Fiscal progress seen in New Orleans as bond offering nears

Some observers say the New Orleans government is improving its finances as it nears selling new bonds for operating expenses this summer.

"There has been clear progress on the budget as the deficit is being reduced," said Joseph Krist, publisher of Muni Credit News. "While the remaining $100 million gap is big, it is surmountable. It is positive that the gap has been closed by addressing both sides of the ledger ? lower expenses and higher revenues.

"The mayor is clearly holding up her end of the bargain," Krist said of Helena Moreno, a former city council member who took office as mayor in January after winning election in October. "It would be a real disappointment if the state does not approve the city's proposed cash flow financing."

Cumberland Advisors Chief Investment Officer John Mousseau was more cautious. He said short-term interest rates are likely increasing and this puts the city in a difficult situation. "The new mayor, Helena Moreno, certainly has her work cut out for her. The city has dug into its reserves and that really needs to stabilize."

The city needs to get Federal Emergency Management Agency reimbursements, Mousseau said. "Longer term, they need to get a budget that fits the slower revenue flows into the city."

In the months since a financial crisis emerged in September, Louisiana State Auditor Mike Waguespack has been overseeing the city's actions and controlling its spending of a recent revenue anticipation note. "Things are going extremely well," Waguespack told The Bond Buyer.

He said he had expected the city to take four years to achieve a healthy fund balance but the city has basically achieved it in six months. In May the city sold a lease for a hotel to an investor for $103 million and this puts its fund balance in good shape, he said. The city is ready to handle any emergencies like hurricanes.

For the long term, the city is looking at generating money through rolling forward property taxes and/or increasing sales taxes, Waguespack said. The mayor is likely to make proposals on these lines soon, he said. The city is also examining shrinking certain departments. Some of these would be recurring measures to address the city's financial situation.

The city is also taking steps to improve sales tax collections, he said.

The city has downsized by about 200 people and is furloughing its employees one day for every two weeks, Waguespack said. It is vigilant on using overtime only when necessary and reducing travel.

The city is also looking at saving money through bringing emergency medical services in house and at generating more money through increasing sanitation fees for residences, Waguespack said.

Earlier this month the city council approved an offering of $110 million in bonds to generate operating funds.

The city became aware it had a problem in October when city council members including Moreno discovered the city didn't have enough money to make payroll at the end of the calendar year. The city's fiscal year corresponds with the calendar year. In response to the problem, the council approved the sale of a $125 million revenue anticipation note.

In November Waguespack said the city would probably have to return to the bond commission for between $75 million and $100 million in RANs in August or September.

Instead, the city now plans to sell $110 million in long-term bonds, with the bonds having final maturity no later than 2046.

Without the bond sale, the city would run out of money in September, New Orleans Chief Administrative Officer Joe Giarruso told WWL Radio New Orleans earlier this month.

The city will seek the approval of the Louisiana State Bond Commission for the $110 million bond at the July 16 meeting.

In the fall, State Treasurer John Fleming, who serves as chairman of the commission, said as a condition for a bond a fiscal administrator should be appointed for the city.

Ultimately, city officials were able to get Fleming and Louisiana Attorney General Liz Murrill to reduce their demands before they approved a city borrowing. All parties agreed that Waguespack would advise the city on its finances for the time being and would have control over disbursements of proceeds from the $125 million revenue anticipation note.

Fleming didn't immediately respond to a request for a comment on how he thinks New Orleans is doing or whether he will support the city executing a new borrowing. Murrill declined to comment.

Assuming the $110 million bond sale goes ahead, J.P. Morgan Securities is to be the lead underwriter and Raymond James & Associates and Siebert Williams Shank & Co. are to be the co-managing underwriters. PFM Financial Advisors and CLB Porter are the co-municipal advisors. Foley & Judell and Auzenne & Associates are the co-bond counsel.

The bonds are to be paid back through proceeds from the city's property taxes.

New Orleans is rated Baa2 with a negative outlook by Moody's Ratings, BBB-plus with a negative outlook by S&P Global Ratings and A-minus with a negative outlook by Fitch Ratings.

"As for the longer term, so much depends on the national economy and continued demand from tourists," Krist said. "Given the difficult hand the mayor was left with and uncertain state support, the city's current position reflects the importance of the will of the city to reform."

Mousseau said higher oil prices driven by the war on Iran would reduce tourism from those who would otherwise drive or fly to the city.

In early May S&P released a report on the city's general obligation bonds saying the BBB-plus rating and negative outlook "reflect our view of New Orleans' reliance on one-time solutions to meet cash flow requirements and are inconsistent with the financial management and performance of higher-rated entities."

S&P said it expects the city to continue to use one-time measures but also attempt to address its structural deficits in the next two years.

As examples of one-time solutions, S&P cited the use of long-term borrowing for immediate cash flow needs, transferring fund balances from outside agencies, reallocating fund balances originally designated for capital needs.

On a more financially sustainable basis, the city is also working to aggressively work on receivables owed the city, addressing property tax and fee revenue collections and exploring the expansion of certain fees, S&P said. The city has newly implemented internal controls on department expenditures, particularly on public safety overtime which has been financially troublesome in recent years.

This city "has a history of management projections not meeting actual audited results. In our view, the city's flexibility to implement structural solutions to the budget gap is limited by, among other things, constraints on revenue-raising flexibility that require legislative support to change, and significant political and practical hurdles to meaningfully reducing recurring expenditures."

S&P said as of June 30, 2024, the city had $194 million in available reserves, equal to 23.9% of general fund revenue. It said unaudited figures show a $136.1 million deficit in fiscal 2025 "and we expect final audited 2025 futures to show another significant decline in reserves."

The city has "elevated liabilities, with short-term maturities that could further pressure cash and significant future debt plans," S&P said. Pension liabilities are substantial and the firefighter plan, in particular, is a credit risk.

While the city's financial management practices have improved with Moreno's assumption of power, they still remain weaker than those of other similar sized cities, S&P said.. On a positive note, the city "has Louisiana state officials on site providing oversight on expenditures, assisting the city with analytical support and providing strategic advice, which we consider credit positive."

Fitch Ratings Director Emmanuelle Lawrence said the spending cuts along with the additional revenues and the sizable lump sum payment from the renegotiated lease agreement are material developments.

"Material improvement to the city's reserve levels and evidence that the city has regained fiscal stability will be key to removing the Rating Watch Negative," Lawrence said. "An improved view of the city's financial resiliency is tied to a longer trend of stable operations and available general fund reserve levels at or above 7.5% of operating expenditures net of transfers."

The Moreno administration didn't respond to questions for this story.