NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to $53.94 million Louisiana Transportation Authority (the authority) refunding bonds, series 2013A.
The bonds are expected to sell via negotiation on Nov. 7, 2013.
In addition, Fitch affirms the following ratings:
--Approximately $2.5 billion in outstanding Louisiana general obligation (GO) bonds at 'AA';
--Approximately $515 million in outstanding Louisiana appropriation-backed bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are special obligations of the authority (a public corporation housed within the state department of transportation and development [DOTD]). Bonds are payable solely from payments received by the authority from annual state legislative appropriations pursuant to a cooperative endeavor agreement (CEA).
KEY RATING DRIVERS
STATE APPROPRIATION: The rating on the bonds is based on the credit quality of the state of Louisiana (GO bond rating of 'AA') as bonds are secured by annual legislative appropriations from the general fund, pursuant to a CEA between the state and the authority.
COMMODITY-BASED ECONOMY: The state's commodity-based, cyclical economy, heavily linked to oil and gas production, has modestly diversified, although one-third of the state's gross state product continues to derive from the production and delivery of raw and intermediate goods.
FINANCIAL OPERATIONS HAVE BEEN CHALLENGED: Financial operations in recent years have been characterized by revenue shortfalls and increasing education and Medicaid expenses. To the state's credit, required budgetary reductions, often large and at mid-year, have been executed to achieve balance. Fiscal year 2013 is estimated to have ended with an operating surplus.
MODERATE DEBT SUPPORTED BY STRONG GO LEGAL PROVISIONS: Debt levels are moderate and debt issuance is well controlled by policy. There are strong legal provisions for GO debt, with all non-dedicated revenues flowing into the bond security and redemption fund to provide for debt service prior to operations.
HIGH UNFUNDED LIABILITIES: Funding of the state's two largest pension systems is below average and has been declining; the combined burden of debt and pensions is well above the median for U.S. states rated by Fitch. The state's modest, recently implemented reforms to improve its unfunded liability position have been ruled unconstitutional on procedural grounds.
RATING SENSITIVITIES
The rating is sensitive to shifts in the state's GO bond rating, to which it is linked. Fundamental credit characteristics that are incorporated in the state's 'AA' GO bond rating include a record of timely action to maintain budget balance and a commodity-based economy.
CREDIT PROFILE
The 'AA-' rating for the series 2013A bonds reflects the authorization for the debt by Louisiana's constitution and the legal provisions included in the CEA between the authority and the state, providing for the state's pledge of annual appropriations to fund debt service payments. The current series 2013A bond issue, together with no more than $122 million of bonds to be privately placed with the U.S. department of transportation through a federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan, will refund all outstanding authority debt issued for its LA1 project in 2005. The authority's series 2005A and 2005B bonds are currently rated 'BBB' by Fitch and the authority's outstanding TIFIA loan is rated 'CCC' by Fitch. The series 2005A and 2005B (1st Tier) bonds have benefited from the state's commitment to replenish draws on the 1st Tier debt service reserve fund through a 2005 CEA, improving otherwise weak project fundamentals that are reflected in the 2005 TIFIA loan rating. Due to the underperformance of pledged toll revenues for the 2005 bonds, absent the current refunding, the TIFIA loan would be expected to default in December 2013.
Louisiana's 'AA' GO rating reflects the state's focus on spending control and an economy that, while heavily reliant on natural resources and the volatile energy industry, has shown steady growth since the recession. The rating also considers the strong legal provisions for GO debt, with all non-dedicated revenues flowing into the bond security and redemption fund to provide first for debt service. However, financial operations are narrowly balanced and while state debt levels remain moderate, the funding levels for the state's two largest pension systems are below average and related pension obligation levels are well above average.
NARROWLY BALANCED FINANCIAL OPERATIONS
Despite the state's economic recovery, financial operations in recent years have been challenged by repeated revenue underperformance and forecast budget gaps, which the state has closed through both structural and non-recurring actions. For fiscal 2012, material mid-year budget gaps emerged in December 2011 and again in April 2012, primarily due to revenues underperforming earlier forecasts. The governor cut spending in response to a $254 million gap that emerged in December 2011, and the legislature consented to using rainy day fund (RDF) resources to offset a $205 million gap that emerged in April 2012. The fiscal year ended with an unexpected General Fund (GF) surplus of $113 million due to strength in the corporate income tax (CIT), while the RDF balance dropped to $444 million (4.5% of general fund revenues).
The state's budgetary challenges continued in fiscal 2013, which ended on June 30. The enacted fiscal 2013 budget closed an earlier identified $1.2 billion gap through about $750 million in on-going spending reductions and the utilization of $273 million in one-time monies; the budget also included a 3.7% rate cut for Medicaid providers and the closure of one prison facility and brought the GF portion of the budget to $22 million below appropriations in fiscal 2012. After enacting the $8.3 billion GF budget ($25.7 billion on an all-funds basis) for fiscal 2013, the state learned in July 2012 that its federal Medicaid matching rate (federal medical assistance percentage, or FMAP) for fiscal 2013 had been significantly reduced, reflecting increased wealth levels in the state, necessitating $859 million in adjustments on an all-funds basis. The state identified $522.5 million in expenditure reductions in fiscal 2013 to partly close this gap, as well as other one-time measures and private partnerships, and received legislative approval to apply about $100 million of the fiscal 2012 cash surplus to close the remaining gap.
