fund various capital improvements to colleges overseen by the board of the LCTCS, an agency of the state that reports to the Louisiana Board of Regents for Higher Education, as authorized by the state legislature in 2013 (Act 360, as amended). The improvements will be overseen by the corporation, a Louisiana nonprofit corporation organized exclusively to assist the LCTCS with these types of projects.
Louisiana's 'AA-' IDR reflects the state's broad though somewhat concentrated economic base, strong ability to control revenue and spending, and above average but still moderate liability burden. The rating also reflects the state's persistent difficulties in balancing its challenged financial operations. Absent substantially improved economic growth, revenue growth is expected to remain slow, pressuring the state's operating budget.
Economic Resource Base
Louisiana's economy is broad but with a significant concentration in natural resources as a major producer and processer of oil and gas, and much of its manufacturing is dominated by petroleum and chemical production. Given this concentration, the state's economy is particularly exposed to the impact of global price and demand. Combined, state economic sectors that reflect these activities contributed almost 21% to the state's GDP in 2016; this is down from 24% in 2014, incorporating the sharp downturn in natural resource markets that began in late 2014. A more vibrant crude oil and natural gas industry beginning in 2017 has increased natural resource activity in the state but employment growth remains slow and below the nation. Tourism is also important, and the port system is among the largest in the world.
KEY RATING DRIVERS
Revenue Framework: 'aa'
Fitch expects Louisiana's revenues, which are supported by broad-based sources, to continue to reflect the economic volatility tied to the extensive natural resources sector. Absent tax policy action, revenue growth in the state's fairly broad revenue sources is expected to remain slow. The state has complete control over its revenues, with an unlimited legal ability to raise operating revenues as needed.
Expenditure Framework: 'aa'
The state has a low burden of carrying costs for liabilities and maintains a solid ability to reduce expenditures. The state's Medicaid expansion provided additional GF expenditure flexibility beginning in fiscal 2017 as state health expenditures were reallocated to the expansion program and funded by federal aid, but continued challenges in the state's economy have kept expenditure growth ahead of expected revenues and require ongoing budget management.
Long-Term Liability Burden: 'aa'
Fitch expects Louisiana's overall long-term liability burden to settle at the low end of the moderate range but remain above the U.S. state median. The state's reported pension burden primarily reflects the benefits of direct state employees, although the state constitutionally also guarantees the benefits of local workers in statewide plans.
Operating Performance: 'aa'
Louisiana's financial operations have faced near continuous stress in the last decade, with recurring budget gaps that the state has closed through both structural and non-recurring actions. The fiscal 2019 budget was enacted without one-time measures and the state provided a longer-term, but still time-limited, solution to the falloff of temporary revenue measures enacted in prior years. Fitch believes the state retains very strong gap-closing capacity and financial operations benefit from a separate rainy day fund with automatic replenishment provisions after withdrawals.
LCTCS Bonds: The rating on bonds of the LCTCS is sensitive to movement in the state's IDR to which it is linked.
Management of Financial Operations: The state's IDR is sensitive to its ability to balance its financial operations on an ongoing basis while responding to its economic and revenue growth challenges.
Energy production and processing dominate Louisiana's economy. For 2018, the state is ranked ninth highest for crude oil production and fourth for natural gas production, when excluding federal offshore production, and the state's 18 operating refineries process 18% of the nation's crude. Many of the nation's largest oil fields are located off the Louisiana coast in the federal Outer Continental Shelf and a large share of production comes onshore in Louisiana. Large-scale liquefied natural gas (LNG) export and import facilities have opened in the state in recent years and additional projects are either under construction or have been approved by regulators, adding to the state's economic growth prospects.
Similar to other natural resource states, the state's economy suffered from the downward energy price trend that began in 2014 and extended through 2016; however, the state's recovery has been subdued compared to others, as recent sector growth nationally has been concentrated in oil-producing shale formations where the state has a more modest presence. Baker Hughes, a large oilfield service company, reported an average of 63 land and offshore rotary rigs in October 2018. This is down from 65 one year prior and compares unfavorably to robust rig growth in neighboring states. Louisiana's rig count is up from a low of 40 in 2016, but the softer recovery is reflected in very slow employment growth and an unemployment rate that remains well above the national average. Commodity prices and production continue to rise in 2018, which has translated into modestly improved natural resource revenue for the state.
Beyond the energy sector, tourism in New Orleans remains a significant sector, and that city's 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, both along its coast and for its inland, low-lying areas. Federal assistance from the Federal Emergency Management Agency (FEMA) through low-interest disaster loans and national flood insurance payments has been an important resource for the state for recovery and rebuilding, in addition to public and private insurance payments.
