Money is city's biggest worry
Government could go broke in a month
Sunday, April 16, 2006
By Jeffrey Meitrodt Staff writer
When John Kallenborn sits down with a group of bankers to talk about a big loan he's trying to put together, he is usually 99 percent certain that he's got a deal by the time he leaves the room.
But when the New Orleans president of Chase Bank walked into New Orleans City Hall on April 6, Kallenborn knew he was facing a much tougher room. Though he had talked his bosses into lending the city $50 million, Kallenborn wasn't sure any of the other 10 lenders at the meeting would be willing to take a piece of the city's proposed $150 million debt placement.
"We think there is more than a 50 or 60 percent chance, but we're not at our usual 99 percent just because of what has happened to the city," said Kallenborn, who remains the only banker who has committed to helping the city through its current financial crisis.
It's not hard to understand why other banks are skittish about doing business with New Orleans, which needs the money to pay for police, firefighters and other basic functions. Although Mayor Ray Nagin likes to talk about how New Orleans is bouncing back more quickly than he thought it would last fall, his government will run out of money next month without another major infusion of cash.
And things won't get better anytime soon. Under the most optimistic scenario, the city's revenues won't catch up with expenses until 2009 at the earliest, and even then, Kallenborn acknowledged, the recovery "does not get real robust."
The problem, according to financial experts, is obvious. Though city officials have already slashed spending by a third and laid off 2,400 workers, New Orleans' current population of around 200,000 simply can't pay for the services -- and carry the accumulated debt -- of a city that was more than twice as large before Hurricane Katrina.
Bailout isn't expected
Sales taxes, which provide the city's largest source of revenue, are projected to decline from $151 million in 2004 to $69 million in 2006, largely because the city's tourist economy is still a shambles. Officials also are projecting huge declines in revenue from property taxes, sanitation service fees and parking meter fines.
The city's problems are so dire that two government watchdogs recently urged local officials to consider seeking bankruptcy court protection, which would allow New Orleans to reorganize its finances without worrying about paying its current debts.
Ironically, bankruptcy experts say the city's problems may be too large to make bankruptcy an attractive option. They said the city needs the kind of bailout that allowed New York City to remain solvent during its financial crisis in the mid-1970s.
"What they really need is significant state aid and federal payments to help them get back on their feet," said Myron Orfield, a law professor at the University of Minnesota who specializes in public finance. "If they just depend on the city's devastated tax base to do these things, it will be very hard to recover."
But so far, it doesn't look like much relief is on the way. The city has already spent almost all of the $120 million it obtained through the federal government's Community Disaster Loan program -- the maximum amount allowed by law.
And while state and federal officials have put together a $400 million fund to help pay down the debts of local governments that were hurt by Katrina, that would only fill a small hole in the city's budget.
In 2006, New Orleans is facing a cash shortfall of $146 million. Of that, $41 million is already going to debt service, said Peter Kessenich, an Atlanta financial consultant who has worked with the city for many years.
Not since the Depression
Kessenich hopes to persuade the city's lenders to voluntarily cut the annual debt load to about $10 million per year, but he said those discussions are still in the preliminary stages. When asked what the city will do it if can't obtain new loans and shrink its current deficit, Kessenich was pessimistic.
"Tell everybody who comes back to pick up their own trash?" he suggested. "I don't know. I'm sure we could figure out a way to make it work, but it's not going to be pretty."
Although other cities have gone through severe economic downturns, financial experts said the United States hasn't seen this kind of trouble since the Great Depression, when Congress first passed bankruptcy laws that made it possible for communities to obtain the same kind of financial relief already available to individuals and corporations.
Since those laws were passed 72 years ago, however, fewer than 500 communities have actually sought bankruptcy court protection. Experts said there probably would have been a lot more but for the steep barriers placed along the road to a municipal reorganization.
One of the biggest hurdles is political. After the city of Bridgeport, Conn., filed for bankruptcy court protection in 1991 over the objections of the state, Congress passed legislation that required state authorization of any such move.
In Louisiana, that means city officials would need to get the approval of the governor, the attorney general and the State Bond Commission. And state Treasurer John Kennedy, chairman of the bond commission, has already said he would do everything in his power to block the city from filing for bankruptcy.
"If a single political subdivision takes bankruptcy in Louisiana, it will have ramifications for every other political subdivision, including the state, when that entity goes to borrow money," Kennedy said. "And obviously, we are going to have to borrow money as part of the rebuilding process."
Watchdogs keep barking
Kennedy said he has been making his position known for months to the financial community through a series of weekly conference calls.
So far, city officials are doing everything they can to kill talk of bankruptcy. Nagin has said there is no need for such a step, and his financial advisers said they aren't even considering the option.
But if Nagin is defeated in the upcoming election, there's no telling what his successor might do. To keep the option on the table, the Bureau of Governmental Research and the Public Affairs Research Council recently issued a report that urged local officials to take another look at the idea.
"For a devastated community, continuing to shoulder pre-Katrina debt loads and obligations may interfere with its ability to create the conditions needed for recovery," said the report by the two watchdog groups. "In that context, bankruptcy is a legitimate line of inquiry and should be evaluated."
Though the groups did not take a position for or against using the bankruptcy law, the report complicated the city's efforts to obtain the $150 million loan, Kessenich said. The report was issued the day before the bankers' meeting at City Hall.
