AUSTIN, Texas--()--Fitch Ratings has assigned a 'BBB+' rating to the City of New Orleans, Louisiana (the city) $200 million taxable limited tax refunding bonds, series 2012.
The bonds are scheduled for a negotiated sale the week of October 8th. Proceeds will be used to refund outstanding series 2000 taxable pension revenue bonds and pay a swap termination fee associated with these bonds, as well as refund outstanding series 2011 taxable bonds.
In addition, Fitch affirms the following ratings of the Board of Liquidation, City Debt:
--$484.2 million general obligation (GO) bonds at 'A-'.
The Rating Outlook is Stable.
The limited tax bonds are special and limited obligations of the city secured by the levy and collection of a 13.91 mills ad valorem tax (such rate being subject to adjustment from time to time due to reassessment). The GO bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property in the city.
KEY RATING DRIVERS
FINANCES IMPROVING; STILL CHALLENGED: The city's finances improved with 2011 results, as management's efforts to regain structural budgetary balance produced a net gain and subsequent reduction in the negative general fund balance. However, challenges remain as the city continues its effort to establish and maintain a sound financial profile.
LONG-TERM ECONOMIC PROSPECTS GOOD: Recent economic news is mixed, as news of infrastructure and commercial development projects is offset by a stalling of employment totals and a slight increase in the local unemployment rate from a year ago. Overall, prospects appear positive, aided by increasing tourism traffic, population gains, and major events scheduled for the next several years.
CAPITAL ASSISTANCE CONTINUES: The city has manageable debt levels but sizeable capital needs, although the city has obtained additional federal recovery money to assist with infrastructure projects.
REFUNDING TO PROVIDE OPERATIONAL RELIEF: This refunding will retire outstanding pension revenue bonds currently in bank bond mode. The refunding will also replace an available revenue pledge securing both the pension bonds and a series of taxable bonds with a limited ad valorem tax pledge. The savings, combined with the maturity of the series 2004B obligations in 2014, should boost operating reserves and generate measurable general fund relief.
FLOOD PROTECTIONS COMPLETED: The U.S Corps of Engineers last year announced completion of various levee and flood wall projects that are designed to protect the city from a 100-year storm surge. The total amount spent on these projects and others planned through 2016 is $10 - $12 billion. The upgraded system reportedly performed well during Hurricane Isaac, which struck southeast Louisiana in late August.
FINANCES BETTER; STILL CHALLENGED
The city's financial profile has improved but is still less than satisfactory. Conditions weakened over the past several years as a result of reduced revenues and ongoing spending pressures. Recovery efforts from Hurricane Katrina in 2005 drove spending for many services and departments higher (e.g. public safety overtime), while use of federal and state recovery monies masked a widening structural imbalance. The general fund recorded deficits and declining reserves annually from 2007 - 2010, with the largest deficit of $51.6 million reported in 2009; the city's fiscal year coincides with a calendar year.
Results for 2010 were weaker than expected, as sales tax revenues fell significantly short of budget projections and spending increases continued. Also, 2010 saw the end of intergovernmental recovery funding, which brought into focus the budgetary gap. The year ended with a $19.4 million general fund deficit and an unreserved balance of negative $11.6 million. Liquidity also eroded as operations suffered, with general fund cash and investments declining to $3.4 million at 2010 year-end from $17.8 million the prior year.
The 2011 budget submitted by a new administration included a number of measures intended to rein in spending growth. General fund spending was budgeted at $488 million, a reduction of more than $20 million from prior-year actual spending; revenues were budgeted at the same amount.
Audited year-end results showed general fund spending exceeding budget by $25 million and revenues bettering budget by $12 million. The gap was closed through the transfer of municipal court fund surpluses and a debt restructuring that provided near-term relief. The negative unreserved position was reduced from negative $11.6 million to negative $3.7 million (unrestricted?committed, assigned and unassigned per GASB 54). General fund liquidity remained weak.
The 2012 budget continued the cost containment trend, with an increase of less than 2% in both general fund revenues and expenses, continuation of the hiring freeze, and a roll-forward in the property tax millage rate for the third consecutive year. The budget was balanced, and management anticipated that another application of $13 million in one-time monies/savings would produce a positive general fund balance by year-end.
