Markets & Finance

Can the Crescent City Come Back?


From Standard & Poor's RatingsDirect

It's an anniversary to be observed, but not celebrated. A year after Hurricane Katrina battered the U.S. Gulf Coast on Aug. 29, 2005, it has proven to be one of the costliest and deadliest storms in U.S. history. Katrina's wrath spread across 100 miles and caused more than $81 billion in damages. Levees separating lakes Pontchartrain and Borgne from New Orleans were breached, flooding about 80% of the city and many areas in neighboring parishes. Katrina also changed the lives of thousands, leaving many people homeless and many businesses shuttered.

State officials set a $5.9 billion price tag to repair the shattered local government infrastructure, of which $640 million is ineligible for FEMA reimbursement. The Louisiana Department of Labor estimates that 196,700 jobs were lost due to hurricanes Katrina and Rita. Of that number, an estimated 83,600 were lower-wage workers who might require workforce housing in order to return to the job. An estimated 81,000 Louisiana businesses were closed due to both hurricanes, and to date, 62,000 have reopened. In terms of sales-tax collections, these changing demographics have both positive and negative implications for Louisiana's local governments.

BIG SHIFTS. After Katrina, many evacuees from Orleans, St. Bernard, and Plaquemines parishes fled to other areas across the southern U.S., and to neighboring cities and parishes in Louisiana, including Baton Rouge, East Baton Rouge Parish, St. Tammany Parish, St. John the Baptist Parish, and Lafayette.

"The economic impact of the hurricanes on local governments has varied widely, with some parishes and cities experiencing strong population and tax growth and others severe losses," says Standard & Poor's credit analyst Wendy Wipperman. The U.S. Census Bureau estimates that Orleans Parish lost 225,000 residents, or nearly 50% of its population, while St. Bernard Parish lost 46,000 residents, or 71% of its population. Meanwhile, St. Tammany Parish gained about 15,000 residents and Baton Rouge's population increased by roughly 34,000.

The population shift meant an increase in sales-tax revenues. However, local governments with increased populations and tax revenues haven't seen ratings upgrades, says Wipperman, "because it's still too early to tell if those evacuees will become permanent residents, or if the increased level of economic activity and resultant growth in sales tax collections are a temporary phenomenon or represent an expanded economic base."

Much of the media's attention has been on Katrina's catastrophic effect on New Orleans. In the first of a two-part report, Standard & Poor's will examine the Crescent City's recovery. (Part Two, to be published later in the week, will examine how other areas in Louisiana are faring.)

UNCERTAINTY. New Orleans' economy, heavily dependent on tourism and convention business, has been devastated. New Orleans has welcomed back an estimated 230,000 residents, or roughly 50% of its pre-Katrina population, and many businesses are back up and running. As of August, 2006, less than half of former New Orleans electric customers, and natural gas customers, have resumed service, according to Entergy New Orleans. Replacement housing remains a critical need -- the Louisiana Recovery Authority estimates that 204,700 homes were destroyed statewide.

Standard & Poor's lowered its ratings on New Orleans' general obligation debt to B from BBB+ and limited-tax GO debt to B- from BBB on Nov. 10, 2005, and removed them from CreditWatch with negative implications. The rating outlook on all bonds is now "developing," which indicates the rating might be raised, lowered, or maintained within two years.

"A rating in the B category means an obligation is vulnerable to nonpayment, but that the rated entity currently has the capacity to meet its financial commitment on its obligations," says S&P credit analyst Alex Fraser. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on its obligation, he adds. "Given the severe economic dislocation and the uncertainty over the restoration of viable, sustainable economic and revenue performance, there's no question that long-term credit fundamentals are now lacking."

DEPLETED CITY. In addition to New Orleans' credit rating, S&P took negative rating actions on the New Orleans Exhibition Hall Authority's hotel occupancy bonds that are secured by hotel tax revenues, lowering the underlying rating to B from A-, and the New Orleans Exhibition Hall Authority's special tax bonds, lowering the underlying rating to B from A. At the same time, the bonds were removed from CreditWatch with negative implications.

"It has been apparent that New Orleans will have to cope with not only the immediate property damage but also a significant displacement of residents in the region, causing a far-reaching, but still unknown, effect on the regional economy and local government revenue bases," says Fraser. "While people are returning and limited governmental services are being provided, we recognize that full economic recovery, however that might be defined, will take years."

As of June, 2006, there were 183,800 fewer people employed compared with June, 2005, representing a 30% decline in employment in the New Orleans metropolitan statistical area (MSA). Orleans Parish sales-tax collections for the state fiscal year ended June, 2006, were $61.72 million, or 23% lower than sales-tax receipts for the prior fiscal year. The critical tourism and convention industry is making a slow comeback, and it remains to be seen whether the city will be able to attain pre-Katrina tax and income levels. As of August, 2006, about 27,000 of the city's 38,000 hotel rooms were reopened.

WORKFORCE CONUNDRUM. New Orleans' Morial Convention Center sustained damage from Katrina. Exterior repairs are 99% completed and management expects interior repairs and renovations to be completed by late October or early November, 2006. Despite the damage, conventions are returning to New Orleans. So far this year, the city hosted the American Library Assn.'s annual conference in June and the annual convention of the American Psychological Assn. in August.

Should the city's post-Katrina population shifts take hold over the long-term, S&P believes its tourism and convention economy may be seriously affected. These industries, which are the main generators of tax revenue in New Orleans, require a large and relatively low-paid workforce with easy access to downtown. However, many of the neighborhoods where these workers lived have been completely devastated.

It's still unclear how this conundrum can be solved. Until these industries are back to full strength, they will need fewer workers. But until they have an adequate workforce, the industries can't operate at pre-Katrina strength.

Next: A look at how other Louisiana parishes are faring one year after Katrina.


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