Markets & Finance

The Gulf's Lingering Pain


Last season's hurricanes decimated Louisiana's economy, had severe effects on the entire Gulf region, and sent ripples across the nation. In the Gulf, damages added up to well above the previous record of $43 billion (in current dollars) from Hurricane Andrew, which blasted South Florida in 1992. The recovery has moved slowly, particularly in Louisiana, where New Orleans lost about $6 billion of economic output in 2005. The pain is not yet over. Despite the city's halting steps toward recovery, that amount may double in 2006.

Aside from tourism and conventions, the major regional industry most severely slammed by the hurricanes was oil-and-gas production, especially at the 115 offshore rigs knocked out by Katrina and Rita. Crude-oil production in the Gulf of Mexico remains 24% lower than its pre-Katrina levels.

TAX CHALLENGE. Ironically, because of record-high energy prices, hurricane-related disruptions, airline consolidations, and a mild winter, the U.S. actually saw a 0.3% contraction in petroleum demand in 2005 -- the first decline since 2001. "For now, the U.S. has been able to import enough crude oil to provide sufficient supplies, though at higher prices," says Standard & Poor's economist Beth Ann Bovino. That counts as a plus for the national economy but comes as little solace for the local one, where ruined rigs await the labor and equipment to repair them.

Since the hurricanes, metropolitan New Orleans has endured both a shrinking labor force and rising unemployment. According to government statistics, the workforce has declined 32%, to about 428,000 people, while the unemployment rate has shot up to 8.2%, from 5.8%. That rate is, however, far below the level in November, 2005, when it hit 17.5%.

To make matters worse, the city still has no plan for how it will assess and collect property taxes. We believe that in April or early May local officials may begin to nail down a solution.

While the hurricanes have cost the Gulf region dearly, their impact on the nation's economy has been surprisingly modest, with fourth-quarter GDP still managing to rise at an annual rate of 1.64% after a strong third quarter. The slow pace of building and reconstruction in the Gulf hampered growth in the quarter.

"The reconstruction ultimately will show up as an increase in GDP, but more slowly than after previous hurricanes, because of the need to fix New Orleans' levee system," says Bovino.

ARRAY OF FUNDING. Debt relief may soon arrive for the battered region. A second special session of the Louisiana legislature recently refined plans for debt relief in the state's fiscally precarious parishes, municipalities, and special tax districts.

The state has approved the use of Gulf Opportunity bonds, which will help ameliorate the destruction from last year's hurricanes. No one can get access to these these funds yet, however, and won't until the state lays down guidelines for their use.

The $7.6 billion in funding originates from the federal government (the bond will be tax-exempt), and will be funneled through the state, which will actually do the borrowing. Mississippi and Alabama are preparing similar plans.

Gulf Opportunity bonds fall into three categories:

Tax credit bonds.

Louisiana has authorized about $200 million of these to lend to at-risk local issuers in order to prevent default.

Advance refundings.

Some local issuers have already refinanced debt, but under provisions of existing federal law are allowed to do so only once. Now, if they need to restructure debt a second time, they will have access to Gulf Opportunity bonds in this category. This is a special opportunity for these affected issuers.

Private activity bonds.

The largest share of the Gulf Opportunity bonds will fall into this category. The debt will go toward housing and economic development once guidelines come from the states. These bonds are similar to the Liberty Bonds issued in New York State after the terrorist attacks of Sept. 11, 2001, which have been used -- some say misused -- to jump-start private development in New York City.

Another key piece of the economic recovery puzzle: the tourism business. Although putting on a successful Mardi Gras constituted the first hurdle to overcome in demonstrating that New Orleans' prime source of revenue -- hotel and sales taxes -- can revive, much more needs to happen before major conventions arrive in pre-hurricane numbers.

The city has far fewer hotel rooms and restaurants than it did before the hurricanes. City officials put the number of rooms in metro New Orleans at 28,500, 26% fewer than before Katrina, while the number of restaurants has fallen 63%, to 2,476 establishments. And while the city's convention center plans to reopen for business in June, it expects only about one-quarter the number of pre-Katrina conventions in 2006.

RECOVERY WORKERS. We believe that in the near term, this important sector will continue to face constraints caused by labor shortages, with many potential employees unable to find housing. But at least one prime New Orleans venue appears on the rebound.

The B-rated Louisiana Stadium & Exhibition District will soon issue debt to restructure its liabilities and rebuild the damaged, currently unusable Superdome. The local NFL franchise, the New Orleans Saints, has already announced it will play there in the 2006-07 season.

"But the bond security is dependent on hotel tax receipts," says Fraser. "It's a big question where that will come from as recovery workers begin to leave." Those workers occupy thousands of rooms in area hotels, whose fortunes will depend, in part, on whether they can replace government-paid guests with a regular retinue of tourists and conventioneers.

On the Mississippi Gulf coast, where casinos counted as big contributors to the state economy, the situation looks better. The Isle of Capri, Imperial Palace, and Palace Casinos have already reopened with temporary facilities. Three other casinos are working to reopen by September, 2006, with a fourth targeting the end of 2006.

In December, Harrah's Entertainment (rated BBB-) agreed to sell its Grand Casino Gulfport to Gulfside Casino Partnership (unrated), which owns the nearby Copa Casino. Whether tourists are seeking the glitz of the casinos or the grit of the Crescent City, they can't come back too soon for the battered region.


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