Fitch Rates New Orleans, LA's PIBs at 'A-'; Outlook Revised to Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'A-' rating to the following City of New Orleans, Louisiana public improvement bonds:

--$65 million taxable public improvement bonds, issue of 2015A.

The bonds are scheduled for a competitive sale on March 18, 2015. Proceeds will finance street and related improvements.

In addition, Fitch affirms the following ratings:

--$507.1 million general obligation (GO) and public improvement bonds of the City of New Orleans and the Board of Liquidation, City Debt outstanding at 'A-';

--$195.9 million limited tax refunding bonds, series 2012 outstanding at 'BBB+';

--$22.3 million Audubon Commission aquarium tax bonds, series 2011A-1 at 'A-'.

The Rating Outlook is Stable.

SECURITY

The outstanding GOs and public improvement bonds are payable from an unlimited ad valorem tax (ULT) levied against all taxable property in the city. The limited tax bonds and aquarium tax bonds are special obligations of the city payable from limited ad valorem taxes levied against all taxable property in the city.

KEY RATING DRIVERS

FINANCES IMPROVED; MAJOR CHALLENGES REMAIN: The Outlook revision to Stable from Negative reflects continued steady improvement in the city's finances. Solid revenue gains and cost management efforts have yielded positive results towards structural fiscal balance. Nonetheless, significant ongoing obligations related to public safety will continue to pressure operations.

POSITIVE LONG TERM ECONOMIC PROSPECTS: Evidence of infrastructure and commercial development projects is accompanied by steadily increasing employment totals and increased retail activity. In addition, prospects appear positive for increasing tourism and convention traffic and population gains.

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 (primarily streets), somewhat offsetting this concern.

PENSION FUNDING CHALLENGES: Pension funding levels are weak, with the firefighter plan severely underfunded. The city resumed full fire pension contributions for 2015 after contributing less than the actuarially required amount in recent years due to litigation and concerns about plan administration.

RATING SENSITIVITIES

ABILITY TO ABSORB ADDITIONAL COSTS AND BUILD RESERVES: The city's ability to maintain structural balance and build reserves while absorbing additional costs associated with a new parish prison and increased firefighter pension contributions are critical to maintaining current credit quality.

If cost increases outstrip revenue growth or the already limited reserves are depleted for capital or other needs, there could be downward rating pressure.

CREDIT PROFILE

FINANCES IMPROVED, STILL CHALLENGED

The city's financial profile has regained some stability, as evidenced by progress on expenditure growth and increasing reserve levels. Revenues in 2013 registered a sharp increase, led by a 9% jump in sales tax receipts. General fund spending was down, aided by control of public safety spending and the refinancing of a general fund obligation. The year-end result was an operating surplus after transfers in the general fund of $26.3 million. The unrestricted general fund balance increased to positive territory for the first time since 2009 to $17 million, or a still meager 3% of spending.

The 2014 budget reflected ongoing public safety pressures, including $11 million for the police consent decree and an additional $2 million for parish prison operations. After budget adoption, the city appropriated another $3.2 million for the prison, and contributed $4.6 million towards a court ordered back payment to the firefighter pension program. Despite this nearly $8 million in additional spending, improved revenue performance (sales tax receipts up nearly 7%) and control of other spending areas are expected to produce a $3-$5 million general fund surplus and further addition to reserves for the year.

The 2015 operating budget is balanced, and highlights include a 5% police pay hike, a modest salary increase for entry level workers, and increased funding for the sheriff's office and components of a police consent decree. General fund spending is budgeted for $536.8 million, a 6% increase from the 2014 budget.

The 2015 budget also includes the full required annual contribution for the firefighter pension program. The city had been contributing a reduced amount to the program for several years as decades old litigation about funding continued. The city's appeal of a court ruling that it must pay $17.5 million to cover its 2012 obligation to the firefighter pension program was denied last year. The ruling also called for the city to make the full annual contribution going forward. Ongoing negotiations between the city and the fire pension board have yielded some near term funding relief, and the state legislature approved governance changes in 2012 that enable the city to have more input into program administration. The pension board decided to extend the program's amortization period from 14 to 30 years beginning in 2015, which Fitch believes is reasonable and will provide some near term budgetary relief.

PARISH PRISON ANOTHER PRESSURE POINT

Negotiations also continue between the city and the Orleans Parish sheriff regarding the city's contribution to operating costs at the new parish prison, as well as the size and scope of additional facilities. The 2015 budget includes $35 million for the sheriff's office and prison operations, up from $24 million budgeted last year but still shy of the sheriff's funding target.

Voters last November turned down the sheriff's proposal to approve re-allocation of a 2.9 mill tax levy from debt service to jail operations. The measure is expected to appear again on the May 2015 ballot, and if approved would generate $8 million annually towards operations and relieve some pressure on other funding sources.

The city last fall received statewide voter approval of increases to two constitutional public safety millages. City voters must also approve the measures before they can be implemented, and management reports no immediate plans to place the item on the ballot. If approved by voters, the doubling of the two 5 mill levies would generate an additional $30 million annually for police and fire.

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. Ultimate approval of the proposed tax increases, as well as continued control of operational spending, would improve the city's prospects for reaching their reserve targets and maintaining structural budgetary balance.

ECONOMIC RECOVERY CONTINUES

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 and registered a healthy 3.4% increase in the 12 months ending in December 2014. An even larger 5% increase in the labor force for the same period boosted the monthly December 2014 unemployment rate to 7.1%; the annual unemployment has been trending downward in recent years as the economy has regained its footing.

Management notes a number of commercial projects either recently completed or underway as evidence of continued economic expansion and diversification. Construction continues on the $1.9 billion University/VA medical center complex that is slated to open in early 2016 and is projected to generate nearly 20,000 jobs. Also, three large retail stores and a new outlet mall recently opened in the city. Tourism continues to be a positive economic force, with the 2013 visitor total of nearly 9.3 million representing the highest count since 2003. The city's convention and visitors bureau also reported that tourism spending in 2013 was a record $6.5 billion.

The city's estimated 2014 population of nearly 380,000 is more than 80% of the pre-storm total. Taxable values have continued to grow at a moderate pace since a nearly 38% jump in 2008 thanks to citywide reappraisals. The gains from 2009-2014 averaged 3.5% annually, and the preliminary 2015 AV total of $3.345 billion represents a nearly 7% jump from the prior year.

AVERAGE DEBT LEVELS, CHALLENGED PENSIONS

The city's estimated overall debt burden is manageable at approximately $2,845 per capita and 3.2% of estimated market value. The pace of principal repayment of the city's GO debt is above average at nearly 60% in 10 years. The city's GO debt is issued by the Board of Liquidation, which has an independent board and manages all bonded debt matters 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. Both the city-administered municipal employee program and the police plan are underfunded (estimated funding at 65% and 70%, respectively using a 7% investment return assumption), and the firefighter pension program is very weak at only 27% (estimated using a 7% investment assumption).

As stated above, recent court rulings require the city to make up reduced prior year contributions to the firefighter plan and contribute the required amounts going forward; the 2015 budget includes the required contribution amount for the year. 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.

The city's OPEB liability is roughly $150 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. Overall carrying costs (combined debt service, pension ARC and OPEB paygo amounts) are above average at roughly 22% of 2013 governmental spending.

This $65 million offering completes a 2004 GO authorization, and proceeds will address primarily street and streetlight improvements. Street repairs comprise the largest portion of the city's five-year capital plan, and management reports FEMA contributions of roughly $260 million will be the primary funding source.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980936

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Contacts

Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Analyst
+1-512-215-3727
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com