Louisiana faces challenges with tax changes and poverty

Analysts say Louisiana's government faces greater challenges than most double-A-rated states, pointing out stagnant or declining tax revenues, high exposure to trade wars, and elevated sensitivity to cuts to federal programs.

Louisiana will test the municipal bond market's response to its conditions Thursday, when it is scheduled to competitively sell $354.9 million general obligation bonds.

The bonds are rated Aa2 by Moody's Ratings, AA by S&P Global Ratings and AA by KBRA.
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The state hasn't used Fitch Ratings since March 2022 to rate its GO debt. Fitch rates the state's GO debt AA-minus with a positive outlook. The other ratings agencies' ratings have stable outlooks.

PRAG is the municipal advisor on Thursday's sale. Boles Shafto is the bond counsel.

The Series 2026-A bonds have serial maturities from 2027 to 2046.

"Louisiana's forthcoming issue will likely price somewhat wider than comparable AA-rated state credits but not as wide as its underlying economic fundamentals alone might suggest," said Justin Marlowe, research professor at the University of Chicago Harris School of Public Policy.

"Louisiana's bond rating and financial stability is increasingly vulnerable to current economic conditions but its vulnerability has also been compounded by decisions made by state lawmakers," said Neva Butkus, a Louisiana-based senior analyst at the Institute on Taxation and Economic Policy.

Louisiana State Treasurer John Fleming said the state is doing well. There have been nine consecutive years of surpluses. The state has used some of the surplus money to reduce pension underfunding and other parts of it to increase rainy day funds, he said.

As of June 30, 2025 the state had $4.81 billion in budget stabilization and revenue stabilization fund balances. If one adds the $472 million in unassigned balance, there were reserves equal to 12.5% of the combined general fund and bond security and redemption fund. Though the state projects it will draw $900 million from these funds for capital improvements and criminal justice projects, the state still expects to have reserves equal to 10% of the combined general fund and bond security and redemption fund as of June 30, which KBRA said was "prudent."

The state has a strong institutional framework for the governor to quickly implement budget cuts and constitutional requirements to pass balanced budgets, S&P said in March. The state has stable financial performance and very high available reserves, S&P said.

Yet analysts say there are some reasons to be concerned. In the most recent four months of preliminary revenue data available from the Louisiana Department of Revenue (December 2025 to March 2026), state source revenues are down 3.6% from the corresponding four months a year earlier.

Butkus said, "In addition to state revenue declining, the state is also projecting a $329 million shortfall for fiscal year 2028 growing to nearly $1 billion by fiscal 2030 for a standstill budget while the state is less than two years out from the major tax changes enacted during a special session in November 2024 in which the legislature traded the state's progressive personal income tax structure for a 3 percent flat tax, among other changes that disproportionately benefited high earners and corporations."

"At ITEP we can only speak to the tax changes and the ripple effect they have and will continue to have," Butkus said. "All signs in that regard point to a rightful concern about the fiscal situation in Louisiana and the lack of political will from lawmakers to meaningfully tackle it."

Mousseau said the tax system transition would likely challenge revenue.

Fitch Ratings Senior Director Eric Kim said, "A year over year decline in revenues in fiscal 2026 is not concerning in and of itself as the state anticipated a decline (related to the significant tax changes implemented in 2024) and built its fiscal 2026 budget around the expectation of less revenues than in fiscal 2025. The state's official December revenue forecast actually revised the revenue forecast upwards for fiscal 2026 as revenues through the first half of the fiscal year were outperforming? There will be another state revenue forecast update in May, after the important April month of income tax collections. That will give the state a sense of how collections are performing relative to budget expectations."

New Orleans Chief Administrative Officer Joe Giarrusso III reportedly said in late February the city was in a financially "dire situation." Moody's rates Shreveport Baa3. Analysts were asked if these cities' troubles cast a shadow on the state's finances.

"The state is not an economic slave to New Orleans, Baton Rouge and Shreveport but they help pull the sled," said John Mousseau, executive vice president at Cumberland Advisors. "With the economy slowing, people less confident on employment and higher costs embedded in tariffs, discretionary spending (which is certainly New Orleans) is slowing down and that is affecting the state as well."

Fleming said he, the state attorney general and legislative auditor had come close to placing New Orleans in fiscal administration this fall, which would have given them complete fiscal control of the city. He said his office is monitoring developments in Shreveport.

In its August report on Louisiana, Moody's noted the state's economic growth has been slower and more volatile than that of the United States. From 2014 to 2024, the state's real gross domestic product has increased 5% while that in the United States has increased about 28%.

The state has the second highest exposure to trade disruption of the 50 states, as measured by the portion of its economy devoted to imports and exports, Moody's said.

"The state's economic model has clear weaknesses," Marlowe said. "It is highly cyclical, with predictably volatile revenue collections. It is also uniquely exposed to disruptions in global trade and its physical climate risks are material and growing."

The state's "state-local dynamics ? support the credit," Marlowe said. "Louisiana's economy is regionally diverse, with different areas driven by different sectors. Weakness in tourism and trade in New Orleans may be offset by strength in the energy economy along the Gulf Coast and so forth."

"However, the state is coming to market at a moment when many of its vulnerabilities are front and center," Marlowe said. "Uncertainty in the energy sector, softer domestic tourism, trade disruptions tied to tariffs, population decline, and ? relatively slow recent growth all create a challenging backdrop. Those factors are likely to give investors pause and result in modestly wider spreads on the new issue."

The state has the highest proportion of its population in poverty among the 50 states and analysts say because of this federal cutbacks may particularly impact state finances. "Pushing Louisianans off Medicaid will have ripple effects across the state's economy as people become sicker and medical care, particularly in rural areas, becomes harder to find," Butkus said. "The state budget will also be absorbing costs for Supplemental Nutrition Assistance Program and Medicaid that were mandated in the One Big Beautiful Bill Act, meaning there will be even less dollars available for other priorities. This is in addition to unpredictable federal disaster relief."

Mousseau said, "With an elevated number of poor, it means a k-shaped economy is exacerbated in a state like Louisiana. I think the state is facing a challenge here as we see federal cutbacks getting thrown on the back of many states. The Federal Emergency Management Agency (FEMA) is a perfect example and hopefully the hurricane spares Louisiana because it's not in as good a position as other years to weather catastrophic storms."

However, "I think the state is fine for now," Mousseau said. "Depending on how long oil stays elevated, they could benefit from the current high prices if the duration of the price increase extends."

Marlowe said, "Its current credit rating reflects the strength of its governance. The state maintains relatively low debt levels, offers strong (i.e. constitutional) investor protections and has made difficult fiscal adjustments during past economic downturns. It is also working to shift its revenue structure away from volatile oil and gas sources toward a more stable and diversified portfolio."

In its March rating report, KBRA said credit positives for the state were conservative budget practices and pandemic-related federal assistance that have resulted in large reserves and liquidity, low tax supported debt ratios and affordable pension commitments, and a tax restructuring that may lead to increased economic growth over time. On Tuesday, KBRA Senior Director Peter Scherer said the governor seems to be succeeding at attracting investment.

For credit challenges, KBRA noted comparatively weak socioeconomic metrics, moderate exposure to energy price volatility due to its sizable oil and gas industry, and an economic base vulnerable to hurricane events and coastal erosion.