Markets & Finance

The Gulf Coast, After the Deluge


Six months after Hurricanes Katrina and Rita, the revelry of Mardi Gras in New Orleans in early March was more than just a colorful respite from the Gulf Coast's agonizing slog toward normalcy. It was also an indicator of how the Crescent City and surrounding areas may fare as rebuilding proceeds.

"Over the next 6 to 10 weeks, we believe that the Gulf region, and New Orleans in particular, will face critical choices in deciding how to rebuild infrastructure, restore the tax base, and whether to refinance some troubled public sector debt," says Standard & Poor's public finance analyst Alexander Fraser.

The turnout for the pre-Lenten street bash -- sparse by historical standards, but otherwise successful -- showed that the city, even in its shrunken state, can at least provide minimal support to its important tourist, visitor, and convention sector as hotels, restaurants, and police services seemed to be in place and working well.

But in the coming months much more will be needed if New Orleans and the other municipalities pummeled by the hurricanes are to regain their financial footing. Among the most pressing issues:

Housing.

Dwellings are a desperate necessity. No homes mean no workers mean no tax revenues. We believe that in Louisiana (S&P credit rating, A) and Mississippi (AA), homeowners might soon find federally funded programs available to pay for their ruined houses.

That would facilitate reconstruction either by clearing land for redevelopment or by allowing residents to rebuild and get their homes back on the tax rolls. What rebuilding is occurring is largely on a hit-or-miss basis, constrained by availability of materials, payment of insurance claims, and the availability of skilled labor.

Debt restructuring.

Once a winner emerges from the city's Apr. 22 mayoral election, New Orleans and some other financially battered public sector issuers in the area might decide if, and how, to restructure hundreds of millions of dollars in debt. While many of the region's public issuers are insured, the ratings on much of their debt have been lowered since the storms, and the near-term outlook for some is grim.

Questions remain about whether these borrowers, some of whom are in special tax jurisdictions supported by dedicated revenue streams, can return to the markets, given the erosion in their revenue bases.

Transportation.

Although Hurricane Katrina hit more than six months ago, it may take many more months for the future of the region's most important transportation facilities to become clear. For all practical purposes these facilities have been in operation for three months or less.

Federal aid.

And last, the federal government so far has allocated $88 billion in aid to the region. Much of that has been spent on emergency assistance. Standard & Poor's expects that federal aid will total $100 billion when all recovery and reconstruction funds are added up.

Perhaps the biggest wild card in New Orleans' recovery will be the mayoral election, postponed once by Governor Kathleen Blanco because of the disarray in the city. If no one in the crowded field receives 50% of the vote, a runoff will be held on May 20. We believe the overriding issue will be incumbent Mayor C. Ray Nagin's handling of the disaster and its aftermath.

We also think that many reconstruction initiatives will not begin in earnest until the city's leadership is determined. The election should be one of the most unusual ever, with candidates campaigning not only in the city but also among displaced residents living in other cities and states.

The mayor is facing a field crowded with challengers, and issues of class and race will undoubtedly affect the outcome. For one thing, the mayor is black, while two of his leading opponents are white. And since the storms, New Orleans' demographics have shifted.

In general, those returning to the city have been its more affluent, white residents. At the same time, some African-Americans worry that they will be pushed out of the next New Orleans. We believe that whatever the state and city decide about rebuilding cannot be solidified until there is a clear mandate about New Orleans' leadership.

STILL PAYING TAXES.

At the same time, there is good news for some localities where the influx of residents from the worst-hit areas has boosted population and tax revenues. Officials in St. Tammany Parish, northeast of New Orleans, estimate that population there has risen by 60,000 people since Katrina. That has brought more money to the parish, they say, with sales tax revenue up 50% during the same period.

And the influx of displaced persons has helped boost tax revenues in the state capital of Baton Rouge, where property prices (and by extension property tax assessments) have risen, while federal aid is expected to help offset the costs of dealing with evacuees from metro New Orleans.

While much attention has been focused on the plight of displaced persons in far-flung cities such as Houston and Atlanta, in truth, thousands of those who left the battered Gulf Coast have stayed in the state, where their spending and purchases have buoyed tax revenues.

HOPE FOR STABILITY. We continue to believe that the recovery of the region, and of New Orleans in particular, will be a difficult process for all stakeholders. It will be complicated by competing claims for land use, political leadership, and federal funding. But some of those issues should begin to be resolved in the next few months.

If public issuers in the region achieve the fiscal stability they are aiming for, and residents regain their homes and jobs, then perhaps Mardi Gras 2007 will be not just another dry run for the future but a full-tilt celebration.


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