Treasurer: Bond security, redemption fund protects bondholders, taxpayers

T’bonne businesses consider post-hurricane recovery plan
May 11, 2010
Thursday, May 13
May 13, 2010

Dear Editor:

If the nation’s recent financial crisis has taught us anything it’s the importance of going back to the basics when it comes to managing money. We’ve seen the devastating effects of families taking on more than they can handle in terms of mortgage and consumer debt.

We’ve seen the problems states and local governments are having making payments because of reduced tax revenues.

Lessons our parents and grandparents taught about paying bills, living on a budget and saving for a rainy day are hitting home now more than ever. And if there’s one area of financial planning where Louisiana excels, it’s responsible debt management. This is due, in part, to the state’s Bond Security and Redemption Fund (BSRF).

The BSRF was originally created in statutes in Act 112 of the 1960 Legislature, and in 1975 the BSRF was granted constitutional status.

The law basically says that all State Treasury receipts (minus a few statutorily mandated exceptions) must first flow into the BSRF to pay debt before anything else. In other words, Louisiana bondholders have first dibs on monies in the fund before anyone else can get paid.

The current balance in the BSRF is close to $536 million, and debt service payments made from the fund totaled $283.7 million last year. So far this fiscal year, debt payments from the fund have totaled $184.8 million. Any balance left at the end of the month, minus the debt service payments due on the first day of the following month, is transferred to the General Fund.

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 provides security to the holders of the state’s full faith and credit general obligation bonds.

The fund benefits more than just bondholders investing in Louisiana, however. It also enhances the state’s credit rating. The higher the credit rating, the lower the cost of financing when the state sells GO bonds and other appropriation backed debt. This benefits all Louisiana taxpayers.

Louisiana is unique in that it is the only state in the nation with a Bond Security and Redemption Fund. This shows investors that we are serious about paying our debt and that we are true to our word. It is important that we keep the BSRF in place, especially during these difficult financial times.

John Kennedy,

Louisiana State Treasurer