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Public Performance & Management Review

ISSN: 1530-9576 (Print) 1557-9271 (Online) Journal homepage: https://www.tandfonline.com/loi/mpmr20

The Financial Logistics of Disaster: The Case of Hurricane Katrina

W. B artley Hildreth

To cite this article: W. B artley Hildreth (2009) The Financial Logistics of Disaster: The Case of Hurricane Katrina, Public Performance & Management Review, 32:3, 400-436

To link to this article: https://doi.org/10.2753/PMR1530-9576320303

Published online: 08 Dec 2014.

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The Financial logisTics oF DisasTer The case of hurricane Katrina

W. BarTley hilDreTh Wichita State University

ABSTRACT: The article describes emergency financial responses and consequences during and after Hurricane Katrina. It uses the case study analysis method and focuses on Hurricane Katrina and the city of New Orleans in addition to giving some comparative views of some neighboring communities and the state of Mississippi. The study uses contemporary media reports, official documents from federal, state, and local governments, independent groups, and financial analysis methods to analyze the impact of a disaster on the fiscal affairs of a community. The study uses fiscal equilibrium analysis as a framework for addressing fiscal policy issues in the aftermath of a catastrophic disaster.

KEYWORDS: disasters, financial management, fiscal equilibrium analysis, Hurricane Katrina

By its very character, a disaster interrupts a government’s intended performance. in terms of its financial affairs, budgets undergo drastic revision. Taxes and other revenue sources are stressed. mission-critical expenditures escalate. Targeted performance goals are discarded or deferred in light of new priorities and work flows. capital assets are impaired. public and private aid materializes. new aid rules must be learned and followed. accountability measures proliferate to sat- isfy new stakeholders. all of this uninvited change produces a gap between the immediate post-disaster wobbly state of affairs and resumption of the pre-event stable condition. public officials must respond to the disaster event by address- ing changes in the stock and flow of resources and, in the process, close the gap between these divergent fiscal performance equilibriums.

Disaster recovery is the least researched phase of disaster management (olshansky, 2005, p. 1). accordingly, this paper examines the acquisition and use of financial resources necessary to operate government during the disaster recovery period and to reassert stability in its fiscal planning. The event studied is hurricane Katrina and mainly its early recovery activities, with the performance of the gulf coast area, and, specifically, the city of new orleans, of direct interest.

400

Public Performance & Management Review, Vol. 32, no. 3, march 2009, pp. 400–436. © 2009 m.e. sharpe, inc. all rights reserved.

1530-9576/2009 $9.50 + 0.00. Doi 10.2753/pmr1530-9576320303

hildreth / The Financial logisTics oF DisasTer 401

on august 29, 2005, the american gulf coast was hit by hurricane Katrina. new orleans was counterpunched first by nature and then a man-made disaster. First, hurricane-force winds pushed waves of water into the city’s adjacent lakes and narrow canals. second, this powerful wave energy and surge current channeled water into the concrete-walled levees that failed in critical points, allowing water to burst into low-lying areas with enough force to blow houses off their founda- tions (marshall, 2006). making matters worse, the area was hit by hurricane rita on september 24, 2005.

By hurricane Katrina’s second anniversary, the federal government had funded a recovery and rebuilding effort totaling at least $116 billion, including flood insurance payments and rebuilding tax incentive (U.s. house committee on the Budget, 2007). of the $94.8 billion in budget appropriations, more than one-half was allocated for federal agency use instead of funding individual, business, or government rebuilding efforts (Fellowes & liu, 2006; U.s. government account- ability office, 2007). city of new orleans activities under the executive control of the mayor were allocated $946 million in federal aid, with $293.3 million received as of april 2008 (city of new orleans, 2008).

hurricane Katrina and its aftermath severely disrupted the personal lives and economic conditions of area residents. civic institutions, especially public safety, required rebuilding. Fundamentally, the fiscal plans of the city of new orleans/ orleans parish (it is one and the same), in particular, required more than right sizing and reconsideration. it is unlikely that even advanced planning, as called for by many organizations including the government Finance officers associa- tion (2005) in its business preparedness and continuity guidelines, could have reasonably anticipated the devastation and rebuilding necessary in a major city that was caused by the flooding due to levee system failure. The most recent “Battle of new orleans” punctured the fiscal equilibrium of revenues, expenditures, and debt-related fiscal policies.

how can a community close the gap between the immediate post-disaster state of affairs and resumption of sustainable fiscal goals? The answer depends on an awareness of how a disaster and its recovery impact a community’s fiscal affairs. The extant literature is silent on that matter. Therefore, this paper follows olshansky’s advice that “the most appropriate way to study community recovery” (2005, p. 2) is to use case study analysis.

logistics refer to the movement of resources, in this case, money. contemporary

initial case study material was part of the author’s Fulbright lecture at mcgill Univer- sity and published in 2005 by policy options/politiques (montreal) and, with revisions, presented at the University of Kentucky in 2006. a draft of the current paper was pre- sented at the 2006 southeastern conference for public administration. Johanna Winter helped prepare the manuscript for publication.

402 ppmr / march 2009

media reports offer a starting point to track local changes. Further details are culled from official documents from federal, state, and local governments, independent groups, and others. Financial analysis methods yield additional findings to help isolate the impact of a disaster on the fiscal affairs of a community.

To answer the question, shocks to the fiscal equilibrium (revenues, expenditures, and debt) are set in the context of the Katrina disaster, providing rich details in the immediate recovery period. While the paper focuses primarily on new orleans, the experiences of surrounding local communities, both in louisiana and missis- sippi, are equally instructive, as are the experiences of the two state governments themselves.

special effort is taken to show the role that higher levels of government and capital markets play in the recovery process. Disaster recovery involves different funding sources and fiscal logistics than those deployed in normal times. This case digs into the fiscal thicket to isolate the range of fiscal affairs affected by disaster recovery. Fundamentally, the case study reveals the complexity of the hurdles and decisions confronting public officials in the aftermath of a disaster.

Based on the case study, the discussion section introduces fiscal equilibrium analysis to distinguish between the forces that either drive or resist efforts to reas- sert fiscal equilibrium. Failure to recognize these different fiscal policy options can compound the community’s vulnerability. Fiscal equilibrium analysis offers a new framework for addressing fiscal policy issues in the aftermath of a disaster.

