New Orleans, LA. New Issue - Moody's Assigns A3 to New Orleans', LA GO Bonds; Outlook is Stable. CREDIT OPINION 7 September 2016.

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1 CREDIT OPINION New Issue New Orleans, LA New Issue - Moody's Assigns A3 to New Orleans', LA GO Bonds; Outlook is Stable Summary Rating Rationale Contacts Sarah Jensen Analyst sarah.jensen@moodys.com Denise Rappmund VP-Senior Analyst denise.rappmund@moodys.com Moody's Investors Service has assigned an A3 to the city of New Orleans' $50 million General Obligation Refunding Bonds, Series 2016 and $70 million Public Improvement Bonds Series At the same time, Moody's affirms the A3 on outstanding unlimited tax debt, totaling $602 million post-sale as well as the A3 on the 2012 limited tax bonds and 1997 limited tax Audubon Commission bonds. The A3 reflects the city s continued economic recovery supported by a growing tax base and improved financial position, as well as the elevated long term liabilities. The rating also incorporates the city s planned reserve draw in fiscal 2016, ongoing budgetary pressures stemming from long term liabilities, aging infrastructure, consent decrees and litigation, compounded by its limited revenue raising flexibility. Additionally, the rating considers the city s below average wealth levels and labor force growth. The lack of rating distinction between the unlimited tax and limited tax debt reflects the ample revenues generated by the limited tax levy and the debt service reserve for the Series 2012 bonds. Exhibit 1 Recent Surpluses Drive Improvement in Reserves Reflects the reserves of the operating funds which includes the General Fund and Debt Service Fund. Source: New Orleans CAFRs, Moody's Investors Service Credit Strengths Large tax base continues to grow supported by strong tourism economy, institutional presence, and regional importance

2 Trend of operating surpluses with improved reserves Recent efforts and settlements have moderated expenditure growth Credit Challenges Elevated fixed costs due to high debt burden and moderate pension liabilities Ongoing budgetary challenges to accommodate full pension payments and consent decree related expenditures with limited revenue raising flexibility Below average wealth levels Employment concentration in tourist related sectors can cause volatility through economic cycles; heightened risk of natural disasters Rating Outlook The stable outlook reflects the expectation of continued stable credit fundamentals supported by a growing economy and management s willingness to maintain adequate reserve levels and balanced operations despite budgetary challenges. Factors that Could Lead to an Upgrade Demonstrated ability to maintain balanced operations and stable reserves while accommodating fixed costs and consent decrees Continued trend of positive financial performance Moderation of debt burden Factors that Could Lead to a Downgrade Inability to manage budgetary pressures resulting in structurally imbalanced operations and deterioration of reserves Significant debt issuance absent tax base growth This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key Indicators Exhibit 2 Operating Funds include the General Fund and Debt Service fund. Source: New Orleans CAFRs, Moody's Investors Service Detailed Rating Considerations Economy and Tax Base: Large Tourist Economy Sees Growth The city's economy will continue to see growth but remains exposed to the volatile tourism industry. Primary industries include tourism, transportation and trade, health care, and higher education. In 2015, tourism continued to improve with the airport reporting a record number of visitors, and visitors spending a record $7.05 billion in the city. The city's transportation and trade networks remain strong as a new $800 million terminal project is underway at the airport, new flights have been added, and shipping and cruise activity at the port continues at healthy levels. One exception is Chiquita which will be moving operations back to Gulfport, MS, and represented 2.5% of total general cargo last year. Multiple institutions of higher education and health care help provide stability to the economy. Assessed valuations for the city have seen steady growth, averaging 5% annually over the past five years. As of tax year 2016 which is a reassessment year, the city's assessed values grew 6.1% over the prior year to $3.5 billion with an estimated full value of $29.5 billion. The housing market has seen strong price appreciation with officials reporting 14% annual growth in Significant ongoing development with the city should support continued assessed valuation growth. Projects underway include a Veterans Affairs hospital, ammonia plant, hotel redevelopment, and improvements of public infrastructure at the airport, water and sewer system, and schools. The tax base is relatively diverse with top taxpayers, which include several hotels, a utility, and banks, comprising only 10% of the base. The city continues to see population gains, but wealth levels remain a challenge. Though the population has increased 13% since the 2010 census to 389,617, it still remains below the pre-katrina population of about 455,000. Wealth levels have remained stable relative to the US with median family income estimated at 73.9% of the US as of the 2014 American Community Survey. Poverty levels are high at 28%. The labor force within the city has continued to grow but unemployment remains somewhat high at 6.8% as of June 2016 compared to 7.0% for the state and 5.1% for the nation. Financial Operations and Reserves: Improved Reserves but Continued Budgetary Challenges New Orleans' financial position will remain satisfactory though challenged by ongoing expenditure pressures and limited revenue raising flexibility. Following three consecutive surpluses, the city's General Fund financial position has improved to a positive position following several years of deficit balances and is certainly a credit positive. Ongoing budgetary pressures to accommodate full pension payments, consent decree expenditures, and various other needs will be met with limited revenue raising flexibility. The ability of the city to maintain structurally balanced operations and adequate reserve levels while fully addressing expenditure pressures will be a key focus in future reviews. 3

