AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following city of New Orleans, Louisiana general obligation (GO) bonds:
--$82.75 million general obligation refunding bonds, series 2015.
The bonds are scheduled for a negotiated sale on or about Nov. 4, 2015. Proceeds will refund a portion of the city's outstanding tax-supported debt for interest savings.
In addition, Fitch affirms the following ratings:
--$566.4 million general obligation (GO) and public improvement bonds of the city of New Orleans and the Board of Liquidation, City Debt (pre-refunding) outstanding at 'A-';
--$186.1 million limited tax refunding bonds, series 2012 outstanding at 'BBB+';
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 are special obligations of the city payable from limited ad valorem taxes levied against all taxable property in the city.
KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: The past three years have witnessed steady improvement in the city's finances. Solid revenue gains and cost management efforts have yielded positive gains in structural fiscal balance and increasing reserves. 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 generally increasing employment totals and increased retail activity. Recent gains in tourism and convention traffic and population are expected to continue.
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 recently announced a settlement with the firefighter pension board that will satisfy outstanding legal judgments against the city and institute certain structural reforms to the pension system.
RATING SENSITIVITIES
ABILITY TO ABSORB ADDITIONAL COSTS AND BUILD RESERVES: The city's ability to maintain structural balance and continue to build reserves while absorbing additional public safety and benefit-related costs could result in positive rating action.
Conversely, if cost increases outstrip revenue growth or the currently limited reserves are depleted for capital or other needs, there could be downward rating pressure.
CREDIT PROFILE
IMPROVED FINANCES
The city's financial profile continues to strengthen, as evidenced by progress on expenditure growth and increasing reserve levels. Operating revenues in 2014 were up roughly 5%, consistent with the average gain since 2010; the increase was led by a more than 9% jump in sales tax receipts. General fund outlays, meanwhile, have increased about 1% annually since 2010, as management has successfully controlled the pace of overall spending, particularly in public safety. The $26 million surplus after transfers in 2014 mirrored the gain in 2013 and increased the unrestricted general fund balance to $43 million, or an improved but still small 8% of spending.
Management reports the positive revenue trend is continuing in 2015, with another projected 5% gain in sales tax collections. However, spending pressures associated with the parish prison, police pay and firefighter pension contributions are expected to boost general fund outlays by 12%. Operating results are expected to be positive despite the increased spending, due primarily to a $36 million payment from British Petroleum related to the 2010 Deepwater Horizon oil spill. The current projection anticipates a $30 million surplus after transfers and corresponding boost to general fund reserves.
The proposed 2016 budget is operationally balanced, with a planned use of $10 million from reserves to satisfy a firefighter pension judgement. Budget highlights include a 10% police pay hike (bringing the cumulative increase to 15% since 2014), additional public safety personnel, and increased funding for the sheriff's office/parish prison. General fund spending is budgeted for $592.7 million, a 4.4% increase from the amended 2015 budget.
The $10 million use of reserves included in the proposed 2016 budget is part of a recently announced settlement between the city and the firefighter pension board. The deal calls for the city to satisfy two outstanding judgements totaling $96 million related to state-mandated pay increases the city did not enact and recent shortfalls in annual pension contributions. The majority of these repayments will be stretched out over a number of years, reducing the near-term financial impact to the city. In exchange for these payments, the pension board has agreed to structural changes that will provide the city with a larger role in decision-making.
Two components of the settlement are still unresolved. Both parties have agreed to let the courts decide on the reading of state law regarding the calculation of future benefits, the decision on which will have major financial implications for the city. The city also plans to approach voters for approval to use a roughly 2.5-mill property tax (recently approved by state voters) to help pay increased annual program contributions. Positive resolution of the benefit calculation question and adequate funding for future pension contributions would be favorable credit considerations.
PARISH PRISON ANOTHER PRESSURE POINT
Negotiations 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 2016 budget allows for $60 million for the sheriff's office and prison operations, $52 million of which the city will provide and another $8.5 million available from a 2.8-mill sheriff tax levy. The fiscal 2016 total is up from $35 million originally budgeted last year but still shy of the sheriff's funding target.
Voters in May approved the sheriff's proposal to approve re-allocation of the 2.8-mill tax levy from debt service to jail operations. The measure is expected to generate $8.5 million towards operations in 2016 and relieve some pressure on other funding sources.
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 city's current projection, which includes annual tax revenue increases of 2%-4% as well as continued control of operational spending, would meet the 10% combined reserve target by 2020. While the revenue assumptions appear reasonable, ongoing public safety and infrastructure (streets) spending pressures and possible additional increases to sheriff/parish prison outlays add a material amount of uncertainty to this projection.
ECONOMIC RECOVERY CONTINUES
Economic recovery continues, as increasing tourism and a growing population highlight recent gains. Annual employment growth in the city has been positive the past several years, although the last 12 months saw some softening and a 1% dip in the labor force. The monthly August 2015 unemployment rate of 6.8% continues an improving trend; the local rate continues to exceed the state (6.3%) and national (5.2%) averages.
Management notes a number of commercial projects either recently completed or underway as evidence of continued economic expansion and diversification. The new University Medical Center recently opened, and construction continues on the adjacent Veterans Administration hospital (opening scheduled for 2016). The combined $1.9 billion complex is projected to generate nearly 20,000 jobs. Also, several large retail stores and a new outlet mall recently opened in the city.
Tourism continues to be a positive economic force, with the 2014 visitor total of nearly 9.5 million representing the highest count since 2003. The city's convention and visitors bureau also reported that tourism spending in 2014 was a record $6.8 billion.
The city's estimated 2014 population of roughly 384,000 is more than 80% of the pre-Katrina total. Taxable values have continued to grow at a moderate pace since a nearly 38% jump in 2008 thanks to citywide reappraisals. The 2015 assessed value (AV) gain of 6.4% was an improvement from the 1.2% increase registered in 2014. The 2015 AV totals $3.33 billion.
AVERAGE DEBT LEVELS, CHALLENGED PENSIONS
The city's estimated overall debt burden is manageable at approximately $2,790 per capita and 3.4% of estimated market value. The pace of principal repayment of the city's GO debt is above average at 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.
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 62% and 71%, respectively, using a 7% investment return assumption), and the firefighter pension program is very weak at only 14% (estimated using a 7% investment assumption).
The city has resumed making the annual required contributions to the firefighter pension plan. 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 court decision regarding calculation of benefits for fire retirees will largely determine the trajectory of future city contributions to the fire pension plan.
The city's OPEB liability is roughly $155 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) were above average at roughly 23% of 2014 governmental spending.
The city currently has no GO bonding authorization. Management reports plans to approach voters in 2016 for a $100 million authorization for street repairs.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992702
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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