New hope for New Orleans

August 31, 2012

Reuters reported this week that New Orleans was lucky to escape major damage from Hurricane Isaac, which dumped heavy rains and high winds on the city. Reactive defenses that were put in place after Hurricane Katrina in 2005 appear to have worked in protecting the city from severe damage. More importantly, the fiscal condition of New Orleans seems to have survived the collapse of the economy after the last disaster.

Just as Hurricane Isaac was making landfall this week, New Orleans was in the municipal bond market with a $167 million general obligation bond offering — A sign of the rebound. However, the bond offering was not painless. The city had to pay 1.31% more to investors for 10-year bonds than comparable AAA-rated securities, according to Thomson Reuters Municipal Market Data.

New Orleans is rated A3 by Moody’s, BBB by Standard & Poor’s and A- by Fitch; all lower investment-grade ratings. This offers a mixed-to-good economic picture for the city. Fitch Ratings details some positives:

“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 8.3 percent to 8.5 percent in the 12-month period ending May, 2012. This rate is higher than both the state (7.1 percent) and U.S. averages (7.9 percent). Management <city officials> 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.”

The aftermath of the disaster was prolonged, however there was some relief. In November 2010, the federal government forgave a $240 million loan to New Orleans for community disaster relief related to Katrina. The forgiveness strengthened the city’s balance sheet and can free up resources for other vital services. But there are some storm clouds on the horizon. Fitch explains why it gives the city’s credit rating a negative outlook:

“The negative outlook reflects the city’s deteriorated General Fund balance that remained negative in fiscal 2011 as well as the current challenge to implement a refinancing plan for outstanding pension obligation bonds. The city is facing a bank bond bullet payment of $115 million on the pension obligation bonds (POB) on March 1, 2013. Along with the bullet payment, the city will owe a swap termination payment currently valued at $46 million. Although the 2012 budget was structurally balanced, revenues are currently falling $12 million short of budget and further expenditure reductions will be necessary to end with a positive result.”

New Orleans has made a remarkable recovery since 2005 with support from the federal and state governments. The city’s population has rebounded to about 380,000 or 80% of the pre-disaster level, after falling to 208,000 in 2006. Between 2010 and 2011, its population grew by nearly 5%, causing the U.S. Census Bureau to name New Orleans the fastest growing U.S. city in the 100,000 or greater bracket. Given the tremendous ordeal the city has been through, it appears to have nearly recovered from the devastation of Katrina. New Orleans is a tough, gritty city and will likely survive Isaac and future hurricanes with resilience.

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