The Nature of Fiscal Equilibrium

Disasters require the quick mobilization of resources by multiple agencies and organizations to ensure the continuity of public services. recovery remains in- complete until the governmental entity that experienced the disaster regains fiscal stability (or at least a return to its predisaster norm). extant research is sparse on the nature of this fiscal policy gap and what occurs during recovery to fill it. schneider (1992) used the concept of gap in the context of the difference between a govern- ment’s formal procedures and the norms that emerge as its population deals with a disaster’s aftermath, with a large gap fueling a sense of failure by government. even journal symposiums dealing with hurricane Katrina overlooked the fiscal aspects of disaster recovery, except for the centrality of federal aid.1 although sylves outlined the basics of budgeting for local government emergency manag- ers, his closest point to the fiscal complexity of disaster recovery comes when he offers this cogent point about the Katrina disaster:

Decisions about who will cover the costs of recovery; how the cost burdens will be distributed among governments, the private sector, and disaster victims; and how all levels of government can prepare to meet the demands of such catastrophes will affect public budgeting in fundamental ways. (2007, p. 311)

hildreth / The Financial logisTics oF DisasTer 403

since that work did not define the “fundamental ways” that budgeting would be impacted, the current work can be viewed as one approach to fill that void.

a distressed city such as new orleans must adjust fiscal policy to deal with three fundamental shocks to its fiscal equilibrium. as shown in Table 1, the shocks occur to expenditures, revenues, and debt. each of the three disruptions is exam- ined in the context of the Katrina disaster. in addition, the discussion considers the role that capital markets and the hierarchy of governments (federal, state, and local) play, and the tools they offer, in responding to these shocks to the local equilibrium. Table 1 previews the nature of these responses.

Government Expenditures

severe disasters force governments to revisit their budgets in order to align spend- ing with reduced revenues. For example, new orleans quickly laid off 2,400 em- ployees, almost one-half of its workforce, and revised the scope of various services such as changing from twice-a-week garbage pickup to once-a-week (meitrodt, 2006b). While these actions cut spending, disasters also require the outlay of ex- traordinary sums of money in a relatively short time to reassert governance and restore vital services. employees are thrown into making emergency repairs, often at overtime pay, with little regard for the budget impact. These obligations have to be paid by the employing government regardless of if, or when, other sources of funding materialize to reimburse the cost. recovery operations can quickly

Table 1. Federalism and Market Options to Fiscal Shocks from a Disaster

Sectors and tools

Focus of shocks to existing fiscal plans Local fiscal issues

Hierarchy (federal, state) Market

expenditures repair, restore, re- construct, replace

grant or loan Borrow

Build to higher standard

grant or loan Borrow

revenues obtain liquidity loan; new revenue source

Borrow

economic (re)development

Direct or indirect targeted help

conduit bonds

Debt pay existing debt guarantee debt; change rules

Bond insurance; refinance, default, or bankruptcy

incur new debt

guarantee debt; bor- row but use locally

Borrow

404 ppmr / march 2009

exceed disaster and contingency planning. events on the scale of Katrina severely test local, state, federal and philanthropic response capabilities.

Under the stafford Disaster relief and emergency assistance act (42 U.s.c. 5121), the Federal emergency management agency’s (Fema) public assistance program allows the president to make contributions to repair, restore, reconstruct, or replace a damaged public or nonprofit facility, and for associated expenses. This grant program covers items from debris removal to overtime of police and fire services, if Fema agrees with the expenditure. The federal share of assistance is set at 75 percent, but the president can expand the percentage. after some delay, president Bush extended 100 percent reimbursement for emergency debris removal and emergency protective measures (such as sandbagging, pumping, and shoring up levees) for a longer period than normal and agreed to 90 percent reimbursement for restoring road systems and water control facilities to the predisaster condition (carney, 2006). in may 2007, congress changed the federal share to 100 percent reimbursement (public law 110–28).

Fema does not advance funds but rather reimburses for allowable expenses. Thus, an organization faced with disaster expenses must have sufficient funds to pay its employees, hire contractors, or otherwise incur obligations. a general government is assumed to have the financial flexibility to advance the funds out of reserves, emergency accounts, budget reallocations, insurance claim advances, or even borrowing.

Fema’s authority is to restore public facilities and infrastructure to the pre- event condition, not to offset a community’s long-term neglect of public facilities. For example, Fema remains unwilling to rebuild new orleans’ water system, which had widespread leakage before the flood, even though the system incurred extensive damage from the flood and the immediate recovery operations, which caused even larger leakage amounts. instead, Fema agreed to fund repairs that would return the system to its pre-Katrina leakage level (roth, 2008). in contrast, after the 1997 flood that overwhelmed grand Forks, south Dakota, Fema covered “new sewers, roads and other infrastructure” in the new “subdivisions sprinkled around the edges” of the city that were created to relocate residents out of the flooded areas (Davies, 2006a, p. 4). apparently, Fema finds it easier to fund new suburban infrastructure rather than repairing old systems in a large city, such as new orleans, that wants infill development.

To receive Fema reimbursement, state and local governments must submit detailed requests called project worksheets. These documents flow from the sub- mitting government agency to the state coordinating agency and then to Fema. By the end of the first year, louisiana’s coordinating agency was tracking 17,000 project worksheets for both hurricanes, including an estimated 4,000 related to damage caused by hurricane rita (louisiana legislative auditor, 2006a; rob- erts, 2006). By the end of the first year, new orleans had submitted 806 project

hildreth / The Financial logisTics oF DisasTer 405

worksheets, received approval for 634, but received reimbursement funds for 247, or a 39 percent payment rate (nagin, 2006). The entity created by the state to run the local school system, the recovery school District, reported that of about $800 million in damages, project worksheets had been submitted for $348 million, with only $62 million approved and $5.5 million received, or less than a 9 percent payment rate by the first year anniversary (Krupa, 2006a). The new orleans sewerage and Water Board reported a 17 percent payment rate for the same period (Krupa, 2006b).

