In The News › Experts disagree on N.O. bankruptcy

May 8, 2006

Source: New Orleans CityBusiness

Experts disagree on N.O. bankruptcy

Experts disagree on N.O. bankruptcy
by Deon Roberts
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New Orleans is handling its financial situation like a boxer reeling from an uppercut to the chin.

In the eight months since Hurricane Katrina, city government has been staggering along, trying not to land face first on the mat.

Roughly two-thirds of the city’s pre-Katrina population of 460,000 has yet to return, which means taxes and other revenue collections are far below normal.

In 2005, taxes accounted for $211 million of the city’s $375-million general fund.

In March, the city collected $22 million in taxes, only 22 percent of year-ago receipts, although sales tax collections have been rising every month this year.

The city recently predicted a $168-million deficit in this year’s budget.

Next year doesn’t look much better: The projected general fund budget for 2007 anticipates a $140-million deficit.

As a result, Mayor C. Ray Nagin cut expenses and 3,000 city jobs. The 2006 budget is $118 million compared with $472 million in 2005.

How quickly people and their tax dollars will return is unknown. In the meantime, debates have centered on what the city should do to pay for basic services.

Some suggest the city file for bankruptcy, an idea explored in an April report issued by two government watchdog groups, the Bureau of Governmental Research and the Public Affairs Research Council of Louisiana.

“Municipal bankruptcy is not a perfect solution for a governmental entity’s fiscal problems, but it can provide breathing room while other long-term options are pursued,” the report advised.

Pros and cons

Virginia Boulet, who lost a run for mayor in the April 22 primary, said municipal bankruptcy is nothing to be ashamed or scared of and should be considered.

“The pros are you clean up your balance sheet. You can borrow new money to build new schools and new roads and new things,” Boulet said. “You don’t run a business or a city solely for the benefit of creditors. You have to run it for the benefit of people who live there. Do we sit around and pay for this disaster forever and we never have any new schools in our city, or do we take a more realistic approach?”

But the bankruptcy idea is distasteful to city officials, including Nagin, who said he won’t support the idea.

Councilwoman Jacquelyn Brechtel Clarkson said bankruptcy is not needed. Tax collections are exceeding projections, thanks to recent events such as the Zurich Classic PGA golf tournament, which ended April 30, and the New Orleans Jazz and Heritage Festival, which ended Sunday, she said.

“It’s exciting,” she said.

John Kallenborn, New Orleans president of Chase Bank, also thinks a city bankruptcy should be avoided.

Official insolvency might reduce $50 million in debt service to $25 million, but “the problem with it is that we don’t really have a debt problem in the city of New Orleans. We’ve got a revenue problem,” he said.

“You wouldn’t create any revenues, which is what you really need,” Kallenborn said. “What they need to do right now is run a police and a fire department.”

Also, creditors would fight the city to prevent a bankruptcy filing, he said.

Lender search

Instead of supporting bankruptcy, Kallenborn has been recruiting 10 foreign and large banks with New Orleans operations to give the city a $150-million, three-year loan to fund basic services.

Kallenborn won’t say how many lenders have committed. His bank has agreed to loan $50 million.

“We’re cobbling it together slowly but surely,” Kallenborn said. “I don’t know what probability we have.”

Kallenborn said there’s a 33 percent chance “that we will call back to the city and say that we were unsuccessful. That happens. You shouldn’t be shocked. It’s not an easy credit. It’s a city whose revenues went from $475 million to $100 million. You’re in a trough and it’s just hard for lenders sometimes to step up during a trough.

“The question is just how fast are revenues going to come back.”

The loan would buy the city time for revenues to pick up, he said.

“If this (loan) doesn’t happen, I don’t know what Plan B is,” said Kallenborn.

“The question is, if you go bankrupt, do you hurt access to loans like the one we’re talking about? Do you limit your options?” he said.

The city is cash strapped. As of March 31, the general fund was $48.2 million, down from $166 million collected by the same time last year.

The BGR-PAR report said the city will run out of money this month.

“The city’s cash flow has improved since the BGR report was issued,” said city finance director Reginald Zeno. “Sales taxes are much more robust than what was initially projected earlier in the year. In fact, sales taxes for the months of February and March are approximately 85 percent of prior-year levels. Budgetary controls have been put in place to further improve cash flow during the first four months of 2006.

“The city is also anticipating to finalize a bank line of credit in the next few weeks to provide financial stability until the city’s operating revenue base completely rebounds. We are also continuing to pursue grants and or loans from federal and state sources to limit the borrowing of funds from the private bank line of credit,” he said.

Kallenborn said the city should be OK for a few more months thanks to property tax bills, which should be mailed this month.

“I would say it’d be highly unlikely that they’d run totally out of money in May,” he said.

The city also has plans to engage long-term consulting services to downsize city operations.

Property tax losses

Property taxes likely won’t generate as much revenue as in previous years after assessors lowered the value of storm-damaged property. Last year, property taxes provided $78 million.

Darren Mire, First District assessor, said his post-Katrina assessment resulted in reducing property values from $372 million in 2005 to $352 million.

Sixty percent of the First District, which includes the Central Business District, the Warehouse District and half of Mid-City, provides 35 percent of the city’s property tax collection.

Revenues should start flowing to the city in late July, Mire said.

Mire said property tax collections will rise as properties are repaired.

“You’ll probably see a trend in increased assessments,” Mire said.

Clarkson said the city has other ways to generate money citing a negotiated lease with Harrah’s Casino New Orleans, but she did not provide details.

Clarkson said the city transferred $36 million into the 2006 budget from a $120-million federal community disaster loan extended to the city last year.

But Ross Fredenburg, Federal Emergency Management Agency spokesman, said the city spent that money by Feb. 15.

The loans can be spent on city operations only and cannot exceed 25 percent of the city operating budget, he said.

Technically, New Orleans is eligible for more loans, he said.

“However, we are out of money appropriated by Congress for Louisiana for the community disaster loan. I guess the answer is no, the city won’t be getting any more money from the community disaster loan.”•

May 8, 2006

Source: New Orleans CityBusiness

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