Fitch Rates Louisiana Public Facil Auth's (Hurricane Recovery Program) $300MM Revs 'A-' Underlying.

NEW YORK -- Fitch assigns an underlying rating of 'A-' to $300 million Louisiana Public Facilities Authority revenue bonds (Hurricane Recovery Program), series 2007. The bonds are scheduled to sell later this month through negotiation with a syndicate led by Morgan Keegan & Company, Inc. The bonds are expected to be sold with credit enhancement. Fitch also affirms its 'A-' ratings on outstanding Louisiana appropriation-backed bonds, as well as the 'A' rating on outstanding state General Obligation (GO) bonds. The Rating Outlook is Stable.

The 'A-' rating is based on the credit quality of the State of Louisiana, as bonds are secured by annual legislative appropriations from the general fund, pursuant to a cooperative endeavor agreement. The authority has pledged such appropriations to the trustee. The state has other such agreements that support debt obligations. Oversight and control mechanisms are in place. The state division of administration analyzes the agreements and covenants to seek appropriation for debt service funds annually. Approval of the state bond commission, consisting of the state's major elected officials, is required, and a state official monitors disbursements of bond proceeds.

The Hurricane Recovery Program is designed to provide the City of New Orleans and the New Orleans Sewerage and Water Board with upfront funding to undertake projects that have been approved for full or partial Federal Emergency Management Agency (FEMA) reimbursement. FEMA will only reimburse for monies spent, and the strained financial situations of the city and board have delayed the start of many post-hurricane rebuilding and recovery projects. Bond proceeds will be used for a wide range of such projects, with about two-thirds going to the city and about one-third to the board. All subsequent FEMA reimbursement monies will go to a trustee-held fund to pay for additional projects of the city and the board; these monies are not pledged to bondholders and are not expected to be used for bond repayment. The bonds are scheduled to mature through fiscal-year (FY) 2027.

Fitch downgraded Louisiana's GO bond rating to 'A' from 'A+' in December 2005 following the devastation caused by hurricanes Katrina and Rita. Subsequent positive financial developments resulted in Fitch's revision of the Rating Outlook to Stable from Negative in August 2006, and positive trends have continued since that time. The state has maintained sizable financial balances and realized exceptionally strong revenue collections, bolstered by high oil & gas and hurricane recovery-related revenues, although it remains to be seen how much of the recent revenue strength is sustainable over the long term. There has been economic recovery, albeit slow in the New Orleans area that was most affected by the storms. The state is working to address an estimated $3-5 billion deficit in its homeowner assistance program, which was expected to be funded entirely from federal sources. The GO rating continues to recognize strong legal provisions for GO debt. Credit strengths have always been tempered by volatility inherent in the state's energy-reliant economy.

The state's current financial position is strong. After severely lowering state-source general fund revenue estimates following the hurricanes, revenue estimates were revised upward repeatedly in FY2006. Final results were well above both fiscal FYresults and pre-hurricane estimates for the year. The state ended the year with a surplus of about $827 million. In FY2007, revenue estimates once again were revised upward on several occasions. Final FY2007 state general fund revenues are now estimated at about $8.7 billion, more than $1.3 billion above May 2006 forecasts for the year. The year-end surplus is estimated at about $1 billion.

An expansive FY2008 budget included spending increases for state employee pay raises and additional headcount, as well as increased spending for Medicaid and higher education. The budget also included numerous new tax cuts and credits, many of which will not impact the budget until FY2009. General fund revenues are projected to rise 1% compared to FY2007.

Before Hurricanes Katrina and Rita, the 1.3 million people residing in the New Orleans metropolitan area made up nearly 30% of the state's population and about one-third of state employment. Following the hurricanes, there were large population losses in New Orleans and some growth elsewhere in the state. The current population of New Orleans is estimated to be about two-thirds of pre-hurricanes levels.

State employment dropped 1.3% in 2005 and another 1.9% in 2006; however, growth has resumed and state employment is now close to pre-hurricane levels. August 2007 nonfarm employment was 2.7% above a year prior, with New Orleans area employment up 3.8%. Historically low state unemployment rates (4% in 2006, 87% of the U.S.) reflect labor force declines. Louisiana's personal income declined 8.7% in 2005, but rose 20.4% in 2006. Personal income per capita in 2006 ranks 40th among the states at 86% of the U.S., a relatively high level for the state.

Progress in the recovery of New Orleans has been limited. Implementation of the state's $7.5 billion 'The Road Home' housing program, designed to be funded through federal community development block grant and hazard mitigation monies, has been very slow. The program offers homeowners up to $150,000 per home to repair, rebuild, or relocate, with a substantial penalty for relocating out of Louisiana. With many more applications than expected, the program is now estimated to have a deficit of $3-5 billion. The state has identified $1 billion to offset this deficit, and is asking the federal government to fund the remainder.

State debt levels are moderate. By policy, debt issuance is well controlled. Funding of the state's two largest pension systems is low at 64.3% (state employees) and 67.5% (teachers) as of June 30, 2006.

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