Fema’s (2006) performance objectives for the public assistance program call for the financial obligation of 80 percent of funding within 180 days of the disaster declaration and to close the program within two years of that date. in congressional testimony on July 10, 2007, almost two months shy of the second anniversary of hurricane Katrina, the program director reported that as of June 25, 2007, Fema had obligated only 88 percent of the project worksheets for a total of 77 percent of the estimated $6.3 billion in public assistance funding for the state (subcommittee on Disaster recovery, homeland security and governmental af- fairs committee, 2007). Fema’s own data (Fema 2008) reveal that, interestingly, just one week earlier than the reported week of data, Fema recorded a dramatic 52 percent increase in the number of project worksheets obligated. otherwise, the percentage of project worksheets obligated would have been reported as 58 percent instead of the still low 88 percent. mississippi was treated similarly. The June 25, 2007, data reported in Fema’s congressional testimony revealed that only 61 percent of its project worksheets were obligated, for a total of 74 percent of mississippi’s estimated $2.87 billion in public assistance funding. however, in each of the subsequent two weekly reporting periods, Fema increased the number of obligated project worksheets for mississippi by an average of 26 percent weekly. Fema’s performance on this critical recovery program fell short of its own goals. Furthermore, its behavior around the date of the congressional hearing on project worksheet performance suggests that Fema can act speedily when needed, especially when facing congressional inquiry.

Fema faces a difficult burden. as a top Fema executive explained: “The story could be written that the federal government is nitpicking. . . . The other side is that we’re trying to be good stewards of the taxpayer dollar” (gonzales, 2007). local entities, however, reported that part of the problem was different rule interpretations by different Fema representatives, caused in part, perhaps, by the “sometimes-inexperienced estimators hurriedly hired and trained by Fema” (roberts, 2006). The Fema reimbursement system generates a “Kafkaesque bureaucratic process” with agencies waging a “paper battle” (gonzalez, 2007). This paper battle between the federal government and the local rebuilding effort is unlikely to be resolved quickly and did not occur only with the Katrina disaster. similar problems have been noted in other disasters (Florida legislative commit-

406 ppmr / march 2009

tee, 2006). For example, project worksheets remained open more than 13 years after the northridge earthquake in california (U.s. government accountability office, 2007).

compared to the tight reins on state and local recipients, the federal govern- ment’s own rebuilding process is less cumbersome. replacing a veterans hospital in new orleans was estimated at “what it would take to build a facility of the desired size, instead of counting each item damaged in the storm,” but Fema will only replace the aged state hospital next door to a prestorm condition that was barely acceptable by modern healthcare standards (gonzalez, 2007). as a result, the new state hospital’s funding plan includes a small Fema share (about 12 percent) with state debt to be issued for the remaining amount (Watts, 2008). This episode is just one example of how tension between local and federal officials turns on the legal requirement to use federal aid to rebuild to pre-storm conditions, compared to the local desire to rebuild to modern standards.

For citizens and businesses to return after a disaster, they need reassurance that the (re)built environment will provide better protection than before (Davies, 2006b). Understandably, in new orleans, the focus is on the levee system designed to keep water out of the (below sea level) bowl in which the city is located. The U.s. army corps of engineers constructed the levee system, but local levee boards maintained them. confirming early reports from the independent forensic engineer- ing investigations organized by the national science Foundation, the corps even- tually admitted that there was a design failure in their original levee construction (Drew & schwartz, 2005; Walsh, 2006a). Facing nearly 500,000 damage claims, however, the agency was found immune from damages by a federal judge even though it was a levee system “known to be inadequate by the corps’ own calcula- tions” (Finch & schleifstein, 2008). For levee repairs, congress appropriated more than $8 billion (Whoriskey & hsu, 2006; U.s. government accountability office, 2007). congress then added $5.8 billion to achieve 100-year flood protection by 2011 (Burdeau, 2008). louisiana faces a standard 35 percent share, a $1.8 billion match, with payments due in three years. state officials complain that the stag- gering cost, if sustained, should be allowed to be repaid over 30 years as allowed by law (Burdeau, 2008; Walsh, 2006b).

moreover, a little-used connecting canal created by the corps of engineers funneled the storm surge into the city. Despite the protest of the few businesses using the canal, the quick consensus of storm experts and local interests was to close the mississippi river gulf outlet (Brown, 2006; mcQuaid, marshall, schleifstein, 2005). even though several businesses relocated due to the canal’s pending closure, it was not until June 2008 that the corps officially de-authorized the mississippi river gulf outlet, thereby providing for actual closure in 2009 (city of new orleans, 2007; “corps completes mrgo,” 2008; U.s. army corps of engineers, 2008).

hildreth / The Financial logisTics oF DisasTer 407

louisiana’s coastal wetlands can serve as a natural barrier to storm surges during hurricanes, if only the marshes were not vanishing. For decades, louisiana tried to induce congress to dedicate a share of the federal offshore oil and gas royal- ties for wetland restoration as a form of compensation for the extensive drilling conducted off its shores. after the disaster, louisiana officials renewed the call for a change in federal law and led a successful effort to amend the louisiana constitution to dedicate such funds for coastal restoration. congress responded with a revenue-sharing plan in December 2006 that gives louisiana (along with alabama, mississippi, and Texas) 37.5 percent of federal royalties from new drill- ing off its coast (mufson, 2006).

Katrina exposed systemic problems with local levee boards in the new orleans area and the accountability for maintenance of the flood control system. multiple levee boards, each a sinecure for political appointees, exercised responsibility for different segments of the local levee system. levee maintenance received less attention by the boards than managing other levee assets, such as an airport, a marina, and valuable real estate. in 2006, louisiana electors amended the state’s constitution to consolidate the levee boards into two districts (it remained too political to make it a single board), revise the composition of the board to include more professional and technically trained members, and, in a significant revision, to limit each board’s scope to the maintenance and ownership of flood control structures (Donze, 2006b; “next step on levee reform,” 2006). To avoid future confusion over who retains responsibility for maintenance of the rebuilt levee system, congress requires state and local government entities that receive flood control aid to sign that they will pay for “operation, maintenance, repair, replace- ment, and rehabilitation costs” and, furthermore, “to hold and save the United states free from damages due to the construction, operation, and maintenance of the project, except for damages due to the fault or negligence of the United states or its contractors” (supplemental appropriations act, 2008).

state governments have to pay a share of the cost incurred when federal disaster assistance is paid to individuals and businesses. Fema sent bills to louisiana seek- ing the state’s share, but initially resisted state efforts to audit those bills (Davis, 2006). louisiana’s audit of a random sample of the almost 290,000 individuals registered by Fema found that only 88.22 percent of the $1.5 billion in awards were “made to qualified applicants in the proper amount” (louisiana legislative auditor, 2006b, p. 1). although louisiana may have been retaliating against the federal government’s insinuation of poor state accountability elsewhere, it con- firms the difficulty of achieving complete fiscal accountability and transparency in a disaster’s aftermath.

