In The News › Candidates offer plans for N.O. financial crisis

Apr 16, 2006

Source: Times-Picayune

Candidates offer plans for N.O. financial crisis

Candidates offer plans for N.O. financial crisis
Bankruptcy isn’t an option for most
Sunday, April 16, 2006
By Gordon Russell
Staff writer

Never in New Orleans’ modern history has a mayoral election been held amid so much fiscal
anxiety, what with recent projections showing that the city may run out of cash in May, within
weeks of the victor taking the oath of office.

The situation is so bad that two watchdog groups, the Bureau of Governmental Research and
the Public Affairs Research Council, recently issued a joint report urging the city to seriously
explore bankruptcy as an option.

For aspiring mayors, the city’s budget woes present a conundrum. While challengers can always
make hay by complaining about what a hash the incumbent has made of things, a pledge to
explore bankruptcy isn’t the sort of campaign plank that makes voters misty-eyed. That’s
especially true in the humbled New Orleans of today, where — at least judging by the campaign
rhetoric — the populace craves a bit of positive news, rather than more muttering about how the
city is on a fast train to Palookaville.

Of the major candidates, only lawyer Virginia Boulet, who is well behind in recent polls, talks
seriously about the possible benefits of bankruptcy. Boulet believes it’s foolish for city leaders to
rule it out: A frank discussion will encourage the city’s creditors to renegotiate the city’s debts,
she said.

Among the front-runners, Mayor Ray Nagin has been most dismissive of the notion of
bankruptcy in particular and of the city’s gloomy financial outlook in general. Nagin has noted in
many debates that certain revenues — sales taxes especially — are trending upward more quickly
than expected, and he has downplayed the idea that the city won’t be able to pay its debts come
May.

Getting a big loan

Nagin’s plan centers on landing a $150 million loan his administration is seeking through a
consortium of local and foreign banks. Nagin has expressed optimism that the loan — which
would be due in three years — will materialize, though the answer may not be known until after
the primary election.

Even if the loan comes through, the city’s budget woes won’t disappear; rather, New Orleans will
have bought more time to get back on its feet. The hope shared by Nagin and some of the
bankers is that the city would stop running a deficit within three years; at that time, the loan
would be renegotiated on terms more favorable to the city. By that time, Nagin and other
optimists believe, the city will be riding a huge construction boom.

The other two front-runners in the mayoral sweepstakes, Lt. Gov. Mitch Landrieu and Audubon
Nature Institute chief executive Ron Forman, have stuck mostly to safe, general statements
about how they would approach the city’s financial predicament.

The Landrieu and Forman plans are similar in many ways. For instance, both men say their first
priority would be to more accurately assess the city’s financial health. Forman says he would
“bring in the best fiscal managers in the country.” Landrieu says he would “get a turnaround
team in there to make quick and accurate assessments” about the budget.

Both men also say they would aggressively seek more federal and state aid, and both want to
renegotiate bank debt. Landrieu has said he’d try to get Congress to amend the Stafford Act,
which governs disaster relief spending, to allow FEMA to pay for normal operations of city
government.

What to cut

Forman and Landrieu both offer doses of government jargon to explain how they’d rebuild the
city’s budget. Forman calls his plan “zero-based budgeting,” meaning that every department
would have to justify its budget from scratch. Landrieu has a similar idea with a different tag: His
“budgeting for outcomes” involves starting with a clean slate and spending money where it’s
most needed and where it provides the best returns.

Forman and Landrieu both have suggested that certain city departments may need to be pared
back, but they are both circumspect about which ones might get put on the chopping block.
“I don’t think you can make that decision without going through the process,” Landrieu said.
Both, however, say that police, fire, sanitation and emergency services would be the top
priorities, a position echoed by nearly every major candidate.

There are a few differences, however slight, between Landrieu and Forman when it comes to the
city’s financial plight. In some cases, the differences come down to tiny distinctions in their
verbiage.

In Landrieu’s view, “stripping down” city departments is “not optimal,” while Forman seems more
resigned to the notion that cutbacks, however painful, are inevitable.

Forman calls taking out a new loan a “last resort” and “a risky thing to do,” while Landrieu
sounds more hopeful that the city will receive the line of credit Nagin is seeking, noting that
“some smart people” think the city can pay it back.

Landrieu has floated the notion of creating a “recovery district” for the city, which might involve
selling bonds that would be paid down with a dedicated penny of sales taxes. He emphasized
that the move would not involve a tax hike.

Bankruptcy? Well . . .

Forman, meanwhile, touting his success at raising money for Audubon, has spent much of his
stump time talking up the idea of creating new charitable organizations that would raise private
money to help supplement city services — grass-cutting on neutral grounds, for instance, or
recreation programs. If the plan worked, some functions traditionally performed by the city could
be scaled back, Forman said.

