Fitch Rates New Orleans, Louisiana's $75MM GOs 'BBB-'; Outlook Stable.

NEW YORK -- Fitch assigns an initial 'BBB-' rating to New Orleans, Louisiana's (the city) $75 million public improvement bonds, series 2007A. Fitch also assigns the 'BBB-' rating to the city's $470 million in outstanding general obligation (GO) debt. The Rating Outlook is Stable. The bonds are scheduled to be sold competitively on Oct. 30. Public Financial Management, Inc. in Atlanta is the city's financial advisor.

The bonds are general obligations of the city, secured by and payable from unlimited ad valorem taxes levied against all taxable property within the city. Proceeds will be used to finance various capital improvements within New Orleans.

The 'BBB-' rating reflects improving taxable values and property tax collections in the city, as well as the independent authority of the Board of Liquidation as the local agency that has exclusive control of all matters related to the issuance of general obligation and limited tax debt, including levying taxes for debt service. Negative credit factors include the significant challenges that New Orleans faces as it continues its economic and financial recovery from the events following Hurricane Katrina in 2005. While progress has been made, Fitch finds that gains in most critical areas such as housing, employment, public safety, healthcare, and education has been very slow to materialize and the city faces years of recovery ahead. However, with the recovery gradually gaining traction, Fitch expects that the large amount of recovery and rebuilding money that is expected to flow into the city and surrounding area will stabilize and ultimately boost the economy.

The most recent estimates put the city's population at between 270,000--275,000, or approaching 2/3 of the pre-storm total. Daytime estimates are higher, as the housing shortage has forced many former residents to commute into the city for work from other parishes in the region. While employment levels in the metropolitan area have shown a gain of nearly 4% over the past year, they remain more than 15% below pre-storm levels.

The federal Road Home Program is largest of the numerous federal and state financial assistance efforts and targets the most pressing need in post-Katrina New Orleans--housing. Until recently the program has been mired in administrative delays, and only in recent months has the number of closings begun to accelerate; the most recent program totals cite roughly 64,000 closings, or about 1/3 of the total number of applications. However, officials now fear that the program may not adequately fund needs, as the number of applicants has greatly exceeded original projections.

The city's economy continues to recover, but at an uneven pace. Tourism is estimated at roughly 60% of pre-storm levels, and the number of hotel rooms in the metropolitan area now exceeds 80% of the more than 38,000 rooms that existed before the storm. Bookings at the Morial Convention Center are climbing, but remain well below pre-Katrina totals. Taxable values have rebounded to a degree, climbing nearly 15% in 2007 following a drop of more than 20% in 2006. Property tax collections also have improved--for 2007 current collections totaled about 85% of the levy amount, which is approaching historical averages. Fitch also considers the recovery at Port of New Orleans a positive credit factor; total cargo tonnage has largely returned to pre-storm levels, driven primarily by bulk cargo such as iron and steel. However, container traffic remains well below earlier levels, due to damage at the port's container terminal facilities.

Substantially weakened infrastructure and service delivery systems remain impediments to future economic gains, as the city struggles to hire and retain police officers, and the criminal justice system continues to function with facilities and staffing below pre-Katrina levels. Also, the city estimates that only 50% of pre-storm hospital beds currently are available in the area. Long-term improvement is evident in the U.S. Department of Veterans Affairs' and Louisiana State University partnering to construct a $1.2 billion medical center in downtown New Orleans; the projected completion date is 2011. While 80 charter and non-charter schools opened for the 2007-08 school year in the city, 59 schools remain closed. The state took over the majority of public schools in the city from the long-troubled Orleans Parish School Board after the events following Hurricane Katrina.

Not surprisingly, the city's financial profile has weakened since the events following Hurricane Katrina. Virtually all general fund revenue sources declined sharply in the final quarter of 2005, impacting results for the entire year. Operating revenues declined nearly 20% for all of 2005, contributing to an operating deficit of more than $75 million. Intergovernmental aid, primarily in the form of a federal community disaster loan of more than $60 million, helped the general fund report net income of nearly $14 million for the year. Liquidity declined sharply, with general fund cash and investments totaling less $7 million at the end of 2005, down from more than $40 million the prior year.

Federal aid contributed significantly again in 2006 and 2007, and current projections indicate the general fund has maintained adequate reserve levels each of these years. Liquidity appears to have stabilized, with the general fund reporting cash and investments of more than $140 million at August 31, 2007. General fund expenditures were budgeted for a 13% increase in 2007 from preliminary 2006 totals, with the city placing emphasis on public safety, infrastructure repair, and hiring and retention of employees. The city's long-range financial forecast anticipates the general fund will regain structural balance by 2011.

The city's direct debt burden is relatively high at roughly $3,800 per capita and 7% of estimated market value. Outstanding debt includes GO and certain limited tax bonds, certificates of indebtedness, and loans and leases. The total also includes $137.6 million from two federal community disaster loans. These two notes mature in 2010 and 2011, although there are provisions for extension of the repayment period. The pace of principal repayment of the city's GO debt is below average at about 35% in ten years.

New Orleans' near term capital needs are sizeable at roughly $1 billion through 2011, with public works comprising the largest share at about $725 million. City officials are hopeful that federal assistance and insurance proceeds will finance 80% of these needs, with the city picking up the remaining $200 million. The city's capital program received a boost recently with the issuance by the Louisiana Public Facilities Authority of $300 million in revenue bonds, two-thirds of which will be used for infrastructure repair for Federal Emergency Management Agency (FEMA) eligible projects in New Orleans. These bonds will be repaid from annual state appropriations, freeing up FEMA reimbursement money for additional projects.

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