However, revenues are coming in below budget. Management reports sharply lower natural gas prices are negatively affecting utility tax and franchise fee revenues. To close an estimated $13 million gap, administrators have directed city agencies to reduce spending by 3.8% for the remainder of the year. The current estimate is for balanced results, with the planned recovery of fund balance to positive territory now delayed until 2013. The city's goal is to establish and maintain a 2% operating reserve and 8% emergency reserve, both calculated as a percentage of general fund outlays.
Fitch will continue to monitor the city's progress towards this objective, noting that any material deterioration in financial performance or meaningful delay in establishing structural budgetary balance will not be consistent with the current rating level.
ECONOMIC RECOVERY ONGOING
Economic recovery continues, although recent statistics suggest a slowdown. Employment in the city has flattened out in recent months, and the city's unemployment rate has ticked up from 9.7% to 10.3% in the 12-month period ending July, 2012. This rate is higher than both the state (7.9%) and U.S. averages (8.6%).
Management notes a number of commercial projects either recently completed or underway, including the recent re-opening of the 1,200 Hyatt Regency hotel and construction on the $1.2 billion LSU-VA medical center complex. Also, the mayor recently announced plans for several large retail stores in the city, and the Brookings Institution named the New Orleans metro area the leader in overall economic recovery in the first quarter of 2012.
Tourism continues to be a positive economic force, with the 2011 visitor total of 8.75 million representing a 5.6% increase from the prior year. The city's convention and visitors bureau also reported that tourism spending in 2011 was a record $5.47 billion.
The city's estimated 2011 population of 360,000 is roughly 80% of the pre-storm total, and the U.S. Census Bureau named New Orleans the fastest growing U.S. city of 100,000 population or greater based on nearly 5% growth from 2010 to 2011.
Taxable values have continued to grow, although at a slower pace than the rapid gains registered in 2007 and 2008. Values climbed more than 10% in 2007 and jumped nearly 38% in 2008 thanks to citywide reappraisals. The gains for 2010 and 2011 were more modest at 3.5% and 3.0%, respectively, and a similar increase is expected for 2012 after adjustments for tax-exempt properties. The taxable assessed valuation for 2011 was $2.75 billion.
AVERAGE DEBT LEVELS, CHALLENGED PENSIONS
This transaction will refund $109 million in outstanding variable-rate pension obligation bonds issued in 2000 that went into bank-bond mode in 2008 during the financial crisis. Due to the higher interest rates for bank bonds and an associated interest rate swap, the city currently is paying roughly 11% annually on this obligation. The bonds also have an accelerated repayment provision due to the bank bond status that occurs in March 2013.
The series 2012 bonds will also terminate the swap associated with the series 2000 bonds and will refund $15.9 million in series 2011 taxable bonds that were issued to refinance outstanding obligations in order to provide short-term general fund relief. The defeasance of the series 2000 bonds will save the city roughly $19 million for each of the next two years, as capitalized interest will pay debt service on the series 2012 bonds until 2015. These savings are expected to help bolster general fund reserves, and the maturity of the series 2004B obligations in 2014 will provide further operational flexibility.
The city's estimated overall debt burden is manageable at approximately $3,275 per capita and 4.9% of estimated market value. The pace of principal repayment of the city's GO debt is above average at 70% repaid in ten years. The city's GO debt is issued by the Board of Liquidation (the board), which has an independent board and manages all bonded debt matter of the city, including setting millage rates for repayment.
On another positive note, the federal government in November 2010 forgave the city's $240 million community disaster loan obligation that was provided following Hurricane Katrina. The city and board also have combined state recovery loans outstanding of roughly $80 million, and efforts continue to obtain state forgiveness of the loans.
The city has three major pension programs, one of which it administers as a single-employer program. The other two are a state police pension program and a firefighter pension program, the benefits and contributions for which are set by the state legislature.
While the city-administered municipal employee program is funded at a satisfactory level (70% using a 7% investment return assumption), the police and firefighter pension programs are both underfunded (around 60% and lower for both using 7% investment assumption). Management reports recent increases in employee contributions for both the municipal and police programs, and negotiations continue for firefighter plan changes. The city's OPEB liability is roughly $162 million, down considerably from nearly $350 million due to a recent change requiring retirees to apply for Medicare coverage at age 65.
New Orleans' five-year capital needs appear manageable at roughly $400 million, the majority of which is for street improvements. The two largest funding sources for the capital plan are $190 million in FEMA reimbursements and a $40 million GO bond issue planned for later in 2012 (from a 2004 authorization).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria