Fitch Ratings assigns an 'AA-' rating to the approximately
$24.245 million Louisiana Local Government Environmental Facilities
and Community Development Authority (LCDA) revenue refunding bonds
(BRCC Facilities Corporation Project), series 2012.
The bonds are expected to sell via negotiation the week of March
26, 2012.
In addition, Fitch affirms the following ratings:
--Approximately $2.8 billion in outstanding Louisiana general
obligation (GO) bonds at 'AA';
--Approximately $497.8 million in outstanding Louisiana
appropriation backed bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The series 2012 bonds are special obligations of the LCDA,
payable from funds received by the LCDA through the BRCC Facilities
Corporation (the corporation) from the Board of Supervisors of the
Community and Technical College System (the board) under the
enabling financing documents. Such payments are received by the
board subject to annual appropriation of the state legislature.
Source of payments is 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, whose GO bonds are rated 'AA', 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.
SOLID FINANCIAL MANAGEMENT BUT SIZABLE BUDGET GAPS CONTINUE:
Financial management has been solid. The state took prompt action
to address projected shortfalls following the severe impact of
hurricanes Katrina and Rita in 2005 and through the recent
downturn. Increasing costs largely related to education and
Medicaid, and the use of one-time money in fiscal year (FY) 2012,
has created an $895 million budget gap for FY 2013 that the
governor has proposed eliminating through ongoing spending
reductions and $230 million in one-time revenue.
MODERATE DEBT SUPPORTED BY STRONG 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. In the
executive budget for FY 2013, the governor has proposed pension
reform measures to reduce the unfunded actuarial accrued
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 (the 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 the last remaining maturity of the series
2002 bonds for debt service savings.
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 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 non-dedicated revenues flowing
into the bond security and redemption fund to provide first for
debt service. The state's GO rating also recognizes the state's
economic concentration in the volatile energy industry. Louisiana's
economic recovery has been steady, with year over year (y-o-y)
employment gains since December 2010, currently surpassing the
national average.
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 and gas and hurricane
recovery-related revenues. Steep revenue declines in FY 2009 and
2010 reflected the impact of the economic downturn and significant
tax cuts enacted in prior years. The general fund (GF) budget for
fiscal 2010 was reduced three separate times to meet deteriorating
revenue estimates, with ending state-source revenue a decrease of
24% from fiscal 2009. Overall, FY 2010 ended with a $591 million
general fund operating deficit (budgetary basis) despite the use of
$198 million from the rainy day fund.
Balanced 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 $645.2 million, remained at a comparable level at the end
of the fiscal year, $646.8 million. FY 2011 also marked the second
year that the state received funds from BP related to the 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 a previously overly optimistic forecast of personal
income tax (PIT) receipts, an increase in oil and natural gas
production that has been increasingly 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 anticipates ending the current
fiscal year with balanced operations, and reserves are expected to
remain unchanged.
The governor's budget proposal for fiscal 2013, which was
released in February 2012, is based on a consensus general revenue
estimate of $8.4 billion, up 4.2% compared to the revised forecast
revenue for fiscal 2012. To address a forecast deficit of $895
million in fiscal 2013, the governor's executive budget proposes
$701 million in on-going spending reductions and $195 million from
maximizing the use of dedicated funds rather than GF revenues for
programs. One-time revenues of $230 million are part of the
recommendation. Ongoing measures include additional agency cuts in
2013, the passage of pension reform measures to save $55 million in
FY 2013, extensive Medicaid reform that is expected to save $136
million in FY 2013, and an average 2% cut to Medicaid service
providers. The proposed budget includes no revenue raising
proposals.
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. According to the state, the state ranks
first in crude oil production in the U.S. when including production
from the Outer Continental Shelf (OCS) and ranks 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; however, the state remains
vulnerable to severe storm activity.
The state has had some recent success with economic development
efforts that support diversification. Following the 2005 storms,
state employment dropped in 2005 and 2006 but then rose steadily
until December 2008 when the state entered the recession. The
state's recovery from the recession has been steady, with monthly
y-o-y employment growth since December 2010, and all sectors
registered positive y-o-y growth in January 2012. Employment growth
in January 2012 was above that of the nation, with 2.4% y-o-y
growth compared to 1.5% for the nation. Mining experienced the
largest y-o-y increase at 6.8%, followed by education and health
services (5.3%), and professional and business services (4.2%).
Louisiana's unemployment rate remains below that of the U.S. at
6.9% in January 2012 compared to 8.3% for the nation, but is still
above historical averages. Quarterly personal income trends have
been positive, with y-o-y growth rates that have surpassed the
nation and region, and per capita income as a percentage of the
U.S. was 93% in 2010.
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
2010 Census population for the state was 1.4% above the level in
2000, compared to 9.7% growth for the U.S. population in this
period, reflecting this dynamic. Following several years of
population out-migration, this trend has reversed and the Census
reports four consecutive years of in-migration.
State debt levels remain moderate, equaling about 3.9% of 2010
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.
In his FY 2013 budget proposal, the governor has recommended
several reforms to the pension systems which would reportedly
reduce the systems' unfunded actuarial accrued liabilities by $500
million and reduce the state's contribution to the systems by $55
million in FY 2013. The proposal includes increasing employee
contribution rates by 3%; increasing the retirement age for current
employees under the age of 55 from 55 to 67; increasing the
calculation of average final salary from three years to five years;
and mandating a cash balance pension plan that would combine
elements of both a defined benefit and a defined contribution
system. Fitch believes it is too early to predict the outcome of
this proposal.
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. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', dated
Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER
RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE
OF CONDUCT' SECTION OF THIS SITE.