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Rating Update:

MOODY'S ASSIGNS NEGATIVE OUTLOOK TO THE CITY OF NEW ORLEANS Baa3 PENSION OBLIGATION BONDS, SERIES 2000; AFFIRMS RATINGS ON DEBT ISSUED THROUGH THE BOARD OF LIQUIDATION

18 Nov 2010

VARIOUS AMOUNTS OF DEBT IMPACTED BY RATING ACTIONS

Municipality
LA

Opinion

NEW YORK, Nov 18, 2010 -- Moody's Investors Service has assigned a negative outlook to the Baa3 rating on the City of New Orleans Pension Obligation Bonds, Series 2000 affecting $128 million debt outstanding. At the same time, Moody's has affirmed the A3 and stable outlook on the city's $548 million in outstanding general obligation unlimited (GOULT) tax debt issued through the Board of Liquidation. In addition, we have also affirmed the A3 ratings and stable outlooks on the City's Downtown Development District Bonds, Series 2001 and Drainage System Limited Tax debt and the Baa1 ratings and stable outlooks on the Limited Tax Bonds, Series 2005.

RATING RATIONALE

The assignment of the negative outlook to the Baa3 rating on the pension obligations bonds reflects the security pledge limited to excess revenues from general fund operations and exposure to insured variable rate demand obligations. The variable rate bonds are currently in bank bond mode and have a higher than anticipated interest expense.

The affirmation of the A3 rating on the GOULT debt reflects the Board of Liquidation's strong management and willingness to adjust rates as necessary. The affirmation also takes into consideration the plans that new city administration has to balance operations which would result in a stabilization and eventual improvement in the General Fund balance. The A3 ratings on certain limited tax debt take into consideration strong debt service coverage of 9.75 times on the Downtown Development District Bond, Series 2001 and 6.96 times on Drainage System Limited Tax debt. The Baa1 ratings on the remaining limited tax debt reflect adequate yet narrower debt service coverage of 1.00 times for Limited Tax Bonds, Series 2005 and 2.15 times on Audubon Commission Limited Tax Bonds, Series 1997.

RISK IN PENSION OBLIGATION BONDS

In 2000, the City issued Pension Obligation Bonds, Series 2001 secured by excess revenue of the General Fund. These securities are rated Baa3, below that of the city's other rated debt, because of the more limited security pledge, the lack of authority to increase taxes to repay the bonds and that the bonds were not issued through the Board of Liquidation.

The bonds were issued in the variable rate mode and are enhanced by a standby bond purchase agreement with JP Morgan (senior unsecured rated Aa1/Negative) and insured by Ambac. The bonds have been in the bank bond mode since February 2008.resulting in higher debt service costs on the bonds. The bank bond rate is currently prime plus one (4.25%). Additionally, the total outstanding amount of variable rate debt ($128.3 million) was hedged by a swap with UBS in which the city pays a fixed 6.95% rate and receives one month LIBOR. With LIBOR currently at 0.25%, the City is paying approximately 10.95% on the debt versus the original intended cost of 6.95%. The interest rate on this debt resulted in an increase of approximately $5 million during the 2010 fiscal year vs original projections.

Favorably, the UBS swap does not require collateral posting by the city. The current mark to market on the swap is $42 million against the City. Termination of the swap could be triggered if one or more of the City's outstanding senior debt ratings falls below Baa3 or BBB- for both Moody's and S&P, respectively. The JP Morgan standby bond purchase agreement was extended on October 1, 2010 and expires on January 1, 2012, and represents the sixth amendment since December 18, 2006. If the agreement was not to be extended, the repayment of bank bonds would commence under the standby bond purchase agreement, The terms of the repayment ("term loan") under the standby bond purchase agreement require the city to begin accelerated repayment in semiannual principal payments over 5 years beginning on July 1, 2012. The City is currently reviewing alternative solutions to prevent the accelerated payments. However, since there is currently not a solid plan already in place to deal with the bank bonds, the negative outlook reflects our concern that if a solution to address the bank bonds is not put in place, they will continue to place pressure on the General Fund operations of the city and could result in a downgrade of the Baa3 rating on the pension obligation bonds.