For costs not covered by Fema, congress responds to emergencies by targeting money to the area through the community Development Block grant (cDBg) program. in the initial appropriation of December 2005, mississippi received $5.1

408 ppmr / march 2009

billion for housing recovery compared to $6.2 billion for louisiana, even though louisiana had incurred significantly more damage from flooding (Walsh, 2007). This disproportionate response was often attributed to mississippi’s stronger political standing with the Bush administration and the republican congress (Dao, 2006; Walsh, 2007; Waugh, 2007). even after a subsequent congressional appropriation (in June 2006), the two supplemental appropriations totaled $10.4 billion for louisiana and $5.5 billion for mississippi despite the finding that the “comparative magnitude of aid” still favored mississippi (pike, 2007, p. 7).2 Just because money is appropriated does not translate into quick outlays. By the second anniversary of the hurricane, for example, most of the cDBg funding in both states was allocated but not spent (pike, 2007).

Federal policymakers called for strong accountability over the use of federal money, given the colorful history of political and legal misdeeds in louisiana in general, and new orleans in particular (shughart, 2006). as soon as federal dollars started flowing into the disaster area, the federal and state governments assigned auditors to keep track of the money and to investigate allegations of misuse of aid funds. in a matter of days, however, there were stories of multimillion-dollar Fema payments being released to several different small louisiana jurisdictions with the same vague single sentence as the only rationale: “extensive response actions to alleviate immediate threats” (Ballard & millhol- lon, 2005). The governor of louisiana, early on, sought to dispel such concerns by forcefully testifying that she would account for every penny (pace, 2005). congress and the administration were not dissuaded from imposing a robust accountability net over the gulf recovery efforts with pronounced attention to public corruption (hearing Before the committee on homeland security and governmental affairs, 2006).3

Government Revenues

The duration and extent of revenue flow disruption depends upon the size of the disaster. revenue estimates were quickly revised in jurisdictions impacted by Katrina. Table 2 shows the changes in louisiana and mississippi revenue estimates over the 12-month fiscal year that started in July before the hurricane. louisiana cut its total revenue forecast by 9.89 percent in its october official revision. By February, the original forecast was revised again, this time by a 4.91 percent reduction. yet, the may 2006 revision called for a 2.05 percent increase over the pre-Katrina original estimate! larger changes, both declines and increases, occurred in the succession of official revenue estimates for the general Fund. al- though mississippi made similar time-period revisions to its July 2005–June 2006 budget, the size of the original budget change was not as severe as louisiana’s. This comparative difference by the two states reflects the particular difficulty

hildreth / The Financial logisTics oF DisasTer 409

facing louisiana budget officials in estimating the loss of the economic activity of its largest city.

a similar examination of the general fund budget for new orleans during 2005 and 2006 reveals significant within-year and between-year changes (see Table 3). in 2005, new orleans’ general fund actual revenues fell 15.58 percent below the original 2005 budgeted level but 18.10 percent below the within-year revised amount. in the same year, expenditures fell 5.13 percent below the amounts originally budgeted but 10.78 percent below the revised level. more important, in 2005, the budget deficit increased from $20.83 million originally planned to an actual $64.92 million deficit, a 211.67 percent further change in the deficit. revenues and expenditures continued to decline for 2006, ending the year with a –21.62 percent change from the original 2005 budget for revenues and a –33.26 percent change in expenditures, yet ended 2006 with $36.412 million in general fund revenues in excess of expenditures. This extreme variability within year and for the two-year period conveys the difficulty facing public officials as they seek to adjust budgets after a disaster.

Disasters impose a change in fiscal priorities—a redeployment of resources. Table 4 offers a three-year perspective on the cost of government in new orleans,

Table 2. Changes in Fiscal Year 2006 (July 1, 2005, to June 30, 2006) Revenue Forecasts, States of Louisiana and Mississippi

Point of official forecast for fiscal year 2006

Original After

Katrina 3rd qtr 4th qtr

louisiana Total revenue ($mm) 9,004.9 8,114.6 8,562.8 9,189.6 % difference from original estimate –9.89 –4.91 2.05 % difference from after Katrina est. 5.52 13.25 % difference from 3rd quarter est. 7.32 general fund only ($mm) 7,271.9 6,301.3 6,900.6 7,485.0 % difference from original est. –13.35 –5.38 2.93 % difference from after Katrina est. 9.51 18.79 % difference from 3rd quarter est. 8.47

mississippi Total revenue ($mm) 4,014.3 3,980.3 4,262.3 4,332.6 % difference from original estimate –0.85 6.18 7.93 % difference from after Katrina est. 7.08 8.85 % difference from 3rd quarter est. 1.65

Sources: state budgets and bond disclosure documents.

410 ppmr / march 2009

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hildreth / The Financial logisTics oF DisasTer 411

and changes in the composition of service priorities as reflected in budget shares. governmental activities provide a broader perspective than just the general fund (and exclude business-like activities and affiliated entities termed component units). general government experienced a large reduction in its budget share from 2004 to 2005 while there were significant increases in funding shares for public safety (as might be expected, given the law enforcement imperative in the aftermath of a disaster of this scale) and public works. over the two-year period, culture and recreation declined significantly, reflecting its lower priority relative to other needs. The cost-share reductions for urban development and housing and economic development assistance are not surprising, given all the federal aid flowing to those activities through other recovery operations. a growing interest and fiscal charge category reflects the city’s debt burden (a topic reviewed later). overall declines of 20–30 percent offer another indicator of the fiscal challenges facing public officials during the recovery and reconstruction period.

