BATON ROUGE — Louisiana’s credit rating was downgraded for the first time in more than a decade Thursday, in response to years of budget instability that have left public colleges and government services wallowing in continued financial uncertainty.
The decision by Moody’s Investors Service to drop the state’s credit rating is another blow to a state teetering on the edge of financial calamity. And it comes as Gov. John Bel Edwards and lawmakers are in a special legislative session grappling with balancing the budget.
The national rating agency dropped the state’s rating by one notch, to Aa3. Moody’s cited the steep drop in oil price’s effect on state tax collections, years “of structural imbalance” in the budget and declining financial reserves. It raised concerns about state retirement debts and the growing cost of Louisiana’s Medicaid program.
Edwards called the downgrade disappointing, and he blamed it squarely on the budgeting practices of his predecessor, Bobby Jindal, who left office in January.
“Unfortunately, the downgrade confirms what we’ve been saying about the structural imbalance of our budget,” the Democratic governor said in a statement. He added: “It is more important than ever for the Legislature to work with me during this special session to stabilize our budget and repair the damage of the last eight years.”
Ratings from the credit agencies help determine interest rates when the state borrows money, through bond sales to investors. A drop in a state’s credit rating raises interest costs, making it more expensive to borrow.
Treasurer John Kennedy said Moody’s decision surprised him, after state officials thought they had persuaded the national rating agencies to give Louisiana time to make structural changes to fix the budget.
“We had a firm understanding that they would give the new Legislature and the new governor a chance, and we repeatedly told them it would take two to three years,” Kennedy said. “I think they just got spooked.”
The state was last hit with a downgrade in 2005, in the months after Hurricane Katrina struck Louisiana. But the rating had been boosted since then.
The top three national rating agencies have repeatedly raised concerns about Louisiana’s long-term finances and imbalances that have the state spending more than it receives in annual revenue.
Jindal, who closely protected his anti-tax record as he readied for a failed bid for the Republican presidential nomination, used piecemeal financing to balance Louisiana’s budget, rather than raise taxes or cut government enough to match recurring tax revenue.
That created new gaps each year as the short-term cash fell away. More than $826 million in such patchwork money is included in this year’s budget. Meanwhile, tax-break spending has ballooned by hundreds of millions of dollars.
An oil price slump now has deepened the problems.
Kennedy said most of the downgrade was a commentary on the Jindal administration and lawmakers who supported his budgeting policies. But the treasurer, a Republican running for the U.S. Senate, also suggested Edwards’ talk of financial calamity and deep cuts if lawmakers don’t raise taxes also made investors jittery.
The state faces a current shortfall ranging from $850 million to $950 million that must be closed by June 30 and a more than $2 billion gap in the financial year that begins July 1.
Edwards and the majority Republican Legislature haven’t yet reached a deal on the mix of cuts and taxes to balance the budget.