Going for the Score

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 of Administration'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 of Louisiana's economy had a dial tone for the virtual meeting.

On the other end, from their international headquarters in New York, sat 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. On the line, quite literally, was Louisiana's credit score.

Davis argued that the state's rating 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 has outpaced 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 for public projects. Kennedy says those savings should eventually add 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 "General Obligation" bond rating from "A2" to "A1" with a "stable" outlook. "This upgrade is comparable to the rating assigned to us yesterday by Standard & Poor's and, like yesterday's increase, provides Louisiana with the same rating as California," Davis said earlier this month.

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 elements in its analysis. The firms are also considered among the toughest from which to earn an "A" rating.

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

And while Louisiana now has the same rating as California, it only means the Bayou State is now tied — for the bottom position. Michael DiResto, a spokesperson for the Division of Administration, says S&P credit analysts specifically voiced concerns about Louisiana's over-reliance on oil and gas money. The analysts also identified revenue diversification as a way to keep moving up in 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 the state's available resources" or if "economic development plans do not materialize."

Fitch Ratings, the third 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 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," the governor says.

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