"The timing of that report was terrible," Kessenich said. "The people we've been talking to have raised it as a discussion item. I don't think the concept of bankruptcy is going to be a deal-killer, but if they thought the city would file bankruptcy, they'd probably walk."
The April 6 meeting was the culmination of nearly four months of work to place $150 million in new debt for the city, he said. The meeting lasted about four hours and was led primarily by Reggie Zeno, the city's finance director. Nagin also spoke for an hour, Kallenborn said.
Banks are hesitant
"The city's message was: We project we are going to be out of money by the end of May. We need to buy some time so the city can rebuild, repopulate and regain some financial footing. Please help us," Kessenich said.
Kessenich declined to identify the banks, but Kallenborn said the group included most of the major banks in the New Orleans area and several large foreign banks.
"Some of the banks helped cities in Europe recover after World War II, so a lot of these banks have a history of helping municipal governments after crises," Kallenborn said.
Originally, the banks were supposed to tell the city whether they were going to participate in the debt placement by Monday, but that date was pushed back a week, to the Monday following the election, Kessenich said.
He said the delay was requested not by the mayor but by the banks, which wanted more time to study the proposal. Under the proposed terms of the deal, the city would not have to pay anything on the loan for three years, at which time the city can restructure the debt and extend the due date again, perhaps with new lenders.
Kallenborn said two participants have recommended the deal to their banks, but, he added, "that doesn't necessarily mean anything."
Kallenborn said his bank agreed to finance $50 million of the loan because it believes in the rosier economic scenario that was presented on April 6. He said that feeling is backed up by years of research by a unit of the bank that analyzes how communities around the world have come back from disaster.
"Frequently, economic activity in a community is greater the year after the storm than the year before the storm because of the boom in construction expenditures," Kallenborn said. "The city of New Orleans is a little dicier, because its budget was disproportionally based on the tourism economy. But we are real believers, long-term, in New Orleans."
Debt isn't the problem
Kallenborn doesn't see how bankruptcy would help the city. "New Orleans doesn't have a debt problem, it has an operating revenue problem," he said.
"If we go bankrupt, that means we don't have to pay $40 million in debt service this year," Kessenich said. "What does that fix? We now have a $100 million hole in the budget, instead of $140 million. And we still have to collect the garbage, pay the police and provide basic city services. How does bankruptcy help with that?"
It doesn't, bankruptcy experts said.
"I don't see what the gain would be for New Orleans," said Roy Bahl, dean of the Andrew Young School of Policy Studies at Georgia State University in Atlanta and an expert in public finance.
In fact, Bahl said, bankruptcy could have "terrible long-run consequences, because it may close doors at a time when the community wants to redevelop itself."
It would also greatly limit the power of local elected officials, Orfield said. In other communities that have gone bankrupt, courts have installed financial control boards that dictate how every penny is spent. He said that leaves little room for local input.
"When you subject yourself to these kinds of controls, you limit the discretion you have to do the things you want or feel you have to do," Orfield said. "You have to negotiate with someone who is above you in the structure of things, and that may not be a person . . . who has the sensitivity or the life experience of the people who live there."
Kennedy said he has a better idea of how to help the city. For several months, he has been urging Gov. Kathleen Blanco to sell the remaining 40 percent of the state's tobacco settlement to help pay for hurricane recovery efforts.
In a November letter to the governor, he estimated that the state could generate about $850 million by turning the settlement into negotiable securities, and $300 million more by refinancing its outstanding tobacco bonds, which were sold in 2001 to pay for improvements to education and health care.
Kennedy said that money could be used to create a loan pool for cash-strapped local governments to draw on to pay for their basic services.
"We would monitor it to make sure that it was used for providing the fundamental services that a city has to offer in order for people to live there or come back to live there," Kennedy said. "We are talking meat and potatoes here -- keeping policemen on the beat, paying firemen, public works crews. There are no frills here."
So far, however, the governor hasn't responded to the proposal, Kennedy said.
"If we wake up in a month or three months or six months and the city of New Orleans is out of money, we have to be prepared to act," Kennedy said. "My plan will allow us to act quickly. I wish the governor would embrace it. If the governor has a better plan, I'll embrace that. But I haven't seen it."
Blanco's chief financial adviser, Commissioner of Administration Jerry Luke LeBlanc, said the governor has met with Kennedy several times to discuss various ways of helping hurricane-ravaged communities, but he said the administration is not prepared to back Kennedy's idea of using the tobacco settlement money for relief efforts.
One problem, he said, is that the proposal requires a statewide vote on a constitutional amendment that would allow the government to create such a fund, and no such vote could take place until September.
"We are more concerned about giving local entities short-term stabilization as opposed to waiting for the fall," LeBlanc said. "You can't put your eggs in that one basket, because if the voters don't approve it, it is going to be too late" for New Orleans.
LeBlanc said that sense of urgency explains why the governor is moving quickly to set up the Gulf Tax Credit Bonds program, which was authorized by Congress last year and creates a $400 million fund for debt relief.
But as local officials point out, that won't go very far in curing New Orleans' troubles. Kennedy said he has found a legislative sponsor for his tobacco proposal, and he hopes the bill moves quickly through the current session.
It will be a hard sell without Blanco's backing, lawmakers said.
"I don't know if the support is there to do that statewide," said state Rep. Steve Scalise, R-Jefferson. "And if the governor doesn't support a plan like that, it would have a very poor chance of passing."
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Jeffrey Meitrodt can be reached at firstname.lastname@example.org or (504) 826-3497.