4 Recent surpluses can be attributed to strong revenue growth relative to conservative assumptions and a significant $36 million onetime settlement in fiscal year 2015 from BP (A2 positive). The city has not historically made the full contributions to the pension plans which also contributed to the surpluses. In fiscal year 2015 (ended December 31), the city realized a $32.6 million surplus in the General Fund driving an improved ending available reserve of $75.3 million or 11.8% of revenues. Operating reserves continue to be healthy given historically strong balances in the debt service fund managed by the Board of Liquidation. Total available operating reserves as of 2015 were $150.6 million or 20.7% of revenues. Fiscal year 2016 performance year to date remains in line with budget which includes the use of reserves for one time needs. The primary driver of the projected $16.5 million draw is the use of $15 million toward firefighter back pay as part of a settlement with the firefighters' union in October A small portion of the 2015 BP settlement was used for a grant application that resulted in a sizeable award. Revenue collection is in line with the budget, with year-to-date revenues exceeding last year by $14.6 million. Expenditures on the whole are in line with budget as well though officials report possible additional funding will be needed for the sheriff's department. Importantly, the budget does include fully funding the firefighter pension plans. Officials project an ending General Fund balance (which excludes smaller funds included in the audited General Fund) of $54.4 million for fiscal year 2016 (9% of budgeted revenues) compared to $69 million for fiscal year Budgetary preparations for fiscal year 2017 are underway and include more modest revenue growth projections and continued budgetary pressures largely driven by retirement, public safety, and consent decree costs. In anticipation of a softening of the economy and normalization following strong sales tax growth driven by new retail, the city is projecting only 2.4% in overall revenue growth. The city has limited revenue raising flexibility as ad valorem and sales taxes must be approved by voters. Voters rejected a new 7.5 mill levy proposed in April 2016 which was to include 5 mills for police and 2.5 mills to help fund the firefighter back pay and retirement contributions. Officials will be approaching voters again in December for the 2.5 mills for firefighters to alleviate the pressure of accommodating the full required contribution and making back pay payments. The city is anticipating modest revenue growth from increased parking rates, increase sanitation collection rates, and the legislature's authorization to collect local taxes on certain events held within the city. Increased public safety and retirement expenditures absent revenue growth will continue to challenge the city moving forward. The city projects to maintain at least 5.5% of revenues assigned in the General Fund balance for emergencies over the next five years. The ability to maintain structurally balanced operations while incorporating increased expenditures could place positive pressure on the rating. LIQUIDITY The city's liquidity position remains adequate though weaker than fund balances due to interfund receivables, however this had moderated over time. As of fiscal year 2015, the General Fund cash position was $55 million or 8.6% of revenues. Operating funds, including the Debt Service Fund, had a cash position of $131.9 million or a healthy 18.2% of revenues. Debt and Pensions: Elevated Long Term Liabilities with Moderate Issuance Plans An elevated debt profile and moderate pension liabilities will continue to drive high fixed costs for the city. Post sale, the city will have $602 million in outstanding unlimited tax debt, $195 million in outstanding limited tax debt, $59 million in state loans issued to fund debt service payments post Katrina, and an additional $29 million in various obligations. The total net debt of $884 million equates to an above average 3% of the tax year 2016 estimated full value. The $70 million in public improvement bonds are being issued out of the April 2016 voter authorization for $120 million for primarily streets, roads, sidewalks, buildings, and fire equipment. The city anticipates issuing the remaining $50 million in The city's capital improvement plan is largely funded by grant revenues and annual operations. Officials report the primary capital need is roads as approximately 65% of the cities roads have been rated in poor condition. A $1.3 billion lump final settlement awarded by FEMA in December 2015 will address the city's road needs for the next five to six years. The Board of Liquidation, City Debt provides oversight for the city's unlimited tax debt. Members of the board include the mayor and two at-large councilmen as ex-officio members and six members appointed by the mayor and confirmed by the council. All ad valorem taxes levied by the Board of Liquidation, City Debt and collected by the city for the payment of general obligation bonds must be transferred daily to the Board of Liquidation, City Debt per statute. The Board has the authority to enforce imposition and collection of 4

