New Orleans gets negative outlook from Fitch ahead of deal

Fitch Ratings lowered the outlook on New Orleans’ A bond rating to negative from stable ahead of its planned sale this week, citing the city’s rising actuarially determined contribution to pension funds.

The outlook change affects $716.8 million in outstanding bonds, $183 million in planned Series 2024A tax-exempt bonds, scheduled for competitive sale at 10:30 a.m., Eastern time on Wednesday, and $17 million in planned Series 2024B taxable bonds, scheduled for Wednesday at 11.

PFM Financial Advisors is the financial advisor on both series of bonds. Series 2024 has serial maturities through 2053 and is callable Dec. 1, 2033, at par, while the Series 2024B matures on Dec. 1, 2024, according to the preliminary official statement.

New Orleans general obligation bonds are rated A2 by Moody’s Investors Service and A-plus by S&P Global Ratings, both with stable outlooks.

The bonds could price a little wider to the triple-A scale because of the negative outlook, said CreditSights Senior Municipal Strategist Pat Luby, but as a result may attract significant interest from market participants interested in lower-rated investment-grade bonds.

With much of New Orleans below sea level, it remains at risk for flooding from extreme weather, Luby said. Its tourism-based economy increases potential future flooding’s impact, he added.

In Fitch’s announcement on Friday, it said it was particularly concerned about the Firefighters’ Pension and Relief Fund, which could “diminish both the long-term liability burden and financial resilience.” The FPRF has a very low assets– to– liabilities ratio of 9%, Fitch said. It also noted the actuarially determined contribution is expected to increase due to the use of a risk-free rate in the latest actuarial valuation.

Fitch said the city has limited budgetary flexibility and would likely maintain general fund reserves at a minimum of 10% of spending.

However, the city’s population is shrinking and its populace has weak demographic and economic level metrics, while the city has an elevated long-term liability burden, Fitch said.

In a report S&P issued Friday, it pointed to similar credit challenges but somewhat different credit strengths in justifying its A-plus rating. It said the city had “very strong, robust, and increasingly diversified economy, buoyed by numerous special events and festivals a year;” strong budgetary performance which is expected to weaken in the next couple of years, and very strong budgetary flexibility.

S&P said the city has a $1.05 billion pension liability and a $303 million other post-employment benefit net liability.

Moody’s said the city’s economy will “continue to strengthen as tourism remains strong,” but in a downturn, tourism revenues can be volatile.