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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

17 Aug 2011

STATE HAS $5.9 BILLION IN NET TAX SUPPORTED DEBT OUTSTANDING

Louisiana (State of)
State
LA

Moody's Rating

ISSUE

RATING

Parish of St. James, State of Louisiana Revenue Bonds (State of Louisiana - Economic Development Project) Series 2011 (Gulf Opportunity Zone Bonds)

Aa3

  Sale Amount

$27,000,000

  Expected Sale Date

08/25/11

  Rating Description

Revenue Bonds

 

Opinion

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.

RATING RATIONALE

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.

STRENGTHS

*The obligation of the state to make payments is absolute, subject to appropriation

*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

CHALLENGES

* 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 budget

* Economic impacts of Deepwater Horizon oil leak still linger

Detailed Credit Discussion

COOPERATIVE ENDEAVOR AGREEMENTS ARE A FAMILIAR COMPONENT OF STATE FINANCE IN LOUISIANA

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 state positions.

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 pre-Katrina levels.

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.

Outlook

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 declines

* 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 emerge

* 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Marcia Van Wagner
Analyst
Public Finance Group
Moody's Investors Service

Emily Raimes
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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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
No Related Data.
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