AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for the City of New Orleans, Louisiana:
--$462 million general obligation (GO) and public improvement bonds of the City of New Orleans and the Board of Liquidation, City Debt at 'A-';
--$24.1 million Audubon Commission aquarium tax bonds, series 2003A, 2011A-1 and 2011A-2 at 'A-'; and
--$195.9 million limited tax refunding bonds, series 2012 at 'BBB+'.
The Rating Outlook on all bonds is revised to Negative from Stable.
The GOs and public improvement bonds are secured by an unlimited ad valorem tax (ULT) levied against all taxable property in the city. The limited tax bonds and aquarium tax bonds are special and limited obligations of the city secured by limited ad valorem taxes levied against all taxable property in the city.
KEY RATING DRIVERS
FINANCES CHALLENGED, NEW HURDLES EMERGE: The Negative Outlook is based on the city's finances, which remains a credit weakness. Efforts by current management to regain structural budgetary balance have shown gains, but new challenges in the form of jail and police mandated spending and fire pension contributions place additional pressure on operations.
POSITIVE LONG TERM ECONOMIC PROSPECTS: Recent economic news is good, as news of infrastructure and commercial development projects is accompanied by steadily increasing employment totals and a generally improving unemployment picture. Overall, prospects appear positive---aided by increasing tourism traffic, population gains and major events scheduled for the next several years.
DEBT MANAGEABLE, SIZABLE CAPITAL NEEDS: The city has manageable debt levels but sizeable capital needs. The city continues to receive federal recovery money to assist with infrastructure projects, somewhat offsetting this concern.
PENSION FUNDING CHALLENGES: Pension funding levels overall are weak, with the firefighter plan severely underfunded. The city has contributed less than the required amount to the fire plan in recent years due to litigation and concerns about plan administration, but has been ordered to resume full contributions.
ABILITY TO ABSORB ADDITIONAL COSTS AND BUILD RESERVES: The city's ability to take on additional costs related to a new parish prison and police consent decree reforms, along with possible increased firefighter pension contributions, will require significant adjustments in other spending areas and possibly additional revenues. Success or failure to adequately address any realized cost increases in the city's 2014 budget will determine the direction of the rating over the coming review cycle.
FINANCES STILL CHALLENGED
The city's financial profile remains less than satisfactory, despite some recent progress on expenditure growth. The fiscal 2012 budget continued with cost containment measures instituted the previous year, 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.
Revenues came in below budget, which management attributed to sharply lower natural gas prices negatively affecting utility tax and franchise fee revenues. To close an estimated $13 million gap, administrators directed city agencies to reduce spending by 3.8% for the remainder of the year. The year-end result was an operating deficit after transfers in the general fund of $5.9 million, slightly worse than mid-year estimates. The general fund balance shrank to a negative $9.3 million, and the effort to restore a positive balance was delayed further.
The planned recovery of fund balance to positive territory is now anticipated for 2013. Management reports that revenues and outlays are generally on track with the budget projection that includes a $14 million surplus and positive year-end fund balance. The revenue picture is aided by better than expected sales tax receipts; they are currently running roughly 2% ahead of budget.
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. The current forecast shows fund balance approaching 10% of recurring revenues (city policy target) by 2018.
However, the mandated spending increases associated with the police consent decree ($11 million) and the new parish prison (estimates range from $6 million to $23 million) will immediately absorb any cushion that is generated in 2013 and force the city to look for additional spending cuts and/or revenue sources. Any increase in the city's two major revenue sources (property and sales tax) would require voter approval (and legislative approval for a sales tax increase), making these prospects more problematic.
In addition, a district court judge ruled earlier this year that the city must pay $17.5 million to cover the city's 2012 obligation to the firefighter pension program. The city had been contributing a reduced amount to the program for several years as decades-old litigation about funding continues. The city has appealed this decision, but an unfavorable final ruling will mean a larger annual contribution and additional spending pressures.
Fitch will continue to monitor these developments and the city's efforts to regain balanced operations, noting that an inability to absorb the additional costs slated for next year and further delays in the restoration of satisfactory reserves will result in a rating downgrade.
ECONOMIC RECOVERY ONGOING
Economic recovery continues, as increasing tourism and a growing population highlight recent gains. Employment growth in the city has generally been positive the past several years, although the city's unemployment rate ticked up from 7.6% to 8.2% in the 12-month period ending May 2013 due to faster growth in the workforce.
Management notes a number of commercial projects either recently completed or underway, including the recent re-opening of the 1,200-room Hyatt Regency hotel and construction on the $1.9 billion University/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 2012 visitor total of 9.0 million representing the highest count since 2003. The city's convention and visitors bureau also reported that tourism spending in 2012 was a record $6.0 billion.
The city's estimated 2012 population of nearly 370,000 is more than 80% of the pre-storm total, and the U.S. Census Bureau named New Orleans the fastest growing U.S. city of 100,00 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 from 2010-2013 have been more modest, ranging from 3.5% to 6.5% over this period. The taxable AV for 2013 is $3.1 billion.
AVERAGE DEBT LEVELS, CHALLENGED PENSIONS
The city's estimated overall debt burden is manageable at approximately $2,750 per capita and 4.0% of estimated market value. The pace of principal repayment of the city's GO debt is above average at 60% repaid in ten years. The city's GO debt is issued by the Board of Liquidation, which has an independent board and manages all bonded debt matter of the city, including setting millage rates for repayment. The city and board of liquidation 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 (an estimated 71% using a 7% investment return assumption), the police and firefighter pension programs are both underfunded (around 60% for the police plan and only 35% for the firefighter plan--estimated using a 7% investment assumption).
As stated above, litigation continues over the city's funding of the firefighter pension plan, and city contributions recently have been below required amounts. Recent legislative changes to the program (including larger employee contributions, 2/3 board approval for any COLA increases) should contribute to better funding levels over the long term, but near term funding pressures likely will continue.
The city's OPEB liability is roughly $168 million or less than 1% of estimated market value, down considerably from nearly $350 million due to a recent change requiring retirees to apply for Medicare coverage at age 65. The plan currently has no assets and is 0% funded. Overall carrying costs (combined debt service, pension and OPEB ARC amounts) are currently manageable at roughly 22% of 2012 governmental spending, but that number would increase with an appeal ruling on firefighter pension contributions that is unfavorable to the city.
New Orleans' five-year capital needs are sizable at roughly $450 million, the majority of which is for street improvements. The two largest funding sources for the capital plan are $228 million in FEMA reimbursements and $105 million in GO bond issues planned for later in 2013 and 2014 (from a 2004 authorization).
Additional information is available at 'www.fitchratings.com'.
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, 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