The federal government shutdown is now in its second week. Congress and the President also must make a decision on exceeding the federal debt ceiling by October 17 or the United States could default on its debt, because Washington is so addicted to borrowed money. (The national debt has increased 57 percent under President Obama.) The events taking place in our nation’s capital today raise questions and concerns about how the financial crisis – and a potential U.S. default – could affect Louisiana state government operations.
At issue is whether or not the federal government should increase the amount of money it is legally allowed to borrow. It wasn’t long ago that Louisiana lawmakers went through similar heated discussions about the state’s debt ceiling and debt limit. We never shut down state government operations, and we never ran the risk of defaulting on our debt obligations. The truth is the U.S. Government may or may not default on its debt, but Louisiana bonds are safe, thanks to the state’s Bond Security and Redemption Fund (BSRF).
Louisiana is unique in that it is the only state in the nation with a constitutionally protected BSRF. In the simplest terms, the holders of Louisiana bonds have first dibs on state revenue before any other item in state government is paid. All State Treasury receipts (minus federal fund receipts and a few statutorily and constitutionally mandated exceptions) must first flow into the BSRF to pay debt before anything else.
The BSRF provides a level of security to the holders of the state’s full faith and credit General Obligation bonds. From a legal, rating agency and investment perspective, the BSRF effectively provides that bondholders have a first lien on virtually all revenues of the state. This guarantees that their principal and interest payments stand in front of all other creditors or lien holders.
The BSRF benefits more than just bondholders investing in Louisiana, however. Taxpayers are saving millions of dollars in interest payments each year, because the fund ensures a higher credit rating for the state. The higher the credit rating, the lower the cost of financing when the state sells GO bonds and other appropriation backed debt.
The federal government might consider taking a page from Louisiana’s book and create a national bond security fund. It would go a long way toward reassuring the markets, and quite frankly, the American people.
In the meantime, we will find out soon what happens if Congress and the President can’t agree in this important debate on the nation’s long-term debt. Regardless of the outcome, however, Louisiana taxpayers can rest assured that we can and will meet our obligations to bondholders and to them.