State looks for loan repayment

State seeks repayment of $400 million in loans to New Orleans

Nearly $400 million in loans made after Hurricane Katrina to keep New Orleans financially stable are helping the Jindal administration balance the state’s operating budget in lean economic times.

Repayment of the loans, which the state made with financial assistance from the federal government, is due despite disagreement on whether the money was supposed to be given and forgotten. And, with millions of dollars owed, the political argument likely will resurface during the next legislative session.

New Orleans Deputy Mayor Andy Kopplin, who led the hurricane recovery for then-Gov. Kathleen Blanco said state officials never intended for the storm-devastated city to repay the loans.

“It’s obviously very important to the city to be able to free up these debt service payments for uses like recreation or hiring more police officers,” he said.

Gov. Bobby Jindal’s chief budget adviser, Commissioner of Administration Kristy Nichols, said the state constitution makes it impossible to forgive debts owed to the state.

“During past sessions, there have been legislators who have brought up the possibility, but legislation was never passed because the legal consensus is that it would be prohibited by the constitution,” the Jindal administration said in a prepared statement.

The current $25.4 billion state spending plan banks on $28.3 million materializing from nearly $400 million in principal and interest owed to state government.

The New Orleans School Board wrote the state a $77.9 million check last year, clearing its debt. The Orleans Levee District is $3 million past due on its obligations. Other entities, including the city, the aviation board, the port and the zoo and aquarium, make annual payments, even as Mayor Mitch Landrieu’s administration lobbies legislators to cancel the debt.

With the state suffering from disappointing revenue collections, the loan repayments came in handy this year when it came time to prepare a state budget that pays health care, education and other bills in the fiscal year that ends next summer. The state has collected $14.1 million in loan payments less than two months into the new budget year.

The state’s repayment demands contrast with the federal government’s treatment of disaster relief.

Vice President Joe Biden announced in 2010 with Jindal on the stage behind him at the St. Bernard Recreation Center that the federal government was willing to forgive at least a portion of the roughly $700 million in loans it made after Katrina to local governments like New Orleans.

The state’s loans date back to the chaotic days that followed Katrina in 2005. The storm shut down New Orleans and stopped the flow of revenue. Cash registers weren’t ringing up sales. The Saints couldn’t play football in the now-Mercedes Benz Superdome. Tourists weren’t flocking to the French Quarter. Yet payments on old debt still needed to be made.

Relief arrived when Congress created special tax incentives in the $7.9 billion Gulf Opportunity Zone Initiative. The package quickly became known as GO Zone. A portion of the package called for the federal government to pay the interest for two years on $200 million in borrowing if the state put up $200 million. The $400 million pool of money was designed to prevent municipalities from sinking under the weight of their existing debt by allowing them to keep current on payments until their revenue rebounded.

New Orleans was the only eligible local government that applied for the money. The city needed dollars to pay debt associated with its school board, convention center, zoo and aquarium, water board, law enforcement district, aviation board, bus system and other services.

By preventing the city from defaulting on debt, the state eliminated any risk to its own credit rating.

State officials had to deal with a legal snag before handing over the money. State government is not allowed to loan, pledge or give away its assets. The problem was resolved with the signing of agreements between the Blanco administration and the city of New Orleans that deferred repayment for five years, and then allowed another five-year delay after that.

The initial payment deferral expired after Jindal took office.

“The discussions that I was involved in fully anticipated that these loans would be forgiven, and the loan agreements themselves are constructed in a manner that would lead to that conclusion,” said Whit Kling, longtime director of the State Bond Commission.

The commission oversees state borrowing and gave final approval to the $400 million loan package.

State Rep. Jared Brossett, D-New Orleans, filed legislation last year to forgive the loans, which stood at $415.3 million in principal and interest on March 27. The Jindal administration warned legislators that the proposal’s success would result in a state budget shortfall. The bill died.

Brossett said New Orleans is a 300-year-old city with expensive and major infrastructure issues.

“Many of these entities could use that money in their budgets to sustain themselves and provide more services,” he said.

Interim Orleans Parish Public Schools Superintendent Stan Smith said it made financial sense to pay every cent his entity owed.

He said the bonds were interest free with no payments for five years. Once that deadline passed, he said, the loans needed to be repaid or renewed on an amortization schedule that added interest.

“By paying the debt off we saved $31 million over the original life of the loan,” Smith said.

The Jindal administration sent a collection letter to the Orleans Levee District after it failed to make its annual payment. The district, which is one of three districts that make up the South Louisiana Flood Protection Authority-East, owes $36.8 million.

The flood authority’s president, Tim Doody, said the loan was secured with the district’s nonflood assets. Those assets include an airport, marina and commercial real estate.

None of the assets generates the revenue needed to make the loan payments, Doody said.

“It’s not like we’re trying to avoid payment. It’s just that those assets haven’t produced any net income,” he said.

The city of New Orleans pays $4.9 million a year on what the Jindal administration said is $66.7 million in debt.

Kopplin said the annual loan payment amounts to half of the city’s parks and recreation budget. A loan forgiveness would help the Landrieu administration meet its goal of bumping up the recreation budget to between $15 million and $20 million. Instead, Kopplin said, the city is repaying a lifeline that was offered when it was a victim of a disaster.

“These loans should be forgiven. ... They were intended to help local governments get their feet back on the ground,” he said. “We believe that is an important case to be made.”