Louisiana credit rating downgraded in midst of budget crisis

Louisiana hit with credit rating downgrade, blow to state
Global long-term rating scale (Source: Moody's Investor Service)
Global long-term rating scale (Source: Moody's Investor Service)

BATON ROUGE, LA (WAFB) - A credit agency downgraded Louisiana's credit rating after years of budget instability.

Moody's Investors Service announced the change in the middle of a legislative special session focused on fixing a state budget shortfall of more than $900 million for fiscal year 2015-2016 and $2 billion for fiscal year 2016-2017.

Moody's Investors Service has downgraded Louisiana's rated debt by one notch, affecting approximately $7.3 billion in outstanding debt. The state's general obligation bonds were downgraded to Aa3. Lease appropriation bonds have been downgraded to A1, A2 and A3, all one notch from their prior ratings. The Aa3 GO rating reflects the state's rapidly deteriorating revenue collections due in part to the continuing low oil price environment, a looming fiscal 2017 gap that could be as large as 20% of general fund revenues, and the effects of years of structural imbalance on the state's reserves and liquidity.

"It's a black eye for the state," said Commissioner of Administration Jay Dardenne. "Other people are taking notice of the problems we're having in Louisiana."

State Treasurer John Kennedy said the lower rating means the state will incur larger interest rates when issuing bonds for things like building roads or fixing college campuses.

"The taxpayers of this state are going to pony up more money to pay the interest when the state borrows money," Kennedy said.

Moody's pointed to several concerns when issuing the downgrade. That includes years of budget shortfalls, when state revenue did not match spending.

"The previous administration spent us into oblivion using one-time money, sweeping all funds, and that creates a totally unstable budget and a dependence upon one-time revenue," Dardenne said.

Moody's also cited the drop in oil prices, which has caused decreased revenue for the state. Added to that, the state has modest amounts of money left in its rainy day fund.

Kennedy said Moody's originally indicated they may wait until after the special session to evaluate the state. However, he said recent comments from the Edwards administration may have changed that plan.

For example, during his special address to the state, the governor indicated that college football may be at risk in Louisiana if the legislature does not act to fix the budget and colleges are forced to close.

"When those statements were made, they went out nationally, particularly the part about LSU football, and I think it scared the day lights out of Moody's," Kennedy said.

For now, state leaders are left to wrestle with the budget before new bonds are issued this summer.

"It'll be a harder sell, but hopefully if the legislature does its job, I'll have a good story to tell," Kennedy said.

Representatives from Moody's are set to visit Louisiana this spring, according to the Edwards administration.

The two other credit agencies, Fitch and Standard & Poor's, have not yet taken action with regards to Louisiana.

Governor John Bel Edwards released the following statement on Moody's Investors Service downgrade of Louisiana's credit rating:

This is a disappointing development, particularly since we believed that Moody's would wait until the conclusion of the special session to make any decision on our rating. Unfortunately, the downgrade confirms what we've been saying about the structural imbalance of our budget. The overuse and abuses of one time money and fund sweeps by the Jindal Administration were a major factor in this decision. It also reflects the global concern about the decline of oil prices and its impact on producing states. It is more important than ever for the legislature to work with me during this special session to stabilize our budget and repair the damage of the last eight years. We can do this by transitioning to a new tax structure that conforms to best practices promoted by organizations such as the Tax Foundation, which will help us achieve long term fiscal stability and predictability in Louisiana.

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