September 16, 2005

Katrina-ravaged governments’ tax base blown away

By Michael Connor and Kieran Murray

MIAMI/SLIDELL, Louisiana (Reuters) - Hurricane Katrina not
only dirtied and damaged Slidell, Louisiana, a city across Lake
Pontchartrain from New Orleans, but stopped up the tax flows
needed for cleanup and getting government back to daily life.

"Our tax base has pretty well been dried up. This is a
crisis," Mayor Ben Morris told Reuters.

In Slidell, where the homes of 10,000 to 15,000 people were
left uninhabitable, extra costs of $250,000 for overtime pay
for city workers were just a start of financial difficulties.

"It's gonna be one hell of a challenge. We still have to
pay our people, I still have to keep the lights on and run a
city," Morris said,

The August 29 storm and massive flooding not only savaged
New Orleans, Slidell and other cities and towns, but threw into
disarray the normal ways Gulf Coast governments collect taxes.

Unlike the four hurricanes last year that struck Florida
but only briefly hit local and state sales and wage taxes,
post-disaster drags on tax rolls and tax collections in some
Louisiana and Mississippi cities and towns may be long lived,
according to economists, analysts and financiers.

The mayor of New Orleans has said his flooded, evacuated
city was essentially broke. The city's schools this week issued
one final round of paychecks to teachers, saying the system had
run out of money.

"People are worried ...," said Peter Kessenich, bond
adviser to New Orleans at Public Financial Management. "When
will things get back to normal? What happens if the tax base is
decimated for years? What happens if the people don't return?"


Slidell needs fast reimbursement for disaster relief
expenses from the federal government, Morris said.

"In 90 days, without reimbursement from the federal
government, we would fall into a default," he said, although
added that he expects the money to come in well before then.

On Mississippi's coast, Long Beach, a town of 18,000, lost
40 percent of its homes and nearly its entire central business
district to the storm that displaced 1 million people.

Tax collections have nearly halted, with the town's key
tourism sector shut down, according to Mayor Billy Skellie.

"We're holding out a little tin cup and saying we need
money," he said.

Authorities estimate Katrina destroyed 65,000 homes and
3,500 commercial buildings in southern Mississippi, taking a
big bite out of the region's local tax base.


Municipalities in Louisiana, Mississippi and Alabama that
were struck hard by Katrina rely heavily on property taxes for
revenue, according to Mark McMullen, a senior economist at

"It's a town-by-town story," he said. "Where people rebuild
homes is not always in the same place. Sometimes people move
and rebuild in a neighboring town, or elsewhere. When you have
extensive damage, there are sometimes changes to revenue

In south Florida, in the years following 1992's Hurricane
Andrew, tens of thousands of people who had lost homes south of
Miami moved 25 miles or more to the north and sparked a housing
boom in Broward County.

The economic rebound common after U.S. natural disasters
may be weaker in the Gulf States because fewer homes were
insured and much damage is being blamed on flooding, which most
insurance polices do not cover, according to some economists.

In Louisiana, cities, school districts and other
bond-issuing entities hit by Katrina have about $8 billion of
municipal bonds outstanding, according to state Treasurer John
Kennedy. About half that debt is insured.

"There will be no property tax paid for awhile," Kennedy
said, referring to governments in and around New Orleans. "My
guess is that the legislature will convene and put those into

Louisiana politicians and government officials will need
federal help to make up for the extra spending and lost
revenues and to help revive taxable business activities, he

The FEMA official in charge of the program to support
cities by reimbursing them for emergency spending said the
Federal Emergency Management Agency, under existing rules,
could not help with their bond obligations.

"Our grant programs do not extend to operational costs or
indebtedness," David Fukutomi told Reuters.

What it does cover, he said, are many of the underlying
assets financed by those bonds, like sewer systems, and FEMA
could reimburse them for those costs.

However, he acknowledged that municipal default was a
looming problem, given that many cities have lost their entire
tax base.

Increased sales tax receipts from rebuilding will help some

Kennedy said he believes recovery and rebuilding in New
Orleans and nearby parishes such as St Tammany and Jefferson
will come more quickly than many now predict.

Asked what steps local government officials working to
re-establish workaday operations can take to get their finances
back in order, Kennedy said, "There's not much local
governments can do. We need to help them."

(Additional reporting by Carey Gillam in Long Beach,
Mississippi, and Ben Berkowitz in Baton Rouge)