In The News › N.O. debt burden nears $1 billion

May 21, 2007

Source: Times-Picayune

N.O. debt burden nears $1 billion

N.O. debt burden nears $1 billion
Action needed soon, watchdog group says
Monday, May 21, 2007
By Bruce Eggler
Staff writer

Compared with the federal government’s debt of $8.8 trillion, the nearly $1 billion that New Orleans owes to various creditors may seem like a drop in the bucket.

A new report by a nonpartisan watchdog group warns, however, that the city’s debt “is a significant burden for New Orleans, given the damage and population loss it has suffered.”

Since 1998, the Bureau of Governmental Research report says, the portion of the city’s annual operating budget devoted to paying off debt has increased from about $10 million to $43.2 million, or more than 10 percent of the general fund budget. Having to spend so much on debt “absorbs undedicated revenue that the city (otherwise) could use to provide services,” the report says.

The debt that is payable from the city’s operating budget totals $482 million, and the separate bonded indebtedness administered by the Board of Liquidation, City Debt, amounts to $510 million, for a total of $992 million.

Counting the $55.7 million the Board of Liquidation expects to pay this year on the bonds and other obligations it oversees, the city’s total spending on debt service this year will come to $99 million.

That debt is likely to increase significantly in the next few years, the report notes. The city expects to borrow an additional $144.5 million by 2010 under state and federal emergency loan programs for disaster relief, and now that its bond rating has improved somewhat, the city also wants to begin selling $260 million of voter-approved bonds for capital projects.

The bureau calls the city’s burgeoning debt a “structural problem that will have to be addressed in the near future.”

The BGR report, “Budgeting in a Time of Crisis,” reviews the city’s 2007 operating and capital budgets as well as its debt situation.

The report credits Mayor Ray Nagin’s administration for creating the 2007 operating budget “under very difficult circumstances . . . while dealing with masses of FEMA paperwork and uncertain revenue streams,” and it says the City Council “did admirable work delving into the details” during its budget hearings last fall.

Nonetheless, it says, “there are some important issues” about the city’s budgeting process. One is the decision to set the 2007 capital budget at a token $150,000, instead listing tens of millions of dollars of expected FEMA reimbursements and other capital expenditures in the operating budget, which causes that figure to balloon and look deceptively healthy.

“At first glance,” the report says, the city’s 2007 operating budget of $773 million — 28 percent higher than the budget for 2004, the last full fiscal year before Hurricane Katrina — “appears robust.”

“A more detailed review indicates that the revenue picture is not as positive as it seems,” the report says. Recurring and mostly locally generated revenue sources — the key to keeping city finances healthy — are expected to be $133 million less this year than in 2004, the report warns, with sales tax revenue expected to be down by 19 percent from 2004.

The operating budget will be balanced only by including $71 million of money borrowed under the disaster-relief programs, the report notes.

Before the storm, the report says, the city had just over 6,000 employees. A few weeks after Katrina, it laid off 3,000 of them. During 2006, it hired or rehired about 800 workers, and the 2007 budget called for adding 215, bringing the total to almost 4,000. Even so, the report says, “some departments critical to rebuilding,” such as the City Planning Commission and the Safety and Permits Department, “remain understaffed and underfunded.”

The $482 million in debt payable from the city’s operating budget includes a variety of borrowings incurred to pay off legal judgments, pension fund obligations and other purposes, plus two post-Katrina loan programs.

The city has received $137.6 million to date under the federal Community Disaster Loan program, and it expects to borrow an additional $50 million this year and lesser amounts in future years, until it reaches the legal limit of $240 million. The money comes with a low interest rate, and no payments are due for five years.

The city and the Board of Liquidation also have borrowed money from a program set up by the state and federal governments through the Gulf Opportunity Zone Act of 2005 to help local governments pay debt service. The city borrowed $10.1 million under this program in 2006 and expects to borrow an additional $21.3 million this year and $20.8 million more in subsequent years. The Board of Liquidation has borrowed about $27.6 million under this program in 2006 and 2007. These loans also need not be repaid for five years.

Like other local governments, the city is hoping that the federal and state governments will decide to forgive the loans made under the two disaster-aid programs before the debts come due, but there is no guarantee of that.

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Bruce Eggler can be reached at beggler@timespicayune.com or (504) 826-3320.

May 21, 2007

Source: Times-Picayune

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