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The Elephant in the Room 

A new issue has emerged in the race for mayor of New Orleans, but few candidates seem willing to talk about it publicly. The issue is the prospect, maybe even the likelihood, of the City of New Orleans filing for municipal bankruptcy. That news should come as no surprise in the wake of Hurricane Katrina, which left the city with a vastly reduced sales and property tax base. Unfortunately, Mayor Ray Nagin keeps insisting he can keep the wolf away from the door by borrowing more money from out-of-state banks.

That's a Pollyannaish view. Our city is broke. It will run out of cash in the next month, and going deeper into debt will not solve the problem -- just postpone the inevitable day of reckoning. Postponement may be Nagin's preference right now because he's running for re-election, and it's not easy to campaign on a platform of insolvency. But citizens deserve to hear the truth. What's even more troubling is the reluctance of Nagin's opponents to discuss this issue more openly. As a result, the city's slide towards bankruptcy has become the proverbial elephant in the room: everyone knows it's there, but nearly everyone nervously pretends not to see it.

Last week, a pair of non-partisan government watchdogs released an in-depth report bringing the issue to the fore. In their joint report -- "Municipal Bankruptcy in Perspective" -- the Bureau of Governmental Research (BGR) and the Public Affairs Research Council (PAR) concluded that the City of New Orleans and the Orleans Parish School Board are "teetering on the edge of the cliff. The school board is dealing with chronic cash-flow problems, and the city is one month away from running out of cash. With their tax bases in shambles, it is unclear whether they will be able to meet the threefold challenge of servicing existing debt, providing services, and rebuilding damaged infrastructure."

That's a cold, dark view of the situation, but we think it accurately and succinctly sums things up. The question now is, what happens next? Is bankruptcy inevitable, or can City Hall and the school board take steps to stave off bankruptcy?

The report ( notes that municipal bankruptcy differs significantly from private-sector bankruptcy. In many ways it is much more difficult for a city to seek bankruptcy protection. For example, an insolvent business can go straight to bankruptcy court and seek protection from its creditors. Or, it can be placed in "involuntary bankruptcy" by several of its creditors. Neither option is available to municipalities. Before a city can file bankruptcy, it must first get permission from the state. In New Orleans' case, that possibility seems remote.

Instead, the city has sought bids from financial and management consultants who can suggest ways to improve the city's revenue-forecasting model, expand revenues, contain spending and enhance its credit rating. In normal times, that would be a good idea, but nowadays that's a little like rearranging the deck chairs on the Titanic. For example, with the city's population down by two-thirds, we don't need a better forecasting model; we know the forecast is grim. And enhancing our credit rating? Even if we could borrow our way to prosperity, what Wall Street bond-rating service is going to be impressed by some consultant's report painting a rosy picture of New Orleans' economic prospects?

In our view -- and in the opinion of PAR and BGR -- city leaders should meet with creditors and ask for forbearance on short- and long-term obligations. Such discussions are required before a city can seek municipal bankruptcy anyway. More important, it's the prudent thing to do under the present circumstances -- and it costs a lot less than borrowing another $150 million. Already the city and the Board of Liquidation expect to spend $96 million on debt service in 2006 -- and that's after significant property tax increases to service some bonds. Moreover, that figure does not include $120 million borrowed from the federal government's Community Disaster Loan program. Repayment of that loan can be postponed for five years, but New Orleans has already reached its borrowing limit.

BGR and PAR also argue that while local governments must pay their debts, such repayments ought to be viewed "in the larger context" of promoting the city's overall recovery. "What conditions are needed to retain and attract residents and businesses?" the report asks. BGR and PAR do not promote the idea of municipal bankruptcy, but they -- and we -- strongly suggest that payment of long-term debts should not "trump" the day-to-day operations of government on which returning citizens and businesses depend. The question of whether to seek bankruptcy protection requires "hard-nosed analysis" and recognition that recovery depends on government's ability to deliver vital services such as police, fire and sanitation.

In short, the first order of business is to get government back in business. The first step in that direction is for our leaders and would-be leaders to start talking frankly and openly about the city's financial dilemma. After all, it's not as if nobody sees that elephant in the room.


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