February 26, 2006
New Orleans Running Out of Options as It Scrambles for New Loans
By GARY RIVLIN
NEW ORLEANS, Feb. 25 — Somehow, some way, at some point in the future, city officials here will need to pay back all the money they are borrowing. In the meantime, though, the Mardi Gras parades must still be protected, the police must still patrol the streets and the garbage must be picked up.
And so, even though the city has already racked up $120 million in debt, officials here are scrambling for loans of as much as $200 million more so that New Orleans can continue to pay its bills through the end of the year.
"We can't keep borrowing money," said Oliver M. Thomas Jr., the president of the New Orleans City Council. "But the need for fire protection doesn't just go away. At some point, we need to rebuild our parks and restart recreation programs as children and families start coming back."
Youth programs, however, are the least of the city's problems right now. With its credit rating downgraded to junk-bond status, it is not clear how the city will even find the money to maintain its most critical services, like police and fire protection. Though the city has already laid off nearly half its work force, New Orleans still needs $150 million to $200 million in 2006 to fill the huge hole that Hurricane Katrina blew in its budget, said Reginald Zeno, the city's finance director.
The lost revenues include tens of millions of dollars in property taxes that will go uncollected in a city in which more than 80,000 homes, according to state estimates, were severely damaged or destroyed. With more than half of New Orleans's populace still living elsewhere, sales tax collections are less than half of last year's levels.
"We put together a bare-bones budget last fall, but we still don't have the resources to fund it," Mr. Zeno said.
Mardi Gras should provide some relief. Crowds were sparse through the first weekend of the eight-day festival, which resumed Thursday and continues through Tuesday, but officials here remain optimistic that it will prove a boon to the economy and, by extension, the city coffers.
Yet even a healthy Mardi Gras would provide only temporary relief to a city that has been falling deeper into debt with each passing week.
The federal government is one potential source of money, Mr. Zeno said, but the city has already borrowed $120 million from the Treasury, and any more will require Washington to lift its ceiling on such loans.
Commercial banks are another option. But even before Hurricane Katrina, New Orleans had a subpar BBB+ debt rating. Since the storm, the rating has been "severely downgraded" to a B, which is junk-bond status, said Alexander M. Fraser, an analyst at Standard & Poor's, the bond rating agency. The low rating makes it much harder to receive commercial loans.
J. P. Morgan Chase, which has a large presence in New Orleans, is working to raise a $150 million line of credit on the city's behalf. The company has agreed to commit $50 million of its own money, said Donald E. Wilbon, who leads the firm's public financing group in the southeastern region, but whether other banks will take the same risk remains unclear.
"It's a challenge putting together a syndicate given the situation here," Mr. Wilbon said. Typically a city would secure such a bond using future property tax collections as collateral, but the reliability of those revenues is just one more unknown in this city where so many big questions remain unanswered.
"It's a dire situation," said Janet R. Howard, chief executive of the Bureau of Governmental Research, a nonprofit policy organization based in New Orleans.
One thin ray of sunshine in an otherwise dreary picture are sales tax collections, which Mr. Zeno described as "a little more robust than we were initially projecting." But good news is relative in a city suffering through what some have dubbed the worst municipal financial crisis in the nation's history.
The city collected $5 million to $6 million a month in sales taxes in the last quarter of 2005, Mr. Zeno said. That compares with the $12 million to $13 million it averaged each month before the hurricane, which covered about one-third of the city's pre-storm $470 million operating budget.
The sales tax, which includes a tax on hotel rooms, is now the city's primary source of revenue, Mr. Zeno said.
Mardi Gras should produce at least a modest increase in the February sales tax figures, Mr. Zeno and others said, with hotels fully booked.
Several large hotels, including the Ritz-Carlton and the Fairmont, are still closed, but there are still about 20,000 hotel rooms housing guests. (Roughly half of those are occupied by insurance teams, contractors, news organizations and others taking up temporary residence here.) The city receives $1.50 for every $100 spent on a local hotel room.
According to one recent study, Mardi Gras usually contributes roughly $16 million to the city coffers, even after subtracting police overtime, garbage pickup and other additional costs associated with the festivities. But of course this is anything but a typical year.
Echoing a sentiment expressed by others, J. Stephen Perry, president of the Metropolitan Convention and Visitors Bureau, predicted that Mardi Gras would generate 50 percent to 60 percent of the economic activity of past years. But he is not worried so much about today as the time between Fat Tuesday and the city's Jazz and Heritage Festival, which starts in late April.
"We're really going to struggle this spring," Mr. Perry said. The city was scheduled to play host to 70 major conventions this year but instead will hold only 15.
Unlike the federal government, which habitually spends more than it collects, state and local governments must balance their annual budgets. The city has laid off most of its planners, building inspectors and demolition employees, said Deputy Mayor Greg Meffert, at a time when their services are needed more than ever.
"I don't know what else we can cut when we've already laid off all these people whose skills we could use right now," Mr. Meffert said. The city has 20 percent fewer police officers today than before Hurricane Katrina, and 9 percent fewer firefighters.
Shortly after the storm, the city received a $90 million public assistance grant from the Federal Emergency Management Agency. In October it borrowed $120 million under a $1 billion emergency federal loan program Congress set up in the wake of Hurricanes Katrina and Rita.
That represented the maximum New Orleans could receive under FEMA's rules — a limit set at 25 percent of a city's pre-disaster revenues. So while President Bush has proposed setting aside an additional $400 million to help local governments devastated by the storm, the city would not be permitted to borrow any more money unless granted an exemption.
The city is lobbying the federal government to bump that limit to 50 percent so it can borrow another $120 million. One advantage in borrowing from the federal government, Mr. Zeno said, is that "those terms are much more favorable to us than a private bank loan."
Another advantage is there is always a chance the city will not have to pay the money back.
"We're going to ask Congress at some point to forgive these loans and make them grants," said John Neely Kennedy, the state treasurer.
The state could also prove a lifeline for a city in need of cash. This month state lawmakers approved participation in a federal loan program that would let the state borrow $200 million on behalf of local governments — as long as the state provides a dollar-for-dollar match. Gov. Kathleen Babineaux Blanco has endorsed the proposal, but it is still not clear where the state, which is struggling through budget woes of its own, would find the matching funds, Mr. Kennedy said.
"We're better than we were, but we're not well yet," he said. "Parishes, particularly New Orleans, still need help."