Sales taxes accounted for the largest share of GF revenue at 44% in fiscal 2018, followed by personal income taxes (PIT) at 33%. Sales tax revenue has increased in recent years due to 2016 legislative action that boosted the general sales tax rate by one penny and increased the tax on business utilities on a temporary basis, both with expiration dates of June 30, 2018. Additional revenue flows from lottery and gaming, reflecting the sizable casino and riverboat gaming presence in the state, as well as corporate income and taxes related to energy production. The state is directed by its constitution and statutes to dedicate certain revenues for specific purposes, including transportation revenues, lottery revenue, and tobacco settlement monies. Dedications diverted approximately 20% of gross revenues from the GF in fiscal 2018.
The enacted budget for fiscal 2019 closed a revenue gap for fiscal 2019 initially estimated at $1.1 billion that was largely driven by the expiration of the temporary sales tax measures in addition to other tax sunsets. The gap was later narrowed to about $650 million as forecast state revenues were boosted by passage of the federal Tax Cuts and Job Act (TCJA) in December 2017 that lowered federal income taxes, reducing the credit toward state PIT liability. The 2018 legislature chose to extend only 0.45% of the expiring penny sales tax and 2% of the 4% tax on business utilities, providing over $460 million toward addressing the remaining shortfall. However, the extensions will expire on June 30, 2025, creating an issue to be addressed by a future administration.
As only portions of the temporary penny sales tax and business utilities tax were extended, overall sales tax revenue is forecast to decline by 9% in fiscal 2019, although the U.S. Supreme Court's Wayfair decision regarding the taxation of internet sales could aid collections. Revenue after dedications and including tax policy actions is forecast to decline by 4.5% from fiscal 2018.
Historical growth in revenues, after adjusting for the estimated impact of tax policy changes, was negative over the 10 years through 2016. Extensive tax policy action was required to balance operations in fiscal 2017 as the slump in crude oil prices was a primary contributor to significantly slowed revenue performance. While natural resource prices have improved and production has increased, the pace of revenue growth remains sluggish and economic performance continues to be below national averages. Following the expected drop in revenue in fiscal 2019, Fitch believes slow revenue performance will be recorded over the medium term.
The state has no legal limitations on its independent ability to raise revenues through base broadenings, rate increases, or the assessment of new taxes or fees. A two-thirds vote of each house of the legislature is required to impose a law that levies a new tax or increases an existing tax.
As in most states, education and health and human services are Louisiana's largest operating expenditures. Education is the larger line item as the state provides significant funding for local school districts and the public university and college system. Health and human services is the second largest area of spending, with Medicaid being the primary driver.
Fitch expects that spending growth, absent policy actions, will be ahead of natural revenue growth, driven primarily by Medicaid, and require regular budget adjustments to ensure ongoing balance. The state's more recent expansion of Medicaid under ACA as well as an increase in its federal medical assistance percentage (FMAP) match rate has reduced some of the financial burden on the GF. Fitch believes federal action to revise Medicaid's programmatic and financial structure appears less likely in the near term given divided control in Congress.
Fitch expects Louisiana to be particularly challenged by natural growth in expenditures as its revenue profile remains subdued. Higher education has been particularly confronted with expenditure reductions in recent years although the enacted budget for fiscal 2019 preserved the prior level of funding including for the state's merit-based scholarship program (TOPS).
Overall, Louisiana retains solid ability to adjust expenditures to meet changing fiscal circumstances. While Medicaid remains a notable cost pressure, fixed spending requirements for debt service, pension, and OPEB are low; carrying costs accounted for 5.3% of governmental expenditures in fiscal 2017. Pension contributions are based on statutory guidelines rather than actuarial calculations, but recent contributions have been above the actuarially determined contribution (ADC.)
Long-Term Liability Burden
As of Fitch's 2018 State Pension Update report that applies a common 6% investment return assumption for pension plans, the combined burden of net tax supported debt and unfunded pension obligations was above the state median of 6% but a low burden on resources at 8.8% of 2017 personal income. Debt burden is modest at 3.8% and debt issuance is closely controlled by the state's bond commission which oversees a limitation that is more restrictive than those contained in the state's constitution.
Funding of the two largest state pension systems is below average and the state has endeavored to make contributions above the ADC in recent years to improve their sustainability. While reporting requirements under GASB 68 allocate a small portion of several pension systems' liabilities to the state, the state's constitutional guarantee to pay benefits to members should the systems be unable increases the state's liability exposure and results in Fitch's 'aa' liability burden assessment.
