Business of Politics

Going for the Score

by Jeremy Alford

State officials have convinced the nation’s top rating agencies to upgrade Louisiana’s credit score, but the fight for fiscal soundness is just beginning. It was the mother of all conference calls. Leading the pitch was Commissioner of Administration Angele Davis, surrounded by her staff in the division’s meeting room. Treasurer John Kennedy had phoned in from his office, along with bureaucrats from economic development, revenue and other agencies. Anyone with any sort of institutional knowledge on Louisiana’s economy was dialed in for the virtual meeting.

On the other end, from their international headquarters in New York, were credit analysts for Standard & Poor’s. Davis led them through a 48-page PowerPoint presentation. One staffer recalls that the credit analysts shot off rapid-fire questions throughout the presentation, which took up the better part of a workday. But on the line, quite literally, was Louisiana’s credit score.

Davis argued that the state’s ranking should be bumped up. Referring to the PowerPoint, she showed the analysts that Louisiana has enjoyed surpluses over the past three years; money in the general fund was outpacing the pre-storm trend; and the fiscal forecasts used by the state to craft its budgets traditionally side with caution.

A few weeks later, Standard & Poor’s responded by increasing Louisiana’s general obligation bonds from “A” to “A+.” The shift translates into lower interest rates on bonds sold by the state, meaning it will cost less for the state and taxpayers to borrow money. Kennedy says those savings should eventually equal up to $3.75 million. “We have been working for three years to regain the bond ratings we had before the hurricanes, and all of our hard work has finally paid off,” says Kennedy.

S&P credit analyst Peter Murphy says the upgrade was awarded because of “continued strong revenue performance and budget discipline in the aftermath of hurricanes Katrina and Rita.” He also says the state has “prudently managed surpluses by allocating them to one-time expenditures or to recurring items that are affordable.” The existence of a Rainy Day Fund, which has remained full since 2006, was likewise noted, as was Louisiana’s budget-spending cap.

Davis also shopped scores for $200 million of Louisiana’s bonds with two other credit rating agencies. The bonds, scheduled to sell on July 15, received similar treatment. Moody’s Investors Service, another national firm, upgraded Louisiana’s GO bond rating from “A2” to “A1” with a “stable” outlook. “This upgrade is comparable to the rating assigned to us by Standard & Poor’s and, like yesterday’s increase, provides Louisiana with the same rating as California,” Davis says.

The combined reviews offer a positive snapshot for the state. Moody’s tends to focus on the debt burden and budget operations of the bond issuer, while Standard & Poor’s traditionally considers the issuer’s economic environment as one of the most important element in its analysis. The firms are also considered among the toughest to land “A” scores with.

Still, the reviews are peppered with some negatives and the outcome — a boost in score — only belies the state’s dismal national rankings in this area. The press releases issued by the administration of Gov. Bobby Jindal largely failed to mention that most of the credit, at least this go around, rests with the administration of former Gov. Kathleen Blanco. Credit analysts used the past three full years of performance to make their decisions, which were the lion’s share of Blanco’s only term.

And while Louisiana now has the same ratings as California, it only means the Bayou State is tied for the bottom position in state by state rankings compiled by both Moody’s and S&P. Michael DiResto, a spokesman for the Division of Administration, says S&P credit analysts specifically voiced concerns about Louisiana’s overreliance on oil and gas money and identified revenue diversification as a way to keep moving up the rankings. In response, the state is looking at different forecasting models that play down the impact of mineral revenues, DiResto adds.

Analysts from Moody’s, meanwhile, lament in their review that the “state’s economic engine, New Orleans, was the area most affected by the hurricane.” It also notes the inflation of debt ratios in Louisiana and the state’s concentration in two “relatively volatile sectors (tourism and energy).”

The Moody’s reviewers even predict that Louisiana’s ranking could potentially decrease if recent legislative action doesn’t bear fruit. Particularly, this could happen if “tax cuts contribute to deterioration in state’s available resources” or if “economic development plans do not materialize.”

Fitch Ratings, the third national rating firm queried by Davis, eventually fell in line as well, upgrading Louisiana’s GO bond rating from “A” to “A+.” Still, the accompanying review brought with it a familiar tone: “It remains to be seen how much of the recent revenue strength is sustainable over the long term.”

The Fitch report also took an understandable swipe at recovery efforts: “Progress in the recovery of New Orleans continues slowly. Implementation of the state’s $7.5 billion ‘The Road Home’ housing program, designed to be funded through federal community development block grant and hazard mitigation monies, has been slow and to date approximately 20 percent of homes have been rebuilt through the program.”

Considering the negatives and the next time period likely to be considered for an upgrade, it’ll be squarely on the shoulders of Jindal’s administration to increase Louisiana’s scores again. Team Jindal, according to the rating agencies, will need to diversify the job market, increase income levels and maintain budget discipline. It’s a harsh reality that isn’t lost on the top man in charge. “This upgrade in our rating lowers the cost of debt and encourages businesses to invest here, but we clearly have more work to do to continue to improve our ratings,” Jindal says.