Notwithstanding concerns about how ratings agencies have handled Wall Street firms and certain financial products (see Anthony's earlier post), the Big Three rating agencies remain a good and useful gauge of the fiscal health of state and local governments. As I've written before, the ratings agencies tend to view positively the use of privatization and other reform tools that aim to control spending and bring budgets back in to structural balance. From Louisiana comes another great example.
I've written extensively on the aggressive efforts to streamline government in Louisiana, initiated by Governor Bobby Jindal and supported by the state legislature. Ratings agency Fitch has also been watching and upgraded the state's bond rating yesterday, a move that will yield more favorable interest rates for the state and produce millions in avoided interest costs over time. Notably, Louisiana has now become the only state that's seen a credit rating upgrade this year by Fitch (the state was upgraded last year too) and it now stands at the highest level in Louisiana in decades.
But even more notable was the explanation of why Louisiana received an upgrade, and therein lie many lessons for other states. Per Gov. Jindal's press release:
The upgrade marks the first time that Louisianaâ€™s G.O. bonds have received a rating from Fitch above the single â€śAâ€ť range since Fitch began rating Louisiana in 1997. Last year, Fitch assigned an underlying rating of â€śA+â€ť to Louisiana G.O. bonds, and upgraded the stateâ€™s outstanding G.O. debt to â€śA+â€ť from â€śA.â€ť To date, the upgrade for Louisiana is also the only upgrade of the bond rating of any state by Fitch this year. This is the first time that the state has been in the double â€śAâ€ť category since the mid-1980â€™s.
In its announcement, Fitch said the â€śupgrade to 'AA-' from 'A+' reflects the strong financial management demonstrated by the state in recent years.â€ť Fitchâ€™s report cites recent actions of the state to maintain a balanced budget and sizable reserves like the rainy day fund. Fitch also â€śrecognized the stateâ€™s record of conservative revenue estimating in recent years and believes that the stateâ€™s reserve position and focus on spending control support its ability to deal with future shortfalls."
In addition, Fitch cited Louisianaâ€™s creation of a streamlining commission and dedicated funding review among steps state government is taking to help address future general fund budget challenges, as well as noting the relative strength of Louisiana economic indicators like employment and job creation compared to the national economy and other states. [...]
Governor Bobby Jindal said, "The upgrade sends a message that Louisiana's business climate continues to improve and weâ€™ve established an economic environment that is creating opportunity for our people. While weâ€™ve made incredible progress through dozens of economic development wins, our work is not done yet. Todayâ€™s bond rating upgrade will enable us to continue our strong economic momentum as well as attract and retain businesses so we can create even more jobs for our people."
Commissioner of Administration Angele Davis said, "This upgrade is rather remarkable given the current condition of the national economy, but it just shows that Louisiana is moving in the right direction in terms of prudent financial management, fiscal reform, and strong economic progress compared to other states."
State Treasurer John Kennedy said, "For the second straight year, a national credit rating agency has taken note of Louisiana's fiscal discipline and economic progress in recent years. For Louisianans, the credit upgrade will mean more taxpayer savings, increased economic development, and more jobs."
Translation: Louisiana is getting serious about spending reform and reducing the size and cost of state government, and the markets are taking notice. The work of the Commission on Streamlining Government and the parallel commission focused on higher education reformâ€”in addition to the many other budget and fiscal reforms underway in Louisianaâ€”apparently sent a clear signal to the markets that state policymakers recognize the imperative to rein in spending and check the growth of government in order to avoid the massive fiscal crises we're seeing in many other states today.
Hopefully, taxpayers in Louisiana will realize that this isn't just a pat on the backâ€”Fitch's rating upgrade will directly translate into real tax dollars saved over time. The state will be able to tap lower borrowing rates and pay less in interest than it otherwise would have.
And it should be a source of taxpayer pride in the Pelican State that at the same time other most states are seeing their credit ratings loweredâ€”or at best, held flat as a consequence of their fiscal irresponsibility and/or inability to address gaping budget shortfallsâ€”Louisiana is clearly viewed as moving in the other direction.
I've said it before and will say it againâ€”while other states are talking or making some noise about the need to cut spending and streamline government, Louisiana's actually doing it and is advancing what in my estimation is the boldest and most aggressive package of reforms in the country. There's still a long way left to go in Louisiana before we see the ultimate fruition of the current reform work, to be sure, but so far that state is definitely far out ahead of the rest of the pack.