Fitch Ratings assigns an 'AA-' rating to the approximately $44 million Louisiana Local Government Environmental Facilities and Community Development Authority (LCDA) revenue refunding bonds (Bossier Parish Community College - Campus Facilities, Inc. Project), series 2012.
The bonds are expected to sell via negotiation the week of Oct. 29, 2012.
In addition, Fitch affirms the following ratings:
--Approximately $2.8 billion in outstanding Louisiana general obligation (GO) bonds at 'AA';
--Approximately $486.8 million in outstanding Louisiana appropriation backed bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
Funds received by the LCDA through Campus Facilities, Inc. (the corporation) from the Board of Supervisors of the Community and Technical College System under the enabling financing documents. The source of payments is annual legislative appropriations from the state's general fund.
KEY RATING DRIVERS
STATE APPROPRIATION: The rating on the bonds is based on the credit quality of the state of Louisiana, whose GO bonds are rated 'AA' by Fitch, as bonds are secured by annual legislative appropriations from the general fund, pursuant to a cooperative endeavor agreement.
COMMODITY-BASED ECONOMY: The state's commodity-based 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.
SIZABLE BUDGET GAPS LARGELY CLOSED THROUGH ONE-TIME ACTIONS: Financial management has been solid and the state took prompt action to address projected shortfalls during the recession. However, recent reductions in both state-source revenue and federal funding for Medicaid programs required sharp cuts to expenditures, particularly in health care, and resulted in the use of the state's rainy day fund to close budgetary gaps.
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.
WEAK PENSION FUNDING LEVELS: Funding of the state's two largest pension systems is below average and has been declining. The state has implemented modest reforms to reduce its unfunded liability.
WHAT COULD TRIGGER A RATING ACTION
Changes in Louisiana's 'AA' GO rating, to which this rating is linked.
CREDIT PROFILE
The series 2012 bonds are issued through the LCDA pursuant to a cooperative endeavor agreement between the state, the board (responsible for supervision and management of the state's post-secondary community and technical colleges under the state Board of Regents), and the corporation (a not-for-profit corporation organized to construct the facilities). The debt is authorized by Louisiana's constitution and the agreement provides for the state's pledge of annual appropriations, securing rental payments under a lease between the board and the corporation and a loan agreement between the LCDA and the corporation. The rental payments have been assigned by both the corporation and the LCDA to the trustee for the benefit of bondholders.
The state has other such agreements in place that support debt obligations, primarily for economic development and higher education purposes. Oversight and control mechanisms are in place and the state division of administration, party to the agreement on behalf of the state, covenants to seek appropriations for debt service funds annually. Approval of the state bond commission, consisting of the state's major elected officials is required. The current issue refunds for debt service savings the LCDA's series 2002 bonds issued on behalf of the corporation.
Louisiana's 'AA' GO rating reflects the sound financial management demonstrated by the state since the hurricanes of 2005 and through the recent recession, including a focus on spending control and maintenance of solid reserves. However, financial operations continue to be narrowly balanced and the state continues to employ one-time measures to close budget gaps. 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 non-dedicated 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.
Following steep revenue declines in FY 2009 and 2010 that required broad budget-balancing measures and use of the rainy day fund, General Fund (GF) operations in FY 2011 produced a $264 million operating surplus (budgetary basis) and most major tax revenues showed improvement. The rainy day fund, which was reduced in FY 2010 to $645 million, remained at a comparable level at the end of the fiscal year, $647 million. FY 2011 also marked the second year that the state received funds from BP related to the 2010 Gulf oil spill. These payments have been directed to the construction of barrier island berms, to increase tourism, to repay state agency costs, as well as other assessment and monitoring costs, and should offset state costs associated with the oil spill. Approximately $116 million was received in FY 2010 and $237 million was received in FY 2011.
