The Louisiana State Bond Commission authorized New Orleans to go ahead Thursday with a taxable refunding of up to $200 million of pension debt and other outstanding liabilities.
New Orleans will use the proceeds to refund taxable pension bonds issued in 2000 to shore up the city’s under-financed firefighters pension fund, public improvement bonds from 2001 through 2004 and $16 million of certificates of obligation issued in late 2011 to refinance certificates in obligation issued in 1998.
The preliminary official statement released this week by the city shows a total refunding tranche of $160.3 million. The negotiated sale is tentatively set for Aug. 28.
The proceeds will also fund a swap termination fee on the pension bonds of approximately $40 million.
Commission director Whit Kling said the non-economic refunding will cost the city $21 million of net present value and a gross loss of $69 million with the termination penalty.
Treasurer John N. Kennedy, who chairs the Bond Commission, said the refunding proposal does not meet the commission’s standards for refunding requests.
“Normally, this would not fit our parameters,” Kennedy said. “But the city’s in a bind with this debt termination payment.”
New Orleans deputy mayor Andrew Kopplin said negotiations with the swap partner to reduce the fee or extend the term were fruitless.
“I wouldn’t want to wish this situation on anybody,” Kopplin said. “The reason the fee is so high is that interest rates are so low.”
Kopplin said refunding the pension debt with bonds backed by a portion of the city’s property tax rate will improve New Orleans’ finances.
“We’re getting out of a variable-rate mortgage and getting into traditional, conventional municipal finances,” he said.
“Getting rid of the unsecured pension debt with a junk rating using bonds with a dedicated revenue stream will improve our credit rating,” he said.
New Orleans’s $509 million of outstanding GO debt is rated A3 with a negative outlook by Moody’s Investors Service and A-minus by Fitch Ratings.
The outstanding pension obligation bonds are rated Baa3 by Moody’s and BBB-minus by Standard & Poor’s.
Kennedy said the state may become involved in a class action suit against large banks over alleged manipulation of benchmark Libor interest rates.
Lamont Financial Management Inc., Louisiana’s financial advisor, was directed to review the potential exposure to the state’s variable-rate debt as a result.
“We’ll have to decide then whether to join into that suit,” Kennedy said. “These are serious allegations.”