new orleans faced, and continues to deal with, an unprecedented modern problem among major american cities—staggering costs and the loss of key parts of the tax base (Wayne, 2005). For example, in the year after Katrina, property tax assessments were two-thirds of the prior year’s level for the orleans levee Board (Donze, 2006a). one option in such a situation is to raise the property tax rate to preserve the pre-disaster revenue flow (given the basic formula: tax rate * tax base = the amount of taxes collected, assuming no delinquencies). a reduced tax base means tax rates have to increase to cover, at least, the existing general obligation debt service. in fact, property tax rates supporting the city’s debt increased by a third in 2006 to offset a 22 percent decline in taxable property

Table 4. Composition of City of New Orleans’ Cost of Governmental Activities

Expense category 2004 2005 2006

general government (%) 41.85 28.29 33.46 public safety (%) 24.59 33.20 30.17 public works (%) 15.59 19.23 18.42 health and human services (%) 2.62 2.98 2.31 culture and recreation (%) 3.16 3.01 1.72 Urban development and housing (%) 2.99 3.77 1.43 economic development and assistance (%) 1.91 1.83 1.20 interest and fiscal charges (%) 7.29 7.69 11.28 Total expenses (%) 100.00 100.00 100.00 Total expenses ($) 794,922,000 751,294,000 572,126,000 % change from prior year –5.49 –23.85 % change 2004 to 2006 –28.03

Source: city of new orleans, Basic Financial statements, for periods ending December 31, 2004, 2005, and 2006.

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values (city of new orleans, 2007; russell 2007).4 compounding the property tax base reduction is the impact of a disaster on tax collections, with owners of distressed property appealing the tax bill or just not paying the amount due. Data for orleans parish reveal a large spike in uncollected property taxes from 4.99 percent of total levied taxes in 2005 to 11.66 percent of the 2006 levy, but part of the problem resulted from state legislation permitting a delay in billing (city of new orleans, 2007, p. B-6).

problems with the louisiana property tax system predated hurricane Katrina. The large homestead exemption in louisiana (effectively $75,000) means that the property tax falls disproportionately (upwards of 90 percent) on income-producing property. having the property tax bear the full weight of the post-disaster budget problem forced larger rate increases on business to offset a lower base and lower collection rates.

immediately after the hurricane, property values were adjusted to reflect storm damage ahead of the scheduled statewide reappraisal of all real property (rus- sell & Donze, 2007). This use of automated mass appraisal caused problems for applicants seeking recovery assistance when their residential value changed significantly from the pre-storm taxable value to market value (Warner, 2006). Despite the noticeable loss of homes and businesses to a casual observer, general reappraisal and the new construction resulted in a significant increase in taxable assessed valuation in new orleans from $2.14 billion in 2005 to $2.54 billion in 2008, a robust 5.97 percent compound annual growth rate (city of new orleans, 2007, p. B2).

accentuating the undervalued and unequal property tax assessment situation was the division of orleans parish (the city of new orleans) among seven elected assessors instead of the single assessor as is the case in all other parishes in the state (russell, 2004). reformers led the post-disaster successful effort that resulted in statewide electors voting overwhelmingly to change louisiana’s constitution to have only one assessor in charge of all of orleans parish, but the switch does not take effect until may 2010 (“la. Voters approve single Tax office,” 2006).

given the problems with louisiana’s property tax system, it is understandable that the two primary “good government” groups in louisiana, funded as they are by business and professional members, suggested that the affected governments should study the actual, rather than the theoretical, impact of filing for bankruptcy (Bureau of governmental research and the public affairs research council of louisiana, 2006). such thinking shifts the burden from property tax payers (mainly businesses since they constitute about 90 percent of the nonexempted property tax base) to investors. in such a scenario, existing bondholders lose their invest- ments, while future investors would be expected to demand a risk premium to purchase city bonds.5

enterprise operations are especially vulnerable due to the loss of operating

hildreth / The Financial logisTics oF DisasTer 413

income when services are disrupted due to destroyed homes and businesses and the entity’s basic infrastructure. For example, new orleans’ city park, one of the nation’s largest urban green spaces, could not earn funds from its operations due to its money-making facilities being ruined or out-of-service. Without operating funds the city park had to lay off employees, which prevented it from having the workers to get the facilities cleared and fixed for income-earning business (Krupa, 2006a). a prime example of the problem facing an enterprise system concerns the sewerage and Water Board that has to deal with massive losses to its water and sewer infrastructure. The problems were so acute that regular monthly bill- ing did not resume until april 2006 (Desue, 2007). Bedeviling quick recovery is the city’s attempt to get Fema to accept more responsibility for rebuilding the infrastructure that local officials assert were materially destroyed by the flood and its aftermath. Fema, for its part, is understandably reluctant to pay for years of local infrastructure neglect.

in a creative, but ultimately unsuccessful, move to gain revenue from debris placement in a private hauler’s landfill, the mayor of new orleans signed an agree- ment to have the firm “donate” to the city 22 percent of the landfill’s revenues. Fema determined that the city would be profiting at the expense of the federal government by passing on the total cost for Fema reimbursement. Fema ruled that any such “donation” would be considered a credit against the city’s reimburse- ment of the prices charged it by the private hauler (luther, 2007, p. 14).

Under section 417 of the stafford act, Fema administers a program of com- munity disaster loans to cover local government revenue shortfalls after a disaster. eligible communities must demonstrate that they are unable to perform essential governmental services budgeted in the general fund (not capital improvements, federal match, or otherwise reimbursable expenses). community disaster loan amounts are based on need; shall not exceed 25 percent of the annual operating budget for the year in which the disaster occurred; and shall not exceed $5 million. Borrowers pay an interest rate set equal to the rate for five-year Treasury bonds. The term is set at 5 years, but it can be extended for up to 10 years. if the recipient government is in arrears on its repayment, it is not eligible for another loan (noto & mcguire, 2005). in fact, the state of louisiana was in arrears on repayment of prior-hurricane loans, so it had to obtain a commonly granted waiver. either the state must cosign the promissory note or the local government must pledge collateral sufficient to cover the loan’s principal amount. Because louisiana does not have the legal authority to co-sign local government loans, it had to obtain a waiver on that provision, too (office of the governor of louisiana, 2005). in the pre-Katrina community disaster loan program, if revenues in the following three years were insufficient to repay the money, the loan was cancelled. in fact, 97 percent of all past loan principal was canceled (noto & mcguire, 2005).

