New Orleans, the Louisiana city rebuilding after Hurricane Katrina collapsed its levees, extended maturities of about $15.5 million in debt to March 2013 through a loan from JPMorgan Chase & Co. to avoid additional budget cuts.
JPMorgan was the only company willing to finance privately, said Lisa Daniel, a managing director at Public Financial Management in Memphis, the city’s adviser. It offered a 5.95 percent rate, the lowest among five banks New Orleans talked with, she said. The previous interest was 5 percent. The refinancing will add about $924,000 in debt-service costs over two years, she said.
“What they’re doing is irresponsible,” said John Kennedy, Louisiana’s Republican treasurer and chair of the State Bond Commission. “All the city is doing is pushing the payment of debt into the future, instead of dealing with it today. It’s a very dangerous precedent.”
The move delays payments on the 1998 bonds for 15 months. About $7.5 million of debt service would have come due on Dec. 1 without the refinancing. All six members of the Democrat-dominated City Council voted in favor of the plan on Nov. 17, and it passed the bond commission 9-3, said Kennedy, who voted against it.
‘House in Order’
New Orleans Mayor Mitch Landrieu, a Democrat, inherited a $100 million budget deficit when he took office in May 2010, said Andy Kopplin, the city’s chief administrative officer. The city has cut spending from $528 million in 2009 to $488 million this year, he said.
“We’ve done all the things that you can do to get your fiscal house in order, but we have this lingering $25 million deficit,” Kopplin said. “A modest restructuring of that debt can be easily managed.”
Tom Kelly, a spokesman at JPMorgan’s commercial bank, declined to comment.
Private placements allow issuers to bypass a public sale and registration with the U.S. Securities and Exchange Commission. The debt doesn’t get rated, which may attract municipalities with lower credit grades.
The approval came two weeks after Moody’s Investors Service put $699 million of New Orleans debt on review for possible downgrade, citing audited fiscal 2010 results that fell “significantly below expectation.” The company rates the city’s general-obligation debt A3, the fourth-lowest investment grade.
Similarly rated one-year notes yield 1.09 percent, five basis points below the 2011 average, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
New Orleans has a history of relying on so-called “one-shot” revenue sources, or non-recurring income such as funding from the Federal Emergency Management Agency, said Robyn Rosenblatt, a senior analyst at Moody’s who covers the city.
With a payment deadline of Dec. 1, the city waited until the last minute and didn’t consider other options, Kennedy said. Revenue anticipation notes, which are short-term securities, might have saved taxpayers’ money, he said.
The decision to refinance through a private placement “was mostly a timing issue” because the city could not obtain a rating on the debt and draft an official statement fast enough, said PFM’s Daniel.
Revenue-anticipation notes “clearly would have been less efficient,” she said. “It would have incurred a whole lot of debt-service burden and would be viewed negatively by the rating agencies.”
Hurricane Katrina, the most expensive natural disaster in U.S. history, killed at least 1,330 people in Louisiana and Mississippi in 2005. About 85 percent of New Orleans flooded after levees collapsed. The storm surge extended as far as 10 miles inland, displacing almost 200,000 residents, a congressional report in February 2006 found.
The population of New Orleans declined by more than 140,000 residents, or 29 percent, from 2000 to 2010, Census Bureau data show. It is still the most populous city in Louisiana, with about 344,000 residents.