Fitch Ratings assigns an 'AA' rating to the following state of Louisiana general obligation (GO) bonds:
--$300,000,000 GO bonds, series 2011A.
The bonds are expected to sell competitively on March 1, 2011.
In addition, Fitch affirms the following ratings:
--Approximately $2.4 billion in outstanding Louisiana GO bonds at 'AA';
--Approximately $449.1 million in outstanding Louisiana appropriation backed bonds at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
-- Louisiana has made progress toward increased economic diversification, although the state's economy remains energy reliant. Flood protection in the New Orleans area has been enhanced; however, the state remains vulnerable to severe storm activity.
--The state's financial management has been solid and while reserves were drawn upon in fiscal 2010, they remain solid. Prudently managed expenditures and improving revenues result in projected balanced operations in fiscal 2011.
--Debt levels are moderate and debt issuance is well controlled by policy. There are strong legal provisions for GO debt, with all nondedicated revenues flowing into the bond security and redemption fund to provide first for debt service.
KEY RATING DRIVERS:
--Continued timely action to maintain budget balance and maintenance of solid financial balances.
--Ongoing progress towards economic diversification.
SECURITY:
The bonds are general obligations of the state of Louisiana, whose full faith and credit are pledged. The bonds are payable from the bond security and redemption fund, on parity with outstanding general obligations, and have a first lien on the fund, which receives all money deposited in the state treasury not otherwise dedicated.
CREDIT SUMMARY:
Louisiana's 'AA' GO rating reflects the sound financial management demonstrated by the state since the hurricanes of 2005, including a focus on spending control and maintenance of still solid reserves. State debt levels remain moderate, while the funding levels for the state's two largest pension systems are below average. There are strong legal provisions for GO debt, with all nondedicated revenues flowing into the bond security and redemption fund to provide first for debt service. The rating also recognizes the state's economic concentration in the volatile energy industry. Louisiana's economic recovery will be hampered by the impact of the gulf oil spill which is expected to slow oil production and development, and have a ripple effect on related industries.
With prudent fiscal management following the devastation caused by Hurricanes Katrina and Rita in 2005, the state maintained sizable financial balances and realized exceptionally strong revenue collections, bolstered by high oil & gas and hurricane recovery-related revenues. More recent steep revenue declines have reflected the impact of the economic downturn and significant tax cuts enacted in prior years. The general fund budget for fiscal 2010 was based on a revenue estimate of $8 billion; $1.3 billion, or almost 14%, below fiscal 2009 estimates, with all major revenue sources projected to decline. Revenue forecasts for fiscal 2010 were reduced three separate times, with ending state-source revenue a decrease of 24% from fiscal 2009. Personal income tax revenues were down 25% and sales tax revenues were down 14%, including the impact of tax cuts enacted in prior years. The state addressed the revenue loss through expenditure reductions, a larger draw ($198 million total from $86 million originally budgeted) from the rainy day fund, and receipts from a tax amnesty program.
Overall, fiscal 2010 ended with a $591 million general fund operating deficit (budgetary basis).
In fiscal 2011, which began on July 1, 2010 revenue was projected to increase 6% to $7.7 billion, with most major tax revenues expected to see improvement. The budget for the year, which was passed on time, was balanced with federal stimulus funds and spending reductions; there were no revenue-raising measures taken. The state anticipates ending the current fiscal year with balanced operations and reserves are expected to remain unchanged; the rainy day fund is expected to have $646.5 million at fiscal year-end. The fiscal 2012 deficit is estimated at $1.6 billion, resulting from rising expenditures and the expiration of the federal stimulus program, despite projected revenue growth of 6.2% above fiscal 2011 levels.
Louisiana's economy is resource-based as a major producer of oil and gas, and much of its manufacturing is also based on petroleum and chemical production. Tourism is also important, and the port system among the largest in the world. Following the 2005 storms, state employment dropped in 2005 and 2006; however, growth above the national rate was recorded in 2007 and employment rose to above pre-Katrina levels in 2008. As the national economy slowed in 2008, Louisiana continued to add jobs. State employment dropped 2% in 2009, as compared to the nation's 4.3% loss for the year, and was up 1.4% year-over-year in December 2010, above the 0.8% growth for the U.S. Louisiana's unemployment rate has been well below that of the U.S. since the 2005 storms and remains so at 8.0% in December 2010, although it is higher year-over-year compared to the U.S. rate which has declined slightly. The state's personal income per capita was 91% of the U.S. level in 2009, ranking 28th of the states. This is a high level for Louisiana and reflects the impact of hurricane recovery. The state has had some recent success with economic development efforts that support diversification.
Before Hurricanes Katrina and Rita, the 1.3 million people residing in the New Orleans metropolitan area made up nearly 30% of the state's population and about one-third of state employment. Following the hurricanes, there were large population losses in New Orleans and a considerable population shift within the state. East Baton Rouge is now the largest parish in the state, having experienced almost 40% population growth between 2000 and 2010. The 2009 population estimate for the state is 0.5% above the level in 2000, compared to 9.1% growth for the U.S. population in this period. The state's population has been growing at a rate well below the U.S.'s for many years, with significant outmigration.
State debt levels remain moderate, equaling about 3.7% of 2009 personal income. By policy, debt issuance is well controlled. Funding of the state's two largest pension systems is below average and declining at 57.7% (state employees) and 54.4% (teachers) as of June 30, 2010. Fitch notes that the state did not fully fund its annual required contribution (ARC) to these systems in fiscal 2010.
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', dated Aug. 16, 2010.
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
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