on october 7, 2005, the president signed an appropriation for $750 million to

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create $1 billion in special community disaster loans for the gulf coast disaster. congress waived the $5 million loan limit and set the loan interest rate just above one-half of the five-year Treasury bond rate, but removed the president’s option to cancel Katrina disaster loans. an additional appropriation of $278.8 million to create $371.73 million of noncancelable loans was approved in June 2006. it waived the $5 million loan amount when the local government faced the loss of 25 percent or more of its tax revenues, but the amount loaned could equal no more than 50 percent of the operating budget (noto, 2007).

loan repayment expectations were contentious. in applying federal budget rules for credit programs, both loan program appropriations were premised on a 75 percent default rate, which accounts for the difference between the appropriation and the gross amount of loans authorized (noto, 2007). still, gulf coast officials were infuriated at the unprecedented statutory provision prohibiting cancellation of the loans, but they were unsuccessful in early efforts to wipe that provision from the law (eaton, 2007; maggi & smith, 2005). making the matter worse, the Bush administration required a 10 percent copayment on each Fema project rather than as a lump sum or in a batch, as the rules had been interpreted by a prior administration for grand Forks, north Dakota, during its recovery from the 1997 flood (hammer, 2007). a newspaper editorial termed the requirement to pay 10 percent as “reeking of partisan politics” since the rule had been waived “32 times since 1985,” including the president’s waiver for new york city after the terrorist strikes, and the louisiana dollar amount exceeded all previous disasters (“Bush pushed to play Fair,” 2007). in may 2007, congress forced the issue by eliminating the 10 percent match and the loan repayment requirements (“congress approves $3.6B,” 2007).

as of the first-year anniversary, louisiana governmental entities had requested $725 million in payments under the community disaster loan program, but received Fema approval for $631 million with only $462 million received, or 73 percent of the approved amounts (louisiana legislative auditor, 2006c). applications for at least 29 governmental entitles were rejected due to ineligible purposes (such as the lack of debt authorization) or having less than the required 5 percent revenue loss (louisiana legislative auditor, 2006d). By mid-February 2006, new orleans had completed its last draw-down from its authorized $120 million (meitrodt, 2006a). The city received a second federal loan of $120 million in october 2006 but as of march 2008 had only drawn down $84.7 million, with plans to use $14.6 million in 2009 and $20.7 million in 2010 (city of new orleans, 2008).

it is not uncommon for governments to smooth over a liquidity problem by borrowing in advance of the receipt of tax collections. a disaster situation imposes a new hurdle: the tax base may be “underwater” both in financial and physical terms. Borrowing against a pre-established line of credit is possible. one of the city of new orleans’ investment banking institutions immediately offered a line

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of credit that the firm admitted failed its normal credit guidelines (rivlin, 2005). Despite the offer, the city found it too difficult to organize the financial syndicate to complete a $150 million debt placement (meitrodt, 2006a). even in october 2007, the issuance of $260 million in pre-Katrina, voter-approved general obliga- tion bonds was dependent upon the availability of bond guarantee insurance from a second-tier firm (a firm without the coveted triple-a bond rating) to offset the city’s below investment-grade bond ratings (“Junk Bond rating prevents,” 2006; “n.o. Board Unlocks,” 2007).

The state of mississippi, for its part, took several steps to bolster its liquidity position and that of the affected local governments. The mississippi legislature expanded the state Bond commission line of credit to cover $500 million for any state general fund deficiencies or for other specified disaster expenditures (state of mississippi, 2006b, p. 5). in a related move, the state authorized the creation of a commercial paper program up to $250 million for its own liquidity. addition- ally, mississippi created a state loan pool for its local governments to access for liquidity and capital projects related to Katrina (mississippi Business Finance corporation, 2006). Within the first year, mississippi “provided approximately $17,500,000 of direct grants to cash-strapped gulf coast local governments so they could maintain essential services such as fire and police protection” (state of mississippi, 2006a, p. 5).

overcoming the destruction of a community’s tax base requires significant re- development efforts. an early success was Fema’s agreement to fund temporary housing on company work sites, especially petrochemical plants and other key drivers of the local economy (“Wanted: housing for Workers,” 2005). in the first months after the disaster, the hotels in new orleans that were open had business,

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but most of the customers were federal workers whose bills were paid by the federal government and therefore exempt from having to pay the sales and hotel occupancy taxes. as shown in Figure 1, the hotel/motel room occupancy tax in orleans parish experienced immediate and dramatic declines, with indicators of recovery in December (louisiana stadium and exposition District, 2006). The adjacent Jefferson parish showed a different pattern in the months after the disaster, but it, too, recovered by December. This revenue source is the collateral for criti- cal convention and tourism facilities, including the superdome (the official name of the controlling entity is the louisiana stadium and exposition District). more recent data report a continuing problem with this indicator of the local economy. hotel/motel room occupancy taxes from the two parishes that are dedicated for the superdome declined from $35.48 million in fiscal year 2005 to $22.97 million in fiscal year 2006, and only $24.74 million in fiscal year 2007, representing a two- year decline of 30.27 percent (louisiana Department of revenue, 2006, 2007a).

a broader perspective on fiscal recovery emerges from an examination of general sales tax collections. Figure 2 shows the per capita taxable sales for new orleans and four neighboring parishes for five successive time periods (calendar year 2004, a nine-month average for pre-Katrina 2005, the worst point during the

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Notes: The listed time periods are 2004 (2005): the average during the full calendar year of 2004; 2005 pre-K: the average during the period before Katrina, average monthly data from January through august 2005; Worst: the point in the data series during september through December 2005 when the series was at its worst; 1st anniversary: July 2006 data; 2nd anniversary: July 2007 data.

hildreth / The Financial logisTics oF DisasTer 417

end of 2005 for each parish, and data for the first and second anniversaries of the disaster). orleans parish levels were the lowest of the five in 2004 compared to the neighboring parishes, with a similar result in pre-Katrina 2005. Katrina’s nega- tive impact was staggering, in the short term, but sales rebounded in orleans as rebuilding accelerated. Jefferson parish experienced an immediate burst of taxable sales, but the impact diminished thereafter even though the per capita amounts stayed higher than 2004 and pre-Katrina 2005. While there are clearly winners and losers in a disaster scenario, the larger message is the impact of disasters on taxable sales. This evidence confirms that all five parishes experienced increases in taxable sales of over 140 percent at both the first and second anniversary of the disaster. For the states, louisiana experienced a 25 percent increase in sales taxes from fiscal year 2005 to 2006, compared to a 17 percent increase for the state of mississippi (state of louisiana, 2006a; state of mississippi, 2006a). other research confirmed the trend: for example, harper and hawkins (2006) noted that increased taxable sales associated with rebuilding activity following a storm can be a fiscal blessing. That new tax increment, however, may benefit the surrounding areas at the expense of the city most directly affected by the disaster.

