Rating service downgrades outlook for New Orleans bonds

Fitch Ratings has downgraded the rating outlook for New Orleans’ bonded debt because of concerns about the city’s ability to cover an underfunded firefighter pension program and court-mandated increases in spending for public safety.

Mayor Mitch Landrieu’s administration has been warning for months the city cannot afford to implement simultaneous federal court consent decrees mandating major changes at the New Orleans Police Department and Orleans Parish Prison without making deep cuts in other departments’ spending, probably involving furloughs or layoffs.

The mayor is scheduled to present his 2014 budget proposals to the City Council in mid-October.

Fitch, one of three national ratings firms, did not actually lower the city’s bond rating, only the future outlook for its rating.

The downgrade applies to about $462 million in outstanding general obligation debt and public improvement bonds and $24.1 million in Audubon Commission aquarium tax bonds, both rated A-. It also applies to $195.9 million in BBB+ rated limited tax refunding bonds.

Fitch has assigned all those bonds a negative outlook.

The outlook previously was been stable.

The change does not affect the interest rates the city is paying on those already issued bonds.

However, it comes months before the city has been planning to try to sell $40 million in new public improvement bonds.

The Fitch report should not affect the chances of selling the bonds, but it could drive up the interest rate, said David Gernhauser, secretary of the Board of Liquidation, City Debt.

“Had it been a downgrade in rating, that would have severely impacted their ability to issue the bonds and interest rates,” Gernhauser said.

Fitch noted that the poor outlook comes despite the city’s anticipated balanced budget for 2013.

“Efforts by current management to regain structural budgetary balance have shown gains, but new challenges in the form of jail and police mandated spending and fire pension contributions place additional pressure on operations,” Steve Murray, a primary analyst for the rating agency, wrote in the report.

The city expects to have to spend $11 million on the NOPD consent decree and as much as $23 million on the prison consent decree next year.

Those expenses “will immediately absorb any cushion that is generated in 2013 and force the city to look for additional spending cuts and/or revenue sources,” Murray wrote.

Trying to increase revenue through higher property or sales taxes would require permission from voters and legislators.

Also putting pressure on spending, Murray noted, is a Civil District Court judge’s ruling this year that the city must pay $17.5 million toward its 2012 obligation to the firefighters’ pension program, after contributing a reduced amount for several years.

The city has appealed the decision.

“Fitch will continue to monitor these developments and the city’s efforts to regain balanced operations, noting that an inability to absorb the additional costs slated for next year and further delays in the restoration of satisfactory reserves will result in a rating downgrade,” Murray wrote.

Still, there are some bright spots in the city’s overall economic picture, the Fitch report notes.

Infrastructure and commercial development projects, along with a “generally improving” unemployment picture and booming tourism industry, bode well for the city going forward, it says.

A $1.9 billion medical complex and several new retail developments are under construction.

What’s more, the tourism industry, one of the cornerstones of the local economy, recorded record spending of $6 billion in 2012, the report notes.