5 sufficient taxes for the payment of debt service upon a failure of the City Council to do so. Additionally, the Board has the authority to bill and collect taxes itself, although this is not currently envisioned. DEBT STRUCTURE All of the city's debt is fixed rate and amortizes over the long term with the exception of the Series 2004 variable rate revenue bonds ultimately supported by the General Fund. The variable rate bonds reset weekly with a maximum rate of 12% and have a letter of credit with Capital One Bank. Payout of outstanding general obligation and limited tax debt is below average with 60.1% of principal retired within ten years. Officials anticipate level debt service for the new public improvement bonds. Moody's rates two series of the city's limited tax debt. The Series 2012 bonds are secured by the city's constitutional millage limited to mills subject to reassessment. The levy generates approximately $49 million in revenues relative to the maximum annual debt service (MADS) of $17.1 million. Additionally, the Series 2012 bonds benefit from a debt service reserve fund funded at 50% of MADS. The Series 1997 Audubon Commission limited tax bonds are secured by a limited millage of 0.32 mills subjected to reassessment and mature on December 1, The levy generates approximately $1.1 million relative to the payment of approximately $385,000. DEBT-RELATED DERIVATIVES The city is not party to any swap or derivative agreements. PENSIONS AND OPEB New Orleans' pension and OPEB obligations will continue to drive high fixed costs and budgetary pressures as the city adjusts to contributing at the full actuarial requirements. The city has four single-employer pension plans, the Employees' Retirement System, two plans for Firefighters (new and old which is closed), and a closed police plan. The City also participates in the Municipal Police Employees' Retirement System, which is a statewide cost-sharing plan. The city's contributions to the Municipal Police plan are set by state statute. The city has historically contributed below the actuarial requirements, with its most significant shortfalls related to the new firefighters plan. In fiscal year 2015, the city contributed $88.4 million across all plans, up from the $74.3 million contributed in As part of the settlement with the firefighters union, the city agreed to annually contribute the full actuarially required amount for the new plan beginning in fiscal year Moody's fiscal year 2015 adjusted net pension liability (ANPL) for the city is $1.4 billion compared to the reported liability of $961 million. The ANPL is an above average 1.9 times operating revenues and an elevated 4.6% of estimated full value. Pension contributions in 2015 exceeded the estimated tread water payment of $65 million. The tread water indicator measures the annual government contribution required to prevent the reported net pension liability from growing, under reported assumptions. The city contributed approximately $924,000 to its fiscal 2015 other post employment benefits (OPEB) cost of $14.7 million. The City currently funds its OPEB obligation on a pay-go basis. The Unfunded Actuarial Accrued Liability (UAAL) for OPEB benefits at fiscal yearend 2015 was $192 million. The city's fixed costs, including debt service, total pension contributions, and OPEB obligations, totaled a sizeable $201.6 million, or an elevated 27.7% of operating revenues, in fiscal Excluding the one time revenues from the BP settlement, fixed costs were 29.2% of operating revenues. Management and Governance The city has a Mayor-Council plan of government. The Mayor, as the chief executive officer, is elected for a four-year term. The Council consists of five members elected from districts and two members elected at large, all for four-year terms. Over the last several years, management has taken prudent steps to address operating pressures, cut expenditures to balance the operating fund budget, and acknowledges a commitment to maintaining reserves. Future reviews will continue to examine management's ability to maintain reserves while fully funding annual pension obligations and addressing other expenditure needs. Louisiana cities have an institutional framework score of Aa, or strong. Property taxes and sales taxes are the major revenue sources for cities, which in sum are moderately predictable because property taxes are highly predictable but sales tax collections (60% of revenues) are economically sensitive. Cities have a moderate revenue-raising ability to increase both property and sales taxes with 5

6 voter approval. Cities expenditures are primarily for personnel and public safety, which are highly predictable. Cities have moderate expenditure-reduction ability. The absence of bargaining units is offset by highly elevated fixed costs, including debt and pension liabilities. Legal Security Both the refunding bonds and public improvement bonds are secured by an unlimited tax and full faith and credit pledge. Use of Proceeds The proceeds of the General Obligation Refunding Bonds, Series 2016 will be used to refund Series 2007A bonds for net present value savings without extension of maturity. Proceeds from the Public Improvement Bonds Series 2016 will be used for various street, sidewalk, and building improvements. Obligor Profile New Orleans was founded in 1718, incorporated in 1805, and with an estimated population of 390,000 is the largest populated city in the state. The city is located in the southeastern portion of the state and lies along the Mississippi River near the Gulf of Mexico. The city's economy is driven by tourism, trade, health care, and higher education. Though the city's population has not returned to prekatrina levels, multiple indicators suggest continued economic recovery. Methodology The principal methodology used in this rating was US Local Government General Obligation Debt published in January Please see the Ratings Methodologies page on for a copy of this methodology. Ratings Exhibit 3 New Orleans (City of) LA Issue General Obligation Refunding Bonds, Series 2016 Rating Type Sale Amount Expected Sale Date Rating Description Public Improvement Bonds, Series 2016 Rating Type Sale Amount Expected Sale Date Rating Description Rating A3 Underlying LT $50,000,000 09/15/2016 General Obligation A3 Underlying LT $70,000,000 09/15/2016 General Obligation Source: Moody's Investors Service 6

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