In December 2012 the revenue estimating conference (REC) reduced the revenue forecast for fiscal 2013 by $135.5 million, incorporating reductions in expected personal income tax (PIT) and sales tax revenues partly offset by an increase in expected CIT, and the governor reduced appropriations correspondingly. Recent estimated ending results for fiscal 2013 show a GF operating surplus of almost $163 million, reflecting improved results from the December 2012 REC for PIT and sales tax revenues offset somewhat by expenditures that were greater than expectations. The RDF balance was maintained at $444 million, about 4.4% of fiscal 2013 GF revenues.
The December 2012 consensus general revenue estimate of $8.2 billion for fiscal 2014 resulted in a total estimated continuing budget gap of $1.28 billion for fiscal 2014. Contributors to the forecast budget gap included $350 million tied to the reduced FMAP rates, $250 million related to one-time monies utilized in fiscal 2013, and $164 million of inflation and employee salary increases (although these items have not been funded in recent years). The May 2013 REC improved the revenue forecast to $8.4 billion, narrowing the continuing budget gap, and the enacted budget for fiscal 2014 provided for expenditure reductions while forecasting an estimated $780 million in savings on an all-funds basis from privatizing most of the state's public hospitals. The budget plan also includes an expectation of $200 million in receipts from a tax amnesty program that would be directly applied to the state's health and hospitals department.
Fitch believes there are a number of uncertain assumptions incorporated into the enacted budget. The state's assumption for wage and salary growth in fiscal 2014 of 6%, which supports the forecast for PIT revenue, appears aggressive and may not be achieved given recent trends in this category and a recently boosted unemployment rate. Additionally, the PIT forecast for fiscal 2014 does not consider increased PIT revenue that may have been pushed forward into fiscal 2013 related to federal tax law changes. While the state's forecast for other economically sensitive revenue sources appears to be conservative, the budget does anticipate the receipt of $200 million from the tax amnesty program that might not be achieved. The REC is expected to meet in December 2013 and will update the state's revenue forecast for both fiscal 2014 and 2015 at that time. At the May REC, continuing fiscal 2015 GF operations were forecast to have a $547.3 million budget gap.
STEADY ECONOMIC GROWTH IN RESOURCE-BASED ECONOMY
Louisiana's economy is resource-based as a major producer of oil and gas, and much of its manufacturing is dominated by petroleum and chemical production. The state reports ranking first in crude oil production in the U.S. when including production from the Outer Continental Shelf (OCS) and ranking second in the nation in natural gas production when including the OCS. The state estimates that approximately one-third of the state's gross state product is connected to the production and delivery of raw and intermediate goods. Tourism is also important, and the 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.
Louisiana's economic recovery has been solid, with fairly steady year over year (yoy) employment gains since December 2010 and the state has fully recovered employment lost during the recession. Employment growth in August 2013 continued to exceed that of the nation at 1.8% yoy compared to 1.7% for the U.S. although unemployment rates have recently moved up and have held steady at 7% over the past three months. The ratio continues to compare favorably to the national average of 7.3% unemployment in August 2013. Construction experienced the largest yoy increase in August at 7.8%, followed by leisure and hospitality at 4.6%. Solid growth also occurred in natural resources and mining at 4.1% yoy and trade, transportation, and utilities at 3% yoy. Quarterly personal income trends have been positive, although the state's growth rates continue to trail both the region and nation. Personal income per capita in the state is 91.6% of the U.S. average.
MODERATE DEBT LEVELS WITH WEAK PENSION FUNDING
State debt levels remain moderate, equaling about 3.6% of 2012 personal income. By policy, debt issuance is well controlled. However, funding of the state's two largest pension systems is below average and has declined. On a reported basis, the state employees' pension system had a funded ratio of 55.9% and the teachers' system was at 55.4% as of June 30, 2012. Using Fitch's more conservative 7% discount rate assumption, funded ratios for the plans decline to 49.1% and 48.7%, respectively. The state's payment to the state employees' system in fiscal 2012 was below the actuarially calculated annual required contribution (ARC) primarily as a result of a timing lag between the determination of required contribution rates and state payrolls that had diminished through headcount reduction.
In 2012, the legislature approved the governor's proposal to move new employees hired after June 30, 2013 to a cash-balance pension plan, a defined benefit plan in which participants are protected from investment losses. The pension changes were litigated by interested parties and the state lost its case at the Supreme Court level in 2013 due to the changes being approved by only a simple majority of the legislature's members; the court ruled that since the legislation resulted in increased costs to the state, a two-thirds majority vote was required on the legislation. The state is expected to address pension issues in the 2014 legislative session.
On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equaled 17.2% of 2012 personal income, well above the 7% median for U.S. states rated by Fitch. The calculations include 100% of the liability for both state employees (LASERS) and the teachers' retirement system (TRS), which are both the responsibility of the state.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=806192
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