While the focus of this paper is on the new orleans experience, it is instructive

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to view the revenue change in the cities along the mississippi gulf coast driving eastward. Figure 3 shows the change in sales tax collections for each of the eight cities from october 2004 to october 2005, and two subsequent periods (missis- sippi state Tax commission, 2006). Biloxi was more affected by the hurricane than gulfport, partly due to the loss of the numerous barge-based casinos along the Biloxi coast (sigo, 2005b). For the august 2005 to august 2006 period, the cities showed signs of recovery from the bleak initial period, but the cities clos- est to new orleans remained revenue poor. gulfport, however, emerged as the regional center for reconstruction and durable goods purchases.

Biloxi offers an interesting case. in a prescient move, given its dependency on the casino industry, just two months prior to hurricane Katrina, Biloxi pur- chased, for $92,000, a $10 million business interruption insurance policy to cover lost gaming revenue for up to six months (moody’s investors service, 2006b; sigo, 2005a). The city laments that the same deal is no longer available (perez, 2008). Biloxi’s budget for fiscal year 2007 was premised on a 29 percent decrease in expected property tax receipts compared to the prior year, reflecting that approximately 38 percent of its assessed value is accounted for by casinos and hotels (city of Biloxi, 2006b; moody’s investors service, 2006b). The city experienced a quick turnaround because its fiscal year 2008 budget reflected a 26 percent increase in property tax revenue due to the expanded tax base from new construction (creel, 2007).

hildreth / The Financial logisTics oF DisasTer 419

casino gaming revenue fuels many of the affected mississippi gulf coast local government budgets. in July 2005, there were 12 open casinos, with one scheduled to open in a few weeks. a year later only five casinos were open, but another four were close to opening (Bourie, 2006). as Figure 4 shows, casino gross revenue was almost 70 percent of pre-Katrina levels on the first anniversary, despite less than half of the casinos being open (mississippi state Tax commission, 2008). By the second anniversary, gross revenue was back to the pre-Katrina levels. in Biloxi, for example, employment in the casino resort industry was at pre-Katrina levels, and seven of nine facilities were back in operation (city of Biloxi, 2006a, p. 9). Katrina changed the casino industry on the mississippi gulf coast by making available large tracts of land cleared by the hurricane’s destruction and prompt- ing the legislature to change the law permitting land-based casinos in the “safe harbor” defined as within 800 feet of shore (sasseen, 2006).

a viable economy rests on a sustainable tax base, not just buoyed by the rebuild- ing surge, as evidenced by taxable sales of building materials, durable goods and personal property. congress recognizes this need, and crafted several avenues to deal with the need for housing and business redevelopment. serving as a model, the liberty Bond program authorized for new york city’s recovery zone allowed private firms to access the municipal securities market (city of new york, 2004; mcconnell, 2005a). it also lifted the state volume cap, exempted the bonds from the alternative minimum Tax, and permitted the bonds to be purchased by banks under special terms (i.e., the bank qualified status). These provisions expanded the market for liberty Bonds, thereby permitting affected firms to borrow at lower cost than they might otherwise have to pay. liberty Bonds, however, are not backed by the U.s. government.

in late 2005, congress passed the gulf opportunity Zone act to spur economic development. after defining the disaster zone, the law provided tax relief to businesses in a similar form to that provided through the liberty Bond program (moran, 2008). The law also provided certain debt options for governments in the region (to be discussed later). overall, the law was estimated to have a 10-year revenue loss (tax expenditure) for the federal government of $8.7 billion (Joint committee on Taxation, 2005a).

significant rebuilding efforts targeted the extensive housing damage in louisi- ana and mississippi. louisiana faced 213,737 housing units with major damage or destroyed compared to mississippi’s 61,386 heavily damaged or destroyed units (pike, 2007). louisiana contended that it sustained almost four times the total housing damages, but by mid-2007 its road home program had received less than twice the amount of cDBg funding of mississippi (louisiana recovery authority, 2007; U.s. senate committee on homeland security & governmental affairs, 2007). in the immediate aftermath of the disaster, Fema activated its transitional housing program involving rental assistance and mobile homes. selection of a

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redevelopment plan proved especially difficult for new orleans (nelson, ehren- feucht, & laska, 2007). one effort envisioned the issuance of “blight bonds” until the investment community pointed out that blighted property offers insufficient collateral for debt (Donze, 2007). immediately after the disaster, a plan to spur mortgage programs through the issuance of tax-exempt bonds was advanced when Freddie mac—a large financial intermediary set up by the national government to provide private mortgage loan liquidity across the country—quickly announced that it would buy up to $1 billion of new housing bonds from louisiana and mis- sissippi, at below market rates, for two years (Vadum, 2005). one analyst estimated at the time of the announcement that the Freddie mac program would likely absorb the total new supply of housing bonds from those states, thereby making a ready market for the bonds (Van Kuller, 2005). mississippi, for its part, issued bonds under this program (mississippi home corporation, 2006; Vadum, 2006).

essential to the rebuilding process is the timely payment of insurance claims to individuals and businesses. insurance payments, including federal flood insurance, in louisiana totaled an estimated $40 billion, but for many customers, payments were delayed, the amounts received were less than the loss, or coverage was denied completely due to flood exclusions (eaton & Treaster, 2007; U.s. senate committee on homeland security & governmental affairs, 2007). cleanup and rebuilding was delayed during the insurance adjustment process. The issue is not just a state insurance regulatory matter, because the louisiana citizens property insurance corporation (lcpic) was created in 2003 to provide property insurance for residential and commercial property where the owner was unable to procure insurance through the normal market. as a result of Katrina, lcpic anticipated losses in excess of its ability to pay. The lcpic law enables it to impose an emergency assessment on all property insurance policies written in the state, not just its own. in april 2006, the lcpic issued $978,205,000 in tax-exempt bonds securitized by these future emergency assessments. state politicians reacted to public anger over this large rate increase and the statewide redistribution of the insurance burden for the low-lying areas by enacting an income tax credit to off- set the full assessment (“la. can Divert Funds,” 2006; louisiana Department of revenue, 2007b). neither these steps nor this paper addresses the broader debate regarding the appropriate role of government in the pricing of insurance risks in disaster-prone areas.

