On Monday, in a report titled "Oil Price Plunge Drills Larger Holes in Louisiana Budget," Moody’s Investors Service called recent reductions in revenue estimates by the Revenue Estimating Conference a “credit negative for the state,” hinting that the state could face a downgrade.
In a prepared statement responding to the warning, Louisiana Treasurer John Kennedy explains that Moody’s may downgrade the state’s credit “outlook” from stable to negative. The next step would be a rating downgrade that would make investors less willing to loan the state money and cost the state more in interest, Kennedy notes.
“Each year for the past seven years, we have spent more than we took in,” Kennedy says in the statement. “We filled the hole with nonrecurring revenue, budget gimmicks and pretend ‘efficiencies’ that never materialized. We spent all $830 million in the Medicaid Trust Fund for the Elderly, drained the state employee health insurance trust fund and took money out of the tobacco settlement trust fund. There are consequences to being fiscally irresponsible.”
Kennedy notes that the national credit rating agency’s report takes a hard look at Louisiana’s multiple fiscal challenges, including a $330 million revenue forecast drop, next year’s $1.6 billion state budget shortfall, the current mid-year budget cuts, the dwindling rainy day fund, the scraping of funds and the state’s muted job growth. A downgrade in the state’s credit rating would make it more expensive to borrow money.
Moody’s analysis makes it clear oil is not the only culprit:
As the U.S. economy picked up steam, Louisiana had muted job growth even before the oil price decline. ... Payroll employment grew just 0.8% in the first half of 2014, compared with 1.4% in 2013.
Because Louisiana has a structural deficit, significant downward adjustments to revenues will make balancing the 2016 budget especially challenging. When adopted last spring, the fiscal 2015 budget was balanced with nearly $1 billion in onetime actions. But, shortfalls in income and sales tax revenues late in fiscal 2014 revealed a gap in 2015, subsequently widened by falling oil prices. The November REC projection reduced fiscal 2015 revenue estimates from the previous projection by $171 million, prompting mid-year budget adjustments consisting primarily of onetime revenue actions that failed to address the growing gap in fiscal 2016. With the January revenue revised estimates, the fiscal 2016 gap has grown to $1.6 billion, or 18% of the projected operating budget of $8.7 billion.
Although the state has closed significant gaps in the past, its actions in recent years have diminished reserves and budgetary flexibility. For example, its formal rainy-day fund dwindled to $444.5 million in fiscal 2014 from $646 million in fiscal 2011, and its unassigned balances fell to $62.5 million from $112 million over the same period. The decline in the rainy day fund balance will be partly reversed this year when the state makes certain mandatory deposits. The state has also directly or indirectly drawn upon funds from various reserves, such as those held by the Office of Group Benefits, reducing available balances.
“This is what happens when you spend more than you take in,” Kennedy adds. “This day has been coming for seven years. Moody’s is telling us that we’d better get our fiscal house in order or we are going to be downgraded, which will cost taxpayers dearly in higher interest rates on our bonded indebtedness.”