AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following City of New Orleans, Louisiana obligations:
--$50.4 million (est.) General Obligation (GO) Refunding Bonds series 2016;
--$70 million Public Improvement Bonds series 2016.
The GO refunding bonds are scheduled for a negotiated sale the week of Sept. 12th, and proceeds will be used to refund a portion of the city's outstanding tax-supported debt for interest savings. The public improvement bonds are scheduled to be sold competitively around the second week of October; proceeds will finance street improvements.
In addition, Fitch has upgraded the following ratings:
-- $531.9 million in GO and public improvement bonds of the city and the Board of Liquidation, City Debt to 'A+' from 'A-';
--$176.2 million limited tax refunding bonds, series 2012 to 'A+' from 'BBB+';
--$19.5 million Audubon Commission aquarium tax bonds, series 2011A-1 to 'A+' from 'A-';
--The city's Long-Term Issuer Default Rating (IDR) to 'A+' from 'A-'.
The Rating Outlook is Stable.
The GO and public improvement bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city. The limited tax and aquarium tax bonds are special obligations of the city, payable from limited ad valorem taxes that are subject to rate adjustment from time to time due to reassessment.
KEY RATING DRIVERS
The upgrade of the city's IDR and bond ratings to 'A+' from 'A-' largely reflects the assessment of the city's credit profile using Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The 'A+' rating incorporates sound revenue growth prospects and a manageable liability burden, as well as adequate expenditure flexibility and a less than robust operating cushion. The city's economy continues to perform well, as evidenced by recent gains in economically sensitive revenues. Management settled a long-running pay dispute with firefighters, although other public safety and pension challenges remain. Reserves are now at satisfactory levels. Under the new U.S. state and local government rating criteria Fitch generally ties both ULT and limited tax ratings to the IDR, resulting in a two-notch upgrade for the Audubon Commission bonds and a three-notch upgrade for the series 2012 limited tax refunding bonds.
Economic Resource Base
New Orleans' status as a major tourism destination, along with its significant commercial presence, supports Fitch's projection of solid growth prospects as the city continues its recovery from Hurricane Katrina in 2005. The local economy continues to diversify from a historical reliance on shipping and energy with gains in healthcare and technology. The population is estimated at about 390,000, roughly 85% of the pre-Katrina total.
Revenue Framework: 'aa' factor assessment
New Orleans' 10-year revenue history has trailed U.S. GDP but exceeded inflation, and Fitch anticipates a similar if not stronger performance going forward as the economy expands. The city's ability to increase revenues through fees and charges is balanced against an inability to increase property or sales tax rates without voter approval.
Expenditure Framework: 'a' factor assessment
Spending increases should generally track revenue growth. A recent settlement with firefighters over back pay establishes a certain repayment schedule, although other pressures continue. Carrying costs (debt and employee benefits) are moderately high, but Fitch considers overall expenditure flexibility adequate.
Long-Term Liability Burden: 'aa' factor assessment
The combination of debt and employee benefits is moderate at about 15% of total personal income. This level is not expected to shift materially, as the city's debt plans appear manageable over the near term. However, pension contributions likely will increase given current net pension liabilities.
Operating Performance: 'a' factor assessment
New Orleans has rebuilt operating reserves, but the combination of public safety and pension spending pressures restrict spending flexibility; limited revenue raising ability further constrains the overall financial resiliency assessment.
Reversal of Recent Gains: A material deterioration in recently bolstered financial flexibility, through some combination of additional spending pressures and economic weakness, likely would pressure the current rating.
Improved Financial Resilience: Given the inherent volatility of much of the city's operating revenues, an increase in operating reserves would help mitigate this risk and bolster financial resilience, improving chances for further positive rating action.
While still a tourism-based economy, New Orleans has diversified since Hurricane Katrina in 2005 -- most notably in healthcare. The new University Medical Center/Veterans Administration Hospital is a combined $1.9 billion complex expected to employ 20,000 ultimately. Tourism continues its post-Katrina rebound, with a 2015 visitor count of 9.8 million (up 2.7% from 2014) and visitor spending at a record
$7 billion. Airport traffic and cruise bookings also were at record levels in 2015. The Port of New Orleans reported a record period of container shippings earlier in 2016.
Sales and property taxes are the two largest components of the general fund revenue total, and combined were roughly one-half of the $639 million operating revenue total in 2015. The 10-year revenue history of 2.5% annual gains through 2014 trailed U.S. GDP over the same period, but recent larger gains reflect some acceleration in the city's post-Katrina recovery. The city's large tourism sector generates significant exposure to economic cycles.
The city's revenue prospects are solid. Management anticipates some moderation from recently strong growth rates, as several new large retail projects are now included in annual totals.
The city's ability to independently increase revenues is limited, as any increase in property tax millage or sales tax rate must be approved by voters. However, Fitch believes that the other locally controlled operating revenues (e.g. fees, charges) that are the only avenues to independently raise revenues provide satisfactory flexibility in this area.
As with most U.S. cities, public safety is the largest general fund expenditure category (40% of 2015 outlays). Ongoing spending associated with a police consent decree and parish prison operations will keep overall spending pressures elevated. The city share of parish prison operating expenses were budgeted for $44 million in 2016, just below 10% of general fund spending and up from $35 million budgeted in 2015.
Spending levels over the near to intermediate term generally should track or marginally exceed an expected solid pace of revenue growth.
The city retains adequate flexibility regarding main expenditure items, although civil service commission rules govern certain workforce-related adjustments (e.g. layoff procedures). Carrying costs (combined debt and retiree benefit outlays) in fiscal 2015 were moderately high at 22.7% of governmental spending, and expected increases to pension contributions likely will move carrying costs higher in coming years.
Long-Term Liability Burden
The city issues both unlimited tax debt (through both the city and the Board of Liquidation) and limited tax debt, for general infrastructure purposes. The pending new money sale is the first installment of $120 million approved by voters in April 2016 for street improvements. The pace of debt amortization is roughly 55% repaid in 10 years.
The city provides pension benefits through three major pension plans, one of which it administers as a single-employer program. The other two are a state police pension plan and a local firefighter pension plan, the benefits and contributions for which are set by the state legislature. The combined debt and net pension liability for the city represents a moderate 14.8% of total personal income; combined pension assets to liabilities are relatively low at 45%, suggesting future contribution increases are likely, but Fitch expects the overall liability burden to remain in the moderate range. Other post-employment benefits total $191.7 million or 1.4% of personal income.
The city's relatively modest (albeit improved) reserves, along with a somewhat constrained expenditure flexibility profile, provide only adequate gap-closing ability in the event of a moderate economic decline. The spending pressures, along with a comparatively volatile revenue stream, likely would result in a modest erosion of reserve levels during a downturn.
The city's record during the current economic recovery -- boosting reserves and increasing pension contributions-- indicates a commitment by the current administration to bolster the city's financial profile during periods of expansion when economically sensitive revenues are increasing. Fitch's expectation is that any deferral of required spending in the future would be minimal during growth periods.
As planned, 2016 operating results will include a drawdown in reserves that is driven primarily by a payment associated with a recent firefighter settlement regarding back pay. Of the projected $16.5 million use of fund balance, $15 million is the settlement payment. This decline would push reserves down to around 9% of spending. Economically sensitive revenue growth continues at a solid pace, with sales taxes projected to climb more than 3% from 2015 to $180 million.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form