STATE HAS $5.9 BILLION IN NET TAX SUPPORTED DEBT OUTSTANDING
Louisiana (State of)
Parish of St. James, State of Louisiana Revenue Bonds (State of Louisiana - Economic Development Project) Series 2011 (Gulf Opportunity Zone Bonds)
Expected Sale Date
NEW YORK, Aug 17, 2011 -- Correction: Substitute last sentence of fourth paragraph of section titled
"State Enacted Fiscal 2012 Budget Closed $1.6 Billion Shortfall" with
the following: "Medicaid represented 22.5% of Louisiana's operating budget
in fiscal 2011."
Moody's Investors Service has assigned a rating of Aa3 to Parish of St. James,
State of Louisiana's $27 million Revenue Bonds (State of Louisiana - Economic
Development Project), Series 2011 Bonds. The bonds are fixed-rate with an 8 year
maturity. Debt service payments are subject to appropriation by the State of
Louisiana. The proceeds from the bonds will provide funds for the development
of an iron-making facility and related capital improvements undertaken by Nucor
Corporation. The outlook for the rating is stable.
The Aa3 rating is notched off the state's Aa2 rating to reflect the
subject-to-appropriation nature of the state's debt service obligation. The
state's Aa2 rating reflects its strong financial position and healthy liquidity
in recent years, primarily due to large amounts of federal money flowing into
the state for post-hurricane rebuilding and federal stimulus aid and, to a
lesser degree, upward trends in oil and gas prices; the state's speedy responses
to downward revenue projections; healthy economic measures relative to the
nation; an improved business environment and active economic development plans;
and debt policies that have lowered the state's debt ratios over time. The
rating also reflects the finite nature of the federal assistance and
insurance money the state has received and is still receiving, and the
potential for deterioration in the state's financial and liquidity position
when the federal support dwindles and the post-Katrina rebuilding is completed.
It also reflects continued uncertainty around the economic recovery after
Katrina and the lingering impacts of the Deepwater Horizon oil leak.
*The obligation of the state to make payments is absolute, subject to
*Relatively short bond term (final maturity in 2019)
* Strong support from the state for the project
* Strong financial position relative to other states
* Proactive economic development policies and policies that appear to be
bringing new jobs to the state
* Low-wealth state with high Medicaid expenditures, which are difficult to
control especially given the state's healthcare delivery system that includes
stand-alone public hospitals for charity care
* Low pension funding ratio that promises future spending challenges
* Sizeable post-retirement healthcare liability as it relates to the state's
* Economic impacts of Deepwater Horizon oil leak still linger
Detailed Credit Discussion
COOPERATIVE ENDEAVOR AGREEMENTS ARE A FAMILIAR COMPONENT OF STATE FINANCE IN
The Louisiana State Constitution permits the state and its political
subdivisions or political corporations, for a public purpose, to engage in
cooperative endeavors (CEAs) with each other, with the United States or its
agencies, or with any public or private association, corporation, or individual.
The state has entered into a number of such agreements with a variety of local
and federal governmental entities, non-profit entities, and others, and has a
history of making the payments required under the CEAs.
STATE OBLIGATION TO PAY DEBT SERVICE FOR THIS ECONOMIC DEVELOPMENT PROJECT IS
ABSOLUTE, SUBJECT TO APPROPRIATION
Under the bond legal documents, the State of Louisiana's obligation to make debt
service payments to the issuer is absolute and unconditional without set-off or
abatement, subject to appropriation, so the debt service payments are shielded
from any potential construction-related litigation or other problems arising
during the development of the project. In addition, the state agrees in the CEA
to reimburse the issuer for "all reasonable expenses, disbursements and
advances incurred or made in connection with any and all losses, injuries,
claims, or damages to persons or property, demands and expenses, including legal
expenses...unless caused by gross negligence or willful default of the
issuer." While there are no bondholder remedies in the event that the
legislature fails to appropriate debt service, the importance of maintaining
access to capital markets provides strong incentive for the state to
appropriate. About $1.7 billion out of roughly $6 billion of net tax supported
debt is subject to appropriation.
In the CEA, the parish agrees to issue bonds to finance Nucor's cost of capital
for the project. In turn, subject to appropriation, the state agrees to make
payments equivalent to required debt service payments to the issuer, the rights
to which are assigned to the trustee in the trust indenture. The state will make
payments directly to the trustee on or before the debt service payment due dates
of December 15 and June 15, mitigating potential risks of delayed payments
stemming from late budget adoption.
PROJECT IS PHASE ONE OF FIVE-PHASE PLAN
The bond proceeds will be disbursed to Nucor Steel Louisiana LLC, a subsidiary
of Nucor Corporation (A2), which has agreed under a previous cooperative
endeavor agreement to develop a new iron manufacturing facility in St. James
Parish. The funds will provide the resources for acquisition, construction and
equipping of an iron-making facility and docks and wharves at the site. Four
more phases are expected to be completed by 2015 with the entire facility fully
online by 2019. State officials expect phase one of the project, which these
bonds support, to create 150 new jobs.