BOARD OF LIQUIDATION KEY FACTOR IN GENERAL OBLIGATION RATING ASSIGNMENTS

The Board of Liquidation was established by the State of Louisiana legislature in 1880 and made a "body corporate" separate and distinct from the City in 1890. The Board has exclusive control and direction of all matters related to the issuance and repayment of the city's general obligation unlimited tax (GOULT) bonds. The repayment of these bonds is therefore separated and excluded from the City's operating budget and a dedicated source and security exists for the payment of the City's GOULT. All ad valorem taxes levied by the City for the payment of GO bonds are transferred to the Board. The Board has the authority to enforce imposition and collection of sufficient taxes for the payment of GO bonds upon a failure of the City Council to do so. Because of this authority and its distinct separation from the City, Moody's believes this provides strong protection for bondholders. The Board demonstrated its willingness to amply meet debt service when it increased the debt service tax rate for unlimited tax bonds from $28.4 mills in fiscal 2005 to $38.2 mills in fiscal 2006, in response to projected declines in assessed value as a result of damage caused by Hurricane Katrina. After collecting 150% of the amount forecasted for 2006, the tax rate was decreased to $31.7 mills for fiscal 2007. The tax rate has decreased further to $23.80 mills for 2008, 2009 and 2010 in order to keep revenues more aligned with annual debt service requirements. Moody's believes that the Board's actions demonstrate its willingness to adjust the tax rate as necessary and this is a key factor in the A3 rating.

Although the Board is not required to maintain reserves for the payment of GO bonds, it has been the policy of the Board, since 1951, to maintain reserves of approximately one-half of the maximum amount of principal and interest on GO bonds payable in one year. The Board had to rely on some of the reserves in 2006 to service debt; however, these reserves were completely replenished to prior year levels and are now at an estimated $32 million. The presence of the reserve was significant and provided additional security in the early months after Katrina, when damage to the tax base and the impact on pledged revenues were unknown.

POSITIVE GROWTH IN ASSESSED VALUATIONS

Hurricane Katrina resulted in a 5-month delay in the mailing of property tax bills for fiscal 2006. Without knowing the full extent of damage to the tax base, City officials created a budget that assumed a 50% reduction in property values. The actual valuation loss was only 25% for fiscal 2006. We have noted in prior reports that real property in Orleans Parish qualify for a $7,500 homestead exemption on the assessed value of an owner occupied home, which is set at 10% of full value. Therefore, on a $100,000 valued home, the assessed value is only $2,500 and homes valued at $75,000 or less are effectively not taxed. For fiscal 2007, the assessment cycle returned to the normal schedule and tax bills were mailed in December of 2006 and due by January 31st of 2007. Total valuations for fiscal 2007 increased 11% over 2006 and remained only 12% below 2005. The tax base again increased 37% in fiscal 2008 which represented not only recovery from the storm but also reassessments on existing values. Assessed valuation increases of 1.5% in fiscal 2009, 3.77% in fiscal 2010, and 3.4% in fiscal 2011 continue to reflect ongoing recovery. The full valuation in fiscal 2011 is sizable at $23.1 billion derived from an assessed valuation of $2.77 billion. Population is currently estimated to be 355,000 which approximates 78% of the pre-Katrina level.

GENERAL FUND OPERATIONS STRUCTURALLY IMBALANCED

In the 2005, 2006 and 2007 fiscal year, the City was able to establish a higher General Fund balance than before the storm and created an emergency fund equal to 8% of General Fund expenditure. The total fund balance increased from $21 million, equal to 4.8% of revenues, in fiscal 2003 to a peak of $99 million in fiscal 2006 which was equal to 27% of revenues. During this period, the unreserved fund balance increased from $11.4 million to $95 million. In fiscal 2007, the total fund balance decreased to $95 million and the unreserved balance was $78 million but these levels were healthy equal to 22.5% and 18.6% of General Fund revenues respectively. During the 2005 fiscal year, City officials enacted significant staffing and other cuts to bring expenditures in line with available revenues and appeared committed to making additional cuts if needed. The improvement in the fund balance was assisted by the budget cuts but primarily driven by influxes of cash from Federal and State government funds received after the hurricane. However, during 2008 and 2009, the City experienced cost overruns associated with police overtime. The General Fund reserves also declined as designated funds for capital outlay were spent; therefore, the total fund balance decreased from $95 million, or 23% of General Fund revenues to $61 million, or 14% of General Fund revenues in fiscal 2008. While the unreserved portion of the fund balance also decreased from $78 million to $53 million, the unreserved, undesignated portion only decreased from $38.5 million to $36.7 million which equaled 8.6% of General Fund revenues in fiscal 2008.

