Lawmakers stopped relying on short-term fixes to balance the state budget every year when voters, at their behest, approved a series of changes to Louisiana’s tax code in 2002.
Wall Street gave a thumbs up the following year when Moody’s, Standard & Poor’s and Fitch all raised Louisiana’s bond rating.
But lawmakers have returned to temporary budget patches, and the rating agencies have taken notice. All three have downgraded the state over the past year, citing the dependence on interim tax measures as a major factor.
The third of the three major credit ratings agencies has downgraded Louisiana's financial ou…
One of the major questions during the 60-day regular session is whether lawmakers will find a new, steady source of tax dollars to offset the $1.3 billion in temporary taxes that will expire next year. The prospect of the disappearing taxes has created what’s known inside the State Capitol as the “fiscal cliff.”
Any hope for getting another bond upgrade depends on avoiding the fiscal cliff, say the state’s treasurer and an outside financial analyst.
“The ratings are not going to move up until the fiscal cliff in fiscal year 2019 is solved,” Renee Boicourt, the New York-based financial adviser for the Louisiana Bond Commission, said in an interview Friday. “If you come up with a mechanism to solve the fiscal cliff in 2019 and it’s more likely to come back in 2020, they won’t be impressed by that.”
The temporary taxes expire on June 30, 2018, a day before fiscal year 2019 begins.
“Wall Street has not looked favorably on Louisiana’s temporary tax measures,” said Ron Henson, the state’s treasurer. “When you start dealing with temporary revenue measures, they get nervous.”
Louisiana’s bond rating is no academic question. A downgrade means that taxpayers have to pay more money in the form of higher interest rates to investors who buy the state’s bonds for state construction projects.
“From January 2016 through March 2017, the state raised approximately $600 million in bonds,” Boicourt said. “We estimate that annual debt service for these bonds is approximately $1 million higher than it would have been had the state’s ratings not fallen. Over the 20-year life of these bonds, that will amount to $20 million in additional interest costs.”
With Louisiana projected to sell $300 million in construction bonds for each of the next three years, the treasury department expects the downgrade will cost the state $10 million more for each of those three years over the next 20 years, or $30 million overall.
With its current AA bond ratings, Louisiana “is solidly investment-grade, low risk,” Boicourt said, adding that the rating is a bit below the national average of the 50 states.
She said the recent downgrades have another downside for the state.
“To some degree, bond ratings are used by business when considering whether to do business in the state,” she said. “It’s a report card on fiscal management.”
Louisiana’s financial low point in recent memory occurred when the mid-1980s oil bust threw the state’s economy into a deep recession under Gov. Edwin Edwards. Tax revenues plummeted, and the state barely had enough cash to pay its expenses. The state suffered three rating downgrades to junk bond status.
The state regained its economic footing under Gov. Buddy Roemer, and rating upgrades followed in the 1990s.
But the Legislature balanced the budget every year by temporarily suspending a sales tax credit for the purchase of food, prescription drugs and residential utilities. Suspending the credit made consumers liable for those taxes every year.
All of that changed in 2002 in a two-step process under Gov. Mike Foster. The Legislature approved a package of changes to the tax code that repealed the sales tax on food, drug and utilities in exchange primarily for higher taxes on the wealthy — and voters then ratified the changes.
The voters’ decision created a more stable revenue stream with the end of the temporary sales taxes.
Boicourt said this was a key factor in the 2003 rating upgrades, along with moves in previous years to lower the state’s debt on a long-term basis.
In 2007, under Gov. Kathleen Blanco, the Legislature cut taxes on business and repeated this move in 2008 under Gov. Bobby Jindal for upper-income taxpayers.
The Legislature cut spending repeatedly under Jindal — the state’s colleges and universities especially took it on the chin — but not enough to keep the lawmakers from repeatedly resorting to ad hoc measures to keep the budget in balance.
Gov. John Bel Edwards and the incoming Legislature inherited a $2 billion deficit in January 2016. Along with cutting spending, they plugged the budget hole with another set of fixes, including a penny increase in the state sales tax for 27 months. This and other tax increases created the fiscal cliff.
The temporary nature of the measures contributed to the downgrades, according to statements released by each of the three bond rating agencies.
“It’s déjà vu all over again with temporary taxes having been put in place to solve a budget problem,” Jay Dardenne, the state’s top budget official and a former Republican state senator, said in an interview. “Are we going to re-create what we did in the past by approving temporary taxes that we approve year after year?”
When they approved the tax increases last year, Edwards and lawmakers agreed they would provide a long-term solution by reforming the tax code this year.
The governor has proposed a series of changes to the code that, if approved by legislators and voters, would cover most of the fiscal cliff.
A major piece of his plan would create a “commercial activity tax” that would tax corporate sales and ensure that companies are paying taxes to the state. But the plan, embodied in House Bill 628, has won little favor from lawmakers and seems likely to die in the House Ways and Means Committee, as early as Monday.
Officials in Gov. John Bel Edwards' administration are now admitting that the proposed Comme…
Edwards complained Friday — as he has numerous times lately — that Republicans in the House, who hold a majority, have yet to introduce their own tax and budget plan to avoid the fiscal cliff.