The state anticipates that the entire project will require $3.4 billion in
capital investment, and has committed to provide a total of $160 million towards
this amount. The state has already contributed $30 million in cash support,
leaving approximately $100 million of its commitment remaining over the next
four phases of the project. The state expects that a portion of that
support will be provided through additional bond financing.
Project funding benefits from the provisions of the Gulf Opportunity Zone Act of
2005, which provided tax incentives and other incentives to stimulate rebuilding
the Gulf of Mexico region impacted by the severe hurricanes of that year.
STATE HAS MAINTAINED HEALTHY FUND BALANCES
In fiscal 2010, Louisiana's GAAP-basis available fund balance (unreserved,
undesignated fund balance plus unrestricted revenues outside of the operating
funds) decreased to 9.0% of revenues, down from 12% in fiscal 2009 and following
a peak of 13.6% in fiscal 2007 as post-Katrina assistance flowed in.
Current law prohibits the state from drawing on its Rainy Day Fund, which
currently has a balance of about $645 million, in 2012: to use the fund,
recurring revenues must be less than the previous year's.
STATE ENACTED FISCAL 2012 BUDGET CLOSED $1.6 BILLION SHORTFALL
The enacted 2012 Louisiana budget set general fund spending at $8.2 billion, an
increase of more than 6% from 2011. The increase in part reflects the
discontinuation of federal stimulus support for certain state operating
expenses. The 2012 gap, which stemmed in part from the termination of the
federal stimulus program, was closed by a combination of higher projected tax
revenues and recurring expenditure actions, although more than $300 million in
one-time measures were implemented with the enacted budget.
The state's spending actions included departmental operating budget cuts in
addition to annualizing mid-year reductions implemented in fiscal 2011. The
state has taken repeated actions to reduce costs since the onset of the
recession and has made significant reductions in headcount. The 2011 and 2012
spending reductions will have eliminated nearly 10,000 full-time equivalent
The March 2011 Revenue Estimating Conference (REC) projections raised the fiscal
2012 general fund revenue projection $65 million, or nearly 1%, from the
previous official forecast. The March REC also raised the fiscal 2011 projection
1.5%, but the higher estimate was partially reversed in the May REC as
income tax collections failed to achieve projected gains. However, the March
projection was retained for the enacted fiscal 2012 budget.
Disaster-recovery assistance and ARRA enhanced federal Medicaid matching
percentages (FMAP) have shielded the state from the impacts of a decline in its
regular federal match stemming from the state's significant increase in per
capita personal income over the past decade. The federal match historically was
70% to 72% of Medicaid costs. In federal fiscal year 2010, the state's total
FMAP had grown to 81.48%; in FFY 2012, the match is scheduled to decrease to
69.78%, eight percentage points of which represents disaster-recovery
assistance. The state's unenhanced FMAP has fallen to 61.09%. The state reports
that it is pursuing an extension of a higher federal match for Medicaid and is
studying several approaches to reducing its health care burden. Any
determination by the federal government pertaining to Medicaid funding for the
state, as well as the state's efforts to redesign the charity health care
delivery system within the state, could have a significant impact on the state.
Medicaid represented 22.5% of Louisiana's operating budget in fiscal 2011.
LOUISIANA ECONOMY REGISTERS AFTERMATH OF OIL SPILL
Louisiana did not register year-over-year job declines until well after the
nation had entered the recession in 2008, and its unemployment rate has been
well below the nation's since the recession began. However, the state's relative
advantage has eroded as the impacts of the Deepwater Horizon oil spill led to
deterioration in the state's economy. The unemployment rate, falling slowly at
the national level, has continued on a generally rising trend in Louisiana. In
June of 2011, the state's 7.8% unemployment rate exceeded its 7.4% 2010
average. In contrast, the nation's June rate of 9% had fallen below its 2010
average. The pace of employment growth fell behind the nation's in the first
half of 2011. On a year-over-year basis, Louisiana's payroll employment grew
0.7%, compared to 0.9% nationally.
In a more encouraging trend, personal income in the state has been converging to
the national level. Louisiana's personal income per capita grew from 78% of the
U.S. average in 2000 to 95% in 2010. Population suffered after the 2005
hurricanes, but the state's population figures have now returned to
The state's recent performance is consistent with Moody's
Economy.com expectation that employment growth will lag that of the nation, in
part due to the aftermath of the oil spill and deepwater drilling moratorium.