OPEB benefits for state employees and teachers, among other systems, are also constitutionally protected, in contrast to the situation in most states, reducing the state's flexibility to lower liabilities. The state made 65% of the actuarially required contribution for OPEB in fiscal 2017. The OPEB unfunded actuarial accrued liability stood at $4.7 billion as of the end of fiscal 2017, 2.3% of personal income.
Louisiana's active revenue monitoring and forecasting process and ability to respond to negative developments are important tools for supporting financial resilience. Recent years have seen repeated challenges to financial operations, including from natural disasters, unfavorable shifts in federal Medicaid reimbursement rates and the end of federal disaster assistance, needs related to the BP oil spill and, most recently, shifts in crude oil and natural gas prices.
The budget stabilization fund (BSF) continues to be an important backup resource for the state in addition to other accessible state funds held in trust that are available for restricted purposes. The state is able to access up to one-third of the BSF balance for current fiscal year operations or a prospective revenue shortfall. The fiscal 2018 ending BSF balance of $321.5 million, or 3% of GF revenues, incorporates both an operating surplus for the fiscal year as well as required deposits. Per statute, the state will deposit an additional $25 million to the BSF in fiscal 2019, growing the balance to a minimum of $346.5 million.
State legislation directs funds tied to a settlement agreement with BP following the 2010 Deepwater Horizon oil spill to its budgetary trust funds, including the BSF, the Medicaid Trust Fund for the Elderly and the Health Trust Fund. The agreement provided $1 billion in economic damage monies to the state, in addition to natural resource damage funds and Clean Water Act penalties, to be received as a $200 million one-time payment on July 1, 2016 and then $53.3 million annually in fiscal years 2019 through 2033. To date, the state's intentions to use these funds for reserves have been derailed by its financial challenges and, instead, the state applied the $200 million payment to balancing fiscal 2016 operations and allocated the fiscal 2019 payment to the GF.
In 2016, the legislature sought to enhance the state's reserve capabilities through the creation of a new Revenue Stabilization Trust Fund (RSF) that will receive mineral revenues in excess of $660 million but less than $950 million after an extensive list of other allocations, and corporate income tax (CIT) revenue above $600 million. These revenue triggers have not been reached since the creation of the RSF. Interest or other investment income on balances in the RSF is to be deposited to the state's GF.
The state's revenue estimating conference (REC) contributes to the state's financial management through meetings at least four times per year to forecast the current and next five fiscal years' revenue sources for appropriation. The commissioner of administration is required to report on the status of the budget on a monthly basis to the Joint Legislative Committee on the Budget (JLCB) and projected deficits must be identified. Any deficit that is not addressed in the current fiscal year, including through an appropriation from the BSF with legislative consent, is carried over into the subsequent fiscal year and must be eliminated no later than the end of that fiscal year.
The REC is also required to report on nonrecurring sources of revenue and use of these resources is restricted under the state's constitution. However, this requirement has not impeded the state's enactment of temporary revenue measures in response to projected budget gaps, postponing the provision of long-term solutions to its structural imbalance.
Despite the benefit of active revenue monitoring and the presence of reserves noted above, the state has oftentimes relied on one-time measures for budget-balancing, along with, in Fitch's view, insufficient budgeting of formula expenditures and overly optimistic revenue projections. These practices required successive years of mid-year corrective action during periods of economic growth, leaving the state in a weakened position as it confronted the energy-related economic slowdown.
The state's October 2018 report to the JLCB estimates fiscal 2018 ended with a budgetary surplus of $308 million. The surplus includes prior year overflow revenue forwarded into fiscal 2018, reduced by revenue carried forward into fiscal 2019 and appropriations to address deferred liabilities. The state attributes the surplus to revenue collections that were ahead of the official forecast on which the budget was based, largely incorporating improved natural resource markets. As Fitch expects the REC to certify the surplus as a nonrecurring revenue source, the surplus will be allocated following constitutional guidelines: to the BSF, pension system funding, coastal restoration or transportation improvements.
Positive revenue flow also improved the fiscal 2018 GF cash position and the $500 million in revenue anticipation note borrowing that was authorized by the state bond commission was not required. The GF tapped available borrowable balances which ranged between $1.8 and $2 billion over the course of the fiscal year for its cash needs.
As noted earlier, the over $9 billion enacted GF budget for fiscal 2019 solved a budget gap created by the expiration of temporary revenue measures by effecting temporary revenue enhancements and adjusting expenditures to hold budget growth essentially flat to fiscal 2018. The state's revenue forecast to support the budget was cautious on key revenue sources, which Fitch views as a reasonable approach given ongoing market turbulence in natural resources. The REC is scheduled to update the revenue forecast on Nov. 27, 2018.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 21, 2019|
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