The adopted budget for FY 2012 closed a $1.5 billion budget gap, partly attributable to the falloff of federal stimulus funds, through spending reductions and about $340 million in one-time revenue; there were no revenue-raising measures taken. A mid-year budget gap of about $254 million was identified in December 2011 as a result of previously overly optimistic forecast of personal income tax (PIT) receipts, an increase in the amount of oil and natural gas production that is tax-exempt due to the extraction measures utilized, and increased costs related to formulaic education spending. The governor reduced GF expenditures by a like amount and the state had anticipated ending the fiscal year with balanced operations and no change to reserves.
The April 2012 meeting of the state Revenue Estimating Conference (REC) certified further erosion in the forecast for PIT receipts for FY 2012, which ended on June 30. Expected corporate income and sales taxes were also reduced, producing a forecast revenue reduction to FY 2012 revenues of $205 million. The governor sought and achieved legislative approval to close the FY 2012 budget gap through use of a like amount of the rainy day fund, although better than expected revenue results in that fiscal year is expected to result in a smaller draw on the fund.
The April REC also reduced the revenue forecast for FY 2013 by $304 million, compounding an earlier forecast budget gap of $895 million by bringing the consensus general revenue estimate of $8.4 billion to $8.1 billion. The enacted FY 2013 budget closed the $1.2 billion gap through about $750 million in on-going spending reductions and the utilization of $273 million in one-time monies as part of $397 million in fund sweeps and re-allocation of certain revenues. The budget also included a 3.7% rate cut for Medicaid providers and the closure of one prison facility and brought the General Fund portion of the budget to $22 million less than appropriations in FY 2012. Following the enactment of the FY 2013 budget, the state was informed of a reduction in the federal government's match rate for the state's Medicaid program, from approximately 72% to 65%. The rate reduction created an $859.2 million funding gap on an all-funds basis, and is expected to largely be resolved through cuts to the state's health care system and reductions in other departmental expenditures.
The use of $130 million in carry-over surplus from FY 2012 is also expected to support the FY 2013 budget. However, the application of surplus funds for this purpose, rather than replenishment of the state's rainy day fund draw, is currently being debated in the state. The issue may not be resolved until the legislative session that begins in March 2013, creating some uncertainty regarding operating results for FY 2013.
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; the state is still recording costs from Hurricane Isaac, which made landfall in Louisiana on Aug. 28, 2012. The storm created extensive damage and flooding in the southern portion of the state but to a significantly less of a degree than the 2005 hurricanes. The state estimates its exposure to costs related to Isaac at about $160 million, with the federal government likely to pay 75%, leaving $40 million in state responsibility. Net of a $16 million emergency response fund, the state is expected to have to cover about $24 million in remaining costs in FY 2013.
Louisiana's economic recovery has been steady, with year over year (y-o-y) employment gains since December 2010, currently surpassing the national average, and the state has fully recovered employment lost during the recession. Employment growth in August 2012 was above that of the nation, with 2.1% y-o-y growth compared to 1.5% for the nation. Mining experienced the largest y-o-y increase at 9.5%, followed by leisure and hospitality (5.2%), and financial activities (4.2%). Louisiana's unemployment rate remains below that of the U.S. at 7.4% in August 2012 compared to 7.8% for the nation, but is still above historical averages. Quarterly personal income trends have been positive, although y-o-y growth rates are trailing those of the nation and region. Personal income per capita in the state is about 93% of the U.S. average.
State debt levels remain moderate, equaling about 3.6% of 2011 personal income. By policy, debt issuance is well controlled. Funding of the state's two largest pension systems is below average and has declined. The state employees' pension system had a funded ratio of 57.6% and the teachers' system was at 55.1% as of June 30, 2011. Using Fitch's more conservative 7% discount rate assumption, funded ratios for the plans decline to 50.4% and 48.2%, respectively. The state's payments to these systems in fiscal years 2010 and 2011 were below the actuarially 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.
On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension (UAAL) obligations equals 16.6% of 2011 preliminary personal income, well above the 6.6% 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.
In his FY 2013 budget proposal, the governor had recommended several reforms to the pension systems targeted to reduce the systems' unfunded actuarially accrued liabilities. 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 are now being litigated by various interested parties.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's 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. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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