Legislature takes hit on credit

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Louisiana officials say the Legislature's failure to reform the levee boards and enact a new ethics law is to blame for Wall Street downgrading the state's credit ratings.

"This means taxpayers will have to pay more in interest because our credit rating is not good, and it will cost us more to rebuild the state when we do it on borrowed capital," said State Treasurer John Kennedy.

Mr. Kennedy was one of several state officials who participated in weekly conference calls with rating agencies and bond insurers to maintain confidence in the state's rebuilding efforts after Hurricane Katrina.

But the recurring theme was the state's colorful political history, they said, and that all eyes were on reform bills before the November special session.

"The bottom line," said one official familiar with the calls, "is that Louisiana taxpayers will have to pay more money to rebuild because the state's levee boards are crooked."

A bill to roll local levee boards into one state board failed, as lawmakers opted for legislation to create an oversight commission over 20 levee boards. The Legislature also failed to pass a bill to prohibit lawmakers from taking federal rebuilding contracts.

"If your house is blown away in the storm, and the reason it is blown away is because the contractor didn't do a good job, do you hire the old contractor and appoint a commission to watch him? The answer is obvious. And what our Legislature did was to appoint a commission. We don't need a commission above the levee board. We need to reform the board, period," Mr. Kennedy said.

Standard & Poor's lowered the state's rating on Wednesday; Fitch followed suit Thursday; and Moody's lowered the rating late Friday. The low credit rating means taxpayers will pay a higher interest rate on $52 million in outstanding bonds.

None of the three major bond rating agencies said failed reform efforts led to the lower ratings, only that the economic future of the state is in limbo.

"One of the major uncertainties Louisiana currently faces relates to the extent and pace of economic recovery in the New Orleans area," said Peter Murphy, credit analyst for S&P. "While reduced economic activity and financial pressure are likely to continue over the intermediate term, their ultimate effects on the state's finances are not known at this time."

Mr. Kennedy said the bond markets "can handle good news or bad news, but not uncertainty." He said the topic of levee reform "was raised a number of times."

Moody's downgraded its General Obligation rating on Louisiana to A2 from A1 and assigned the state a "negative outlook." Moody's has a negative outlook on six states and the commonwealth of Puerto Rico.

In addition to the lowered rating, the S&P has a negative outlook on Louisiana and Puerto Rico. Fitch has Louisiana and Mississippi on Rating Watch negative.

Moody's said its downgrade reflects "the unprecedented circumstances the state has faced as it has dealt with the economic and financial aftermath of Hurricanes Katrina and Rita."