For fiscal 2009, total fund balance decreased to a narrow level of $7.9 million which is only 1.8% of General Fund revenues and the unreserved General Fund balance of $7.2 million is 1.6% of General Fund revenues. The significant $52 million decline was the result of structural imbalance between revenues and expenditures that continued throughout the fiscal year. Major revenue streams such as sales taxes fell short of projections while expenditures exceeded budgeted levels. Additionally, for fiscal 2010, new administration reported that under funding was an issue for certain line items and revenues were inaccurately projected resulting in a $67 million revenue to expenditure gap. By implementing cost cutting measures, controlling expenditures, and using a one time insurance settlement of $23 million, officials believe they have successfully closed the gap and fiscal 2010 will end balanced. Although the fiscal 2011 budget has not officially been adopted, officials stated the proposed budget uses conservative budgeting that takes into consideration the ongoing National economy and its impact on local revenues. Additionally, the budget is balanced and the budget document states that any unanticipated General Fund revenues will be used to first fully fund the unreserved fund balance account. The current five year plan anticipates a gradual build up to meet the goal of fund balance and emergency reserve account to 10% of General Fund expenditures by 2015.

One positive note is that FEMA announced it will forgive the $240 million community disaster loan to the city. The loan was drawn on during the 2006 through 2009 fiscal years in order to help balance financial operations following Hurricane Katrina. Initially, the loan was to begin repayment in 2012 although a five year delay could be requested. The forgiveness of the loans alleviates the need to provide for this repayment in future budgets. While the 2009 General Fund position is narrow, we believe the fiscal 2010 level will remain similar given reports of balanced operations; further depletion of reserves could impact all of the city's ratings. Most notably, the rating on the pension obligation bonds could be pressured downward with depletion of General Fund reserves given that the bonds are secured by revenues of the General Fund and lack of reserves results in inability to deal with potential increases in debt service requirements on the bonds.

The negative outlook on the Pension Obligation Bonds, Series 2000 reflects our concern that the General Fund operations of the city is already in a weakened financial position and further stress from increasing interest rates or accelerated payments in the event of a term loan could mean deterioration in the reserve to a level that is not consistent with the Baa3 rating. The stable outlook on the remaining ratings reflects the strong management at the Board of Liquidation and the stable tax base that provides security for those bonds.

WHAT COULD CHANGE THE RATING - UP

Trend of improvement in General Fund reserve

Solution to variable rate exposure in the Pension Obligation Bonds

WHAT COULD CHANGE THE RATING - DOWN

Further decline in the General Fund reserve

Ongoing financial pressure from variable rate exposure

KEY STATISTICS:

Population (2000): 455,000

Population 2010: 355,000

2011 Full valuation: $23 billion

2011 Assessed valuation: $2.76 billion

2000 Per Capita Income: 17,258 (79.9% of US)

Payout (10 years): 52%

2008 General Fund balance: $61 million (14.3% of General Fund revenues)

2009 General Fund balance: $7.9 million (11.8% of General Fund revenues)

2007 Unreserved, undesignated General Fund balance: $7.9 million (9.1% General Fund revenues)

2008 Unreserved, undesignated General Fund balance: $7.2 million (1.6% General Fund revenues)

Outstanding Debt:

GOULT: $548 million

Drainage Tax bond: $21.5 million

Downtown Development District: $5.9 million

Limited Tax Bonds, Series 2005: $26.8 million

Audubon Limited Tax Bonds: $2.2 million

Pension Obligation Bonds: $128.6 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Kristin Button
Analyst
Public Finance Group
Moody's Investors Service

Toby Cook
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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Research Clients: (212) 553-1653


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MOODY'S ASSIGNS NEGATIVE OUTLOOK TO THE CITY OF NEW ORLEANS Baa3 PENSION OBLIGATION BONDS, SERIES 2000; AFFIRMS RATINGS ON DEBT ISSUED THROUGH THE BOARD OF LIQUIDATION
No Related Data.
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