IMPACTS OF HURRICANES ON THE STATE
Because of its location, from time to time the State of Louisiana is damaged by
hurricanes. The hurricanes that hit the state in 2005, Katrina and Rita, were
the largest and most destructive in recent history-not because of the wind
force, but because of the flooding related to a breach in the levees. Since
2005, the levees have been rebuilt to a higher standard, suggesting the state is
better positioned to weather future storms and their potential impact on the
state. In addition, the state's financial recovery after the storms suggests
that federal aid and rebuilding moneys available after storms reduce the
financial impact of storms to the state.
STRENGTHS AND WEAKNESSES IN GOVERNANCE PRACTICES
Louisiana has some relatively strong governance structures in place, including
binding consensus revenue forecasts done four times a year, multi-year financial
planning, the executive authority to make mid-year spending cuts up to 3% of
general fund spending without legislative approval, debt affordability
analysis, and timely budgets and audits. One weak governance structure is the
requirement to have 2/3 of the legislature vote for tax increases. In practice,
however, the state has managed around this weakness through very speedy action
in times of revenue downturn, largely through spending cuts.
LITIGATION OVER RAINY DAY FUND
The state has been sued for drawing upon its rainy day fund in 2010. Statute
modified the conditions itemized in the constitution under which deposits to and
withdrawals from the rainy day fund are to be made, which plaintiffs argue is
unconstitutional. The constitution requires that mineral revenues greater than a
base amount be deposited into the fund, while the statute requires revenue
collections to reach 2008 levels before additional deposits can be made. The
matter is in the early stages of litigation and may have no impact on fiscal
2012. A decision in the plaintiff's favor could result in deposits to the
state rainy day fund resuming sooner than would be required under the
provisions of the statute.
LOWER DEBT BURDEN, BUT WEAK PENSION FUNDING
Since the early 2000s, Louisiana's debt ratios have dropped significantly as a
result of reduced borrowing, economic gains, and the adoption of debt limitation
measures. Since these debt limitations were implemented, the state has
consistently issued less than the allowable amount and has applied various
one-time resources to accelerate debt retirement. The evaluation process for
debt issuance has also been strengthened, with the requirement that any debt
having general fund impact is subject to state bond commission review. While
Louisiana had ranked among the most indebted states on a per capita basis and as
a percentage of personal income, its more recent debt control measures have
moved it down in the debt rankings among states.
Based on Moody's 2011 debt medians, Louisiana ranked 19th in terms of net
tax-supported debt as a percent of personal income. Its debt per capital stood
at $1,308, compared to a median of $1,066.
The state's retirement system is underfunded, with a pension funding ratio for
its four defined benefit plans of 57.2% as of June 30, 2010. The contributions
made to the pension systems have been higher than the actuarially required
contribution (ARC) since 1990. Over time, the state has created a series of
funding schedules to amortize most of its unfunded liabilities by 2029 or
2040, depending on the plan. Because the state's ARC is determined based on a
method which produces higher contributions in later years, this goal would have
required rapidly escalating pension expenses as 2029 draws nearer. In 2009, the
state enacted legislation that reclassified amortization bases and elongated to
2040 the amortization schedule for portions of unfunded liability that were
previously scheduled to be amortized in 2029. As a result, the state's
pension contributions will be less than previously projected until 2032 and
will be greater thereafter.
As of July 1, 2009, the state's other post-employment benefits (OPEB) actuarial
accrued liability for benefits was $7.5 billion for the primary government and
$3.4 billion for components. As with most states, Louisiana pays these
benefits, which are not guaranteed, on a pay-go basis. The combined ARC for 2010
was $851 million. An OPEB trust fund was established on July 1, 2008, but was
not funded and has no assets.
The stable outlook for the State of Louisiana is based on the state's relatively
healthy financial position and economy, as well as the state's rapid response to
downward revenue forecasts and the maintenance of reserves, and the likelihood
that the state will use the budgeting tools available to it to manage the
upcoming decline in federal aid and increase in health care costs.
What could make the rating change--UP
* Strengthening of the state's healthy financial position,
including implementation of a plan to address growing costs relative to Medicaid
* Continuation of the state's speedy actions to deal with economic and revenue
* Improvement in the state's economy, including personal income and employment,
relative to the nation
What could make the rating change--DOWN
* Failure to maintain budget discipline and budget overspending and imbalances
* Failure to contain costs related to the state's Medicaid system
* Reduction in state pension funding
The principal methodology used in this rating was Moody's State
Rating Methodology published in November 2004. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
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Marcia Van Wagner
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
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CORRECTION TO TEXT, AUG. 17, 2011 RELEASE: MOODY'S ASSIGNS Aa3 RATING TO $27 MILLION OF ST. JAMES PARISH, STATE OF LOUISIANA REVENUE BONDS (STATE OF LOUISIANA - ECONOMIC DEVELOPMENT PROJECT) SERIES 2011; OUTLOOK IS STABLE
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