In The News › Our Views: Facing red ink after Katrina

Apr 13, 2006

Source: Baton Rouge Advocate

Our Views: Facing red ink after Katrina

Our Views: Facing red ink after Katrina
Advocate opinion page staff
Published: Apr 13, 2006

The Public Affairs Research Council of Louisiana is not known for hyperbole in the studies it releases on important
state issues. So when PAR recently issued a report declaring that the city of New Orleans and the Orleans Parish
School Board are “teetering on the edge of the cliff” in their post-Katrina finances, we were reminded that we live in
unusual times that will require unusual responses.

In the study that it undertook with the New Orleans-based Bureau of Governmental Research, PAR concluded that
bankruptcy should be considered as one option for New Orleans-area governments confronting cash crises.

Both PAR and the Bureau of Governmental Research are nonprofit and nonpartisan. The research groups were careful
to stress that they are not taking a position for or against the declaration of bankruptcy by hurricane-stressed local
governments.

But PAR and BGR did conclude that bankruptcy should be considered and evaluated among other tools for dealing
with post-Katrina financial problems.

“It is a matter of hard-nosed analysis,” said Janet Howard, head of BGR. “The (bankruptcy) option should not be
foreclosed without a thorough evaluation of all the short-term and long-term costs and benefits for the community.”
Bankruptcy is a scarlet letter for local governments — a designation that would promise massive public relations
problems for a community trying to sell itself to the wider world.

That’s one big reason why state officials, so far, have removed the bankruptcy option from the table for local
governments stressed by the hurricanes.

Louisiana law requires a local government to get the consent of the governor, attorney general and the State Bond
Commission before declaring bankruptcy.

As the study by PAR and BGR points out, municipal bankruptcy provides local governments with a means to refinance
or reduce debt to obtain relief from burdensome contracts. However, bankruptcy would not wipe the financial slate
clean.

Municipal bankruptcy is an appropriately rare action of last resort by governments across the country. Nationwide,
fewer than 500 municipal bankruptcy petitions have ever been filed, and most have been for small entities such as
irrigation districts. PAR and BGR could find only one filing in Louisiana, which was made by a hospital district.

Faced with extreme financial duress, local governments can cut services, raise taxes, borrow money or get assistance
from state and federal governments — or use some combination of these measures.

It’s axiomatic, of course, that government must live within its means. But if taxes are dramatically raised in hurricanestressed
areas, or if basic services are reduced to substandard levels, then many people won’t be willing or able to stay
in those communities or return to them.

The result could be as bad or worse than what would happen if a community were to declare bankruptcy, according to
the report.

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A vivid example of this dilemma involves the legal requirement of local governments in Louisiana to raise taxes to the
level necessary to support general obligation indebtedness.

“A municipality intent on paying its debt could be forced into a situation where the tax rate becomes prohibitively high,
impeding the government’s ability to deliver services, deterring investment, and even causing disinvestment if residents
and businesses relocate to other jurisdictions,” PAR and BGR conclude in their report.

In New Orleans, the city government’s debt service is estimated at $96 million this year. Required payments on that
debt service will exceed property tax collections this year.

According to PAR and BGR, the Orleans Parish School Board is dealing with chronic cash-flow problems, and New
Orleans’ city government is about a month away from running out of cash.

Although sensitive to the financial challenges imposed on local governments in southwestern Louisiana by Hurricane
Rita, PAR and BGR said that government entities in Cameron Parish do not seem to be candidates for bankruptcy
because they have relatively small debt burdens.

Beyond allowing hurricane-stressed local governments to declare bankruptcy, the state could help local governments
deal with their fiscal crises by providing grants or loans through the Gulf Opportunity Zone tax credit program, or
allocating federal Community Development Block Grants to local government expenses. The state also could use
general fund revenue to help prop up local governments, or pick up the local cost of meeting unfunded state
government mandates.

Using one-time grant money to meet recurring expenses creates problems. It is also unrealistic to expect the state to
assume the burden of funding New Orleans-area government on an indefinite basis.

Like PAR and BGR, we are not yet ready to embrace bankruptcy as a solution for New Orleans-area governments.
But the very mention of this prospect underscores the urgency of the crises and the need for state, local and federal
officials to work together to find creative solutions.

Apr 13, 2006

Source: Baton Rouge Advocate

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