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New Orleans’ reserve fund stands empty for second year in a row

October 25, 2011
By Ben Myers
New Orleans City Business

For the second consecutive year, the New Orleans City Council is dissecting a budget proposal containing no reserves, leaving the city vulnerable to catastrophes and weakened bond ratings.
City budget policies aim for a cushion equal to 10 percent of expenses, a portion of which is meant to safeguard against emergencies. Landrieu’s 2011 proposal envisioned meeting that goal by 2015 starting with a $2 million general fund balance in 2012.
Now the forecast shows 2017 as the earliest date to meet the 10 percent goal and a fund balance of $10.2 million next year.
The administration announced in June that last year’s budget deficit was $25.1 million greater than previously known, forcing a series of mid-year cost reductions that wiped out hopes of creating reserves in the 2012 budget. That resulted primarily from higher-than-expected health care costs, Chief Administrative Officer Andy Kopplin said.
The mayor has presented the council with a $494.9 million spending plan for 2012. A reserve goal based on that budget would be nearly $50 million.
That fund balance currently stands at zero.
“If you don’t have a fund balance, if you have an emergency, if you have terrible flooding or something like that, you don’t have money on hand to deal with it,” Bureau of Governmental Research CEO Janet Howard said. “Ideally you would have one in place, but when you are coming out of a $25 million hole, you have an issue of how fast you can rebuild.”

Kopplin said the city is in better position now to manage emergencies because the city is living within its means. The health care costs amounted to a fiscal emergency, he said, albeit one that unfolded over months as opposed to a sudden natural disaster.
“The hangover from overspending habits was still present in (the 2011) budget,” Kopplin said. “We’ve got the flexibility (to respond to emergencies) now because we have revenues and expenditures in balance.”
The city’s fund balance stood at $35.8 million at the beginning of 2009, but city spending that year under then-Mayor Ray Nagin exceeded recurring revenues by $120.5 million. Nagin made up a little more than half the difference with one-time sources, including federal disaster assistance, and the fund balance was wiped out.
That’s partly why Standard and Poor’s continues to rate the city’s creditworthiness at “BBB,” which is the weakest investment grade. Any future upgrades will depend on the city’s ability to “restore and maintain sound financial operations,” according to the agency’s March report when it last affirmed its rating for New Orleans.
“We don’t want a city to continually rely on (reserves) to balance their budget because obviously that shows there’s some structural weaknesses,” Standard and Poor’s analyst Sarah Smaardyk said.

Many other cities are relying on reserves in an era of strained government finances, Smaardyk said, but they also tend to hold stronger reserves than what their policies require. On the upside, she said, maintaining zero dollars in the general fund balance for two straight years at least means the city is not ending the year in a deficit.
Kopplin said this is the first year since Hurricane Katrina that New Orleans will close out the year on budget.
Smaardyk said BBB is rare among cities, but that New Orleans has done well not to dip below investment grade, considering post-Katrina challenges. She also praised the Landrieu administration for being forthcoming with information on how it plans to build reserves in accordance with city policy.
“As long as we have open communication with the issuer and we know what’s going on, we can feel comfortable,” Smaardyk said.

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