In The News › Study says city should weigh bankruptcy

Apr 6, 2006

Source: Times-Picayune

Study says city should weigh bankruptcy

Study says city should weigh bankruptcy
Municipal government, schools described as near insolvency
Thursday, April 06, 2006
By Frank Donze
Staff writer

Bankruptcy should be considered as an option for New Orleans’ financially crippled city
government and public school system, which are “teetering on the edge of a cliff” seven months
after Hurricane Katrina, according to a report by two government watchdog groups.

“For a devastated community, continuing to shoulder pre-Katrina debt loads and obligations may
interfere with its ability to create the conditions needed for recovery,” said the analysis prepared
by the Bureau of Governmental Research and the Public Affairs Research Council.

“In that context, bankruptcy is a legitimate line of inquiry and should be evaluated.”
Mayor Ray Nagin’s administration dismissed the recommendation, saying they have a plan to
keep city government solvent.

“The city is not considering bankruptcy as an option,” said Finance Director Reggie Zeno.

BGR and PAR, which did not take a position for or against bankruptcy, acknowledge in the report
that such action is a relatively rare occurrence that does not wipe the financial slate clean for a
government entity.

The pluses

But the two organizations note that bankruptcy would offer the city and the School Board
advantages, including a way to refinance or reduce debt, obtain protection from creditors and seek
relief from burdensome contracts such as collective bargaining agreements and retiree benefit
plans.

“It’s a matter of hard-nosed analysis,” BGR President Janet Howard said. “The option should not
be foreclosed without a thorough evaluation of all the short-term and long-term costs and benefits
for the community.”

Jim Brandt, president of Baton Rouge-based PAR, said many Louisiana communities ravaged by
hurricanes Katrina and Rita have resources they can draw upon to avoid bankruptcy.

“Some entities outside of New Orleans may require some additional assistance,” Brandt said, “but
this need appears relatively small compared to the magnitude of the fiscal distress in New
Orleans.”

Last month, Nagin aides told the City Council that while New Orleans’ financial situation remains
dire, the economy is doing better than expected. The administration reported that the city won’t
run out of money for at least another two months, and well beyond that if it is able to obtain more
federal money or more loans from private sources.

The city’s financial consultants said potential lenders seem amenable to the idea of more loans,
although nothing has been worked out.

Credit rating wrecked

Filing bankruptcy likely means that a municipality’s credit rating would be withdrawn or
downgraded, eliminating the ability to — or increasing the cost of — borrowing money.

Bankruptcy also could impair, if not eliminate, the ability of the city or the School Board to secure
bond insurance and could close or limit access to credit markets in the future, a potentially serious
issue for entities with major infrastructure needs.

School Board officials could not be reached for comment.

While the BGR/PAR review focused heavily on New Orleans’ post-Katrina fiscal dilemma, it also
found that St. Bernard and Cameron parishes face similar challenges.

Despite a host of remedial steps ranging from mass layoffs to loans to halting spending on capital
improvements, the report says, both City Hall and the Orleans Parish School Board remain mired
in a fiscal morass.

“The city is one month from running out of cash and there is no plan in place for dealing with the
cash-flow problem,” BGR and PAR staffers said. Meanwhile, the report added, the school system
already would be running a deficit were it not for federal disaster-related grants and loans.

Recently, the Nagin administration issued a request for proposals for financial and management
consultant services to advise the city about how to improve its revenue forecasting, expand
revenues, contain spending and enhance its credit rating.

But the report speculates that any outside help might come too late because the administration’s
budget projections indicate that the city lacks the revenue to pay both debt service and to provide
“its current, rather dismal level of services.”

A grim equation

While the School Board has advised the state Bond Commission that it has enough cash on hand
to pay its long-term debt obligations, the report speculates that the system’s fixed costs “could
interfere with its ability to provide even a minimal level of education.”

Though the city’s tax revenue is projected to plummet from the $260 million originally expected in
2005 to $110 million in 2006, the city’s debt load is projected to increase, the report said. The total
outstanding debt stands at $964 million, with debt service estimated at $96 million this year.

The report said debt service payments in 2006 will exceed property tax collections.
Acknowledging how important it is for government entities to keep debt payments current, the
BGR and PAR said those obligations must be considered in the “larger context of restoring the
community’s health and recovery.”

State government, which must approve any bankruptcy action by a local governing body, has
historically opposed the step.

If that mind set persists in the post-Katrina environment, the report said the state must “provide
alternative means of relief,” including:

— Providing grants or loans though the Gulf Opportunity Zone tax credit program.

— Allocating Community Development Block Grant funds to cover local government expenses.

— Redirecting money from the state general fund.

— Assuming the cost of mandates such as the local court system and expenses like
unemployment compensation.

Whatever choices are made, BGR and PAR called on the state and distressed local governments
to immediately assess and address their financial needs.

Can’t wish it away

“The problems are not going to disappear on their own,” the report said.

Research by BGR and PAR shows that less than 500 municipal bankruptcies have been filed
nationwide and most have been for small entities such as water districts. In Louisiana, the only
filing on record was by a hospital district.

While there is an abundance of information regarding municipal bankruptcy “in the way of theory,”
the report says, “there is little in the way of a track record.’

Finally, the BGR and PAR acknowledge that “political realities” may ultimately prevent the city and
the School Board from taking such a step.

Under state law, any bankruptcy filing requires the consent of the Bond Commission, the attorney
general and the governor.
. . . . . . .
Frank Donze can be reached at fdonze@timespicayune.com or (504) 826-3328.

Apr 6, 2006

Source: Times-Picayune

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