Regional News

New Orleans Refundings Bolster City's Finances

DALLAS — New Orleans will take two refunding issues totaling more than $300 million to market in the next two months to lower its debt service payments and restructure an unsecured debt into a more affordable secured one.

The refundings are an essential part of Mayor Mitch Landrieu's efforts to bring the Crescent City's finances into coherence after the devastation of Hurricane Katrina in 2005 and the uneven but progressive recovery from the disaster.

The flooding damaged 134,000 housing units, severely reduced the city's tax revenue and forced the city to cut its workforce in half.

The city has restored much of its population and more than regained property values lost in the 2005 flooding.

New Orleans' total tax base has grown steadily, averaging 2.8% from 2009 through 2011. The 2011 assessed valuation of $2.8 billion is 30% higher than the pre-Katrina valuation.

The current population is estimated at 360,740 by the Census Bureau, up 4.9% from April 2010 to July 2011. The population was 452,170 before the 2005 disaster, but fell to 223,388 in 2006.

The city ended 2011 with no reserve balance, but Landrieu's five-year plan calls for a general fund ending balance in fiscal 2016 of 8.2%.

The first deal coming to market is a negotiated issue of up to $170 million of general obligation bonds, primarily to refund debt issued in 1998, 2001, 2002, 2003 and 2004. It is set for the week of July 23.

The deal is expected to total $142 million, and will refund all or portions of $154.8 million of the outstanding debt.

David Gernhauser, secretary of the Board of Liquidation, City Debt, said the refunding is expected to provide cash-flow savings of $26 million and net present-value savings of $20 million.

New Orleans is paying interest of 4.75% to 5.3% on the outstanding GO debt that is being refunded, Gernhauser told the City Council's budget committee in June.

The lower rates expected from the refunding will allow the city to cut its property tax rate by 0.7 mills, he said. Each mill generates $2.6 million a year.

Citi is the lead underwriter on the GO refunding. Co-underwriters include Raymond James | Morgan Keegan, Bank of America Merrill Lynch, Loop Capital and Stephens Inc.

Co-bond counsel are Foley & Judell LLP and the Cantrell Law Firm. Financial advisors are Public Financial Management Inc. and CLB Porter LLC.

New Orleans' GOs are rated A3 by Moody's Investors Service and A-minus by Fitch Ratings.

The refunding was approved by the City Council on June 7 and by the Louisiana State Bond Commission on June 21.

The City Council also approved a refunding of up to $170 million that will include $115.8 million of taxable pension bonds issued in 2000 to shore up the city's under-financed firefighters pension fund, $25.6 million of bonds issued in 2004 to pay court judgments and $16 million issued in late November 2011 to refinance 1998 certificates of obligation.

The 2011 refinancing covered a $7.5 million debt service payment due on Dec. 1, 2011, and a similar payment in December 2012.

Without the relief, deputy mayor Andrew Kopplin said, the city would have cut the proposed 2012 budget to resolve a $25 million budget gap from 2010.

New Orleans will refund the taxable bonds with taxable debt backed with additional security — a portion of the city's property tax rate.

The refunding plan will be presented to the State Bond Commission at its July 19 meeting.

If approved, the bonds would be issued in mid-August.

The pension obligation bonds are rated Baa3 by Moody's and BBB-minus by Standard & Poor's.

The city has not determined the underwriting team for the August refunding. Foley & Judell and Auzenne & Associates LLC are co-bond counsel.

In his presentation to the City Council last month, Kopplin said taking out the pension debt with bonds supported by the property tax could result in a better rating.

"We'll be substituting an unsecured credit with debt secured by the property tax," he said. "That will show the rating agencies that the city is putting its fiscal house in order."

Refunding the pension bonds will allow New Orleans to avoid a bank bond bullet payment of $115 million in March 2013, Kopplin said, but it will incur a swap termination payment of $40 million.

The refunding will not reduce the 2030 maturity of the pension bonds, Kopplin said.

However, the $19 million a year now budgeted for debt service will allow the city to serve all of the new debt and pay the termination fee.

"This will change a very, very unattractive credit of the city of New Orleans, which is dragging down our GO bond rating, into a secured credit," he said. "These will be very conventional, long-term fixed bonds, very traditional."

The pension bonds were issued as variable-rate debt with a standby bond purchase agreement through JPMorgan Chase & Co. and were insured by Ambac Assurance Corp.

The debt was hedged through a swap with UBS, with a synthetic fix of 6.95%.

The bonds have been in a bank mode since February 2008.

Kopplin said JPMorgan could have charged an interest rate of 11.95% on the pension debt, but set the rate at 9.95% in light of the city's post-hurricane financial position.

The city has been paying debt service that is $5 million a year more than had been expected, he said.

The bank agreed to hold the bonds for only five years, Kopplin said, and without the refunding. the city will face a $115 million payment next March.

In a report to the New Orleans Revenue Estimating Conference on June 25, economist Jerome Lomba said revenue so far in 2012 is $12.2 million less than expected, with personnel costs higher than expected.

Hotel tax collections in the first four months of 2012 are up 27% from the same period of 2011, Lomba said, and sales taxes are up 6% from last year.

New Orleans operates on a calendar fiscal year.

Lomba said the city may have a revenue shortfall of $13.1 million by the end of 2012, but Kopplin said the gap will be covered.

The refunding in late 2011 saved $7 million in debt service that had been included in the 2012 budget, Kopplin said, and the remainder of the shortfall coverage will come from a deeper freeze of city agency spending.

"At the beginning of this year, I instituted a 2% reduction in all agency discretionary spending," Kopplin said. "That reduced spending by $4 million in 2012."

"I have advised the executive board that we may call for another 3.8% reduction in the remainder of this year," he said. "That should give us more than $7 million in savings, which would take care of the shortfall.

"The growth in our tax collections is robust," Kopplin said. "It's just not good enough."




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