Both men tiptoed around the subject of municipal bankruptcy.

“It’s the last resort, but it has to be considered,” Landrieu said. “But the approach of getting close
and bringing in our creditors may not be a bad idea.”

Forman agrees. “We can’t ignore the possibility” of bankruptcy, he said, while making clear that
it’s not an option he wants to trumpet. “I would hope we could get off the negative and get on the
positive,” he said. “If we keep talking about how the city’s destroyed, it’ll never come back.”
If the front-runners’ plans for dealing with New Orleans’ fiscal crisis are vague, some opponents
less averse to political risk have offered more detailed visions.

Lawyer and businessman Rob Couhig, for instance, is adamant that the city budget must be
pared back drastically. While Nagin’s layoffs cut City Hall spending by about a third, Couhig says
he believes the cuts should be commensurate with the city’s population loss, which he estimates
at two-thirds. He has also floated ideas that would cost more money, like keeping City Hall open
24 hours.

“We have to draft the budget so it fits the actual population base,” Couhig said.

In part, Couhig said, he would accomplish such cuts by focusing city services and spending on
Algiers and the area west of the Industrial Canal. Most departments would come in for cuts, he
said, the exceptions being those that deal with public safety and rebuilding, such as the safety
and permits department.

Some other options

His opponents are being Pollyannas, Couhig said, adding that borrowing more money when the
city is already deep in the hole would be folly.

“You never want to borrow money to pay your mortgage,” he said.

Couhig also claims that the sale of little-used city property could help generate as much as $100
million, a figure he said he got from Beth James, Nagin’s former economic development director,
who he said is advising him. Among the possibilities for sale, Couhig said, are parcels near Louis
Armstrong International Airport and near Dillard University, along with the former City Hall annex
on Canal Street.

If Boulet were elected, one of her first moves would be to sit down with the city’s creditors to see
if deals could be worked out.

“We have almost $500 million of debt for a convention center that has almost no conventions,”
she said. “Nearly every penny of our property taxes now goes to service pre-Katrina debt, in
many cases for assets that are no longer serviceable.”

Other government entities have benefited by at least talking about and sometimes going through
bankruptcy proceedings, and usually their predicaments were homegrown. New Orleans’ wasn’t,
she said.

Ruling out bankruptcy is “a terrible negotiating mistake,” Boulet said, adding that a frank
conversation with creditors would probably produce some concessions.

Fiscal reality

Raising taxes is not an option, Boulet said, because higher taxes could discourage people from
coming back. Instead, she’s proposing to sell revenue bonds, which would function as sort of a
loan program financed through a fee collected from borrowers.

Residents who needed money for rebuilding or to buy blighted properties would essentially sign
up to pay a fee of $1,200 per year that would be added to their property tax bill for the next 20
years, she said. In return, the resident would receive a loan of, say, $20,000.

Because the fee would be deductible from federal income taxes, Boulet said, the system would
provide residents with “incredibly cheap money.”

Former City Councilwoman Peggy Wilson said one of the biggest problems with trying to come
up with solutions to the city’s budget crisis is that the underlying fiscal reality hasn’t been brought
into the sunshine.

“I would want to have an auditing firm come in and look at the numbers first,” Wilson said.
But Wilson doesn’t see bankruptcy as a real option because the city has too many assets, she
said.

If elected, Wilson said, she would pare back city government drastically, but like Couhig she’d
spare public safety and departments that deal with rebuilding, including the Planning
Commission and the Vieux Carré Commission.

“The budget needs to be cut to the bone, to the absolute minimum,” she said.
But her cuts would be handled differently than those executed thus far by Nagin, she said.
“The way I understand it is the mayor fired all the people who do the work and kept all the people
at the top, the political appointments,” she said. “That’s not acceptable.”

Wilson also said she’d privatize certain functions of government, such as grass-cutting.
“We should bid those things out so we get a good price,” she said. “There’s ways to do this so
there’s competition, and you encourage entrepreneurial activity at the same time.”

Tax-free city

The signature plank on Wilson’s platform is her plan to designate New Orleans as a “tax-free
city” for at least five years. During that time, government operations would be paid for by
federally backed bonds that would be retired after the tax-free status expires, she said.
While Wilson said the idea would create a boom in the city, opponents and some outside
observers have said the tax-free city would get weak support in Congress.

The Rev. Tom Watson, who is running a long-shot populist campaign, did not return phone calls
seeking clarification of his position.

In general, Watson has said he would focus on getting the federal government to acknowledge
its failures in protecting New Orleans from flooding and demand that it compensate the city fully
as a result.
. . . . . . .
Gordon Russell can be reached at grussell@timespicayune.com or (504) 826-3347.

Apr 16, 2006

Source: Times-Picayune

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