Government Debt

Disasters impact the ability to repay existing debt and create the need for new debt to rebuild that which was destroyed. For example, the city of Valmeyer, illinois, which had to be relocated due to the 1993 midwest flood, “lost a third of its residential tax base, forcing it to raise taxes on those who remained. The

hildreth / The Financial logisTics oF DisasTer 421

move, including the $3 million it cost to buy and annex 500 acres of farmland, put the village millions of dollars in debt” (lamb, 2003). hurricane Katrina of- fers another case, that of a major city with large amounts of debt at risk and more debt issuers affected.

hurricane Katrina raised doubt about state and local governments’ ability to repay debt. The state of louisiana had an estimated $7.5 billion in debt outstanding. in addition, the following political jurisdictions in orleans parish had accumulated at least an aggregate total of $2.7 billion in debt obligations outstanding at the time of the disaster, with most of it not general obligation debt but rather revenue bonds backed by a dedicated revenue source:6

• City of New Orleans ($874 million) • Sewerage and Water Board ($367 million) • Audubon Commission (i.e., the zoo and aquarium, $54 million) • New Orleans Aviation Board ($184 million) • New Orleans Municipal Yacht Harbor Management Corporation ($1.2 million) • Orleans Parish Communications District ($10 million) • Law Enforcement District of the Parish of Orleans (i.e., the sheriff, $35 million) • Orleans Parish School Board/School District of the Parish of Orleans ($287

million) • Regional Transit Authority ($121 million) • Ernest N. Morial New Orleans Exhibition Hall Authority ($506 million, based

on a 3 percent hotel/motel room occupancy tax, food and beverage tax, and sales tax)

• Port of New Orleans Board of Commissioners ($93 million) • Orleans Levee District ($78 million) • Greater New Orleans Expressway Commission ($70 million, the causeway over

lake pontchartrain, the second-longest bridge in the world) • Crescent City Connection ($22 million, the downtown toll bridge, part of the

state transportation department) • Louisiana Stadium and Exposition District ($194 million; this state authority is

the superdome, with the debt backed by a 4 percent hotel/motel room occupancy tax).

immediately after hurricane Katrina, moody’s investors service placed 51 bond ratings from the multistate disaster zone, totaling $9.4 billion, on its credit watch list. of this amount, 69 percent were insured (Desue, 2005; Van Kuller, 2005). in the case of new orleans, about 72 percent of its debt was insured, meaning that investors are repaid regardless of the debt issuer’s financial situation (Bureau of governmental research, 2006). Dedicated revenue provides the source for many of the orleans-area political subdivisions’ debt. By December, $2.16 billion of orleans-related debt was still affected (standard & poor’s, 2005). For example, the ernest n. morial new orleans exhibition hall authority bonds are backed by an excise tax on hotel occupancy and restaurant sales (louisiana Department

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of revenue, 2007c). When there is no money flowing from those sources, the bonds are at risk.

The capital markets had judged the orleans political jurisdictions debt heavy before hurricane Katrina, as reflected in the bond ratings and extensive use of bond insurance by these credits. after the disaster, these existing debt profiles limited local actions to fund recovery operations. For example, with an estimated pre- Katrina population of 452,269, the $2.7 billion in orleans-related debt translated into about $6,000 per person. at the first anniversary, the parish was estimated to have a population of 222,200, so the burden was an estimated $12,150 of debt per capita.7 The dead weight of the soaked buildings, destroyed infrastructure, and reduced services make this a seemingly insurmountable mountain of debt and yearly debt service, short of assistance from outside the area.

mississippi offers interesting comparative perspectives. in January 2006, the mississippi Development Bank, a state-created financial conduit, issued special obligation bonds to cover the existing debt service obligations of hard-hit har- rison county on the gulf coast (mississippi Development Bank, 2006). The public authority providing sewerage service for the Biloxi area restructured its debt, effectively deferring most of its debt for two years, and within months of the disaster, Biloxi had to turn to a local bank to purchase a fire truck using a five-year capital lease (city of Biloxi, 2006a).

Disasters can disrupt timely payment of debt service obligations and lead to the failure to observe other debt covenant requirements. at the lesser end of the spectrum of things that can go wrong regarding debt, louisiana failed to meet its continuing disclosure agreements when it was late issuing its end-of-year audited financial statements, better known as the comprehensive annual financial report.

a higher-level government can step in and guarantee the debt of another juris- diction. There was an early effort to get the U.s. government to guarantee gulf zone debt, but the secretary of the Treasury, John W. snow, quickly dismissed this option as a mistake because it could impose a risk-premium on Treasury debt. This position was based on the view that subnational debt would then become a contingent liability of the federal government (mcconnell, 2005b). While this op- position seemed to stall the public discussion of the federal guarantee, the house Ways and means committee—the key tax committee—moved the proposal until strong White house objection ended up quashing this proposal (alpert & maggi, 2006; mcconnell, 2005c; powell, 2006).

There are other ways that the federal government can help communities fac- ing disaster recovery. congress governs the way state and local governments can refinance tax-exempt debt with new tax-exempt debt. This rule is termed an advanced refund because the old debt remains outstanding with the new debt proceeds used to buy risk-free U.s. Treasury securities that will mature at the yearly dates when the old debt’s principal and interest payments are due. There

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is a limit of one advance refunding per bond issue because of the loss of federal taxes on the interest payments received by the investors of (now) two bond issues that are outstanding for the same capital project. after 9/11, congress granted new york city a second refunding option. a similar option was extended to gulf zone issuers in the gulf opportunity Zone act of 2005. The added benefit to issuers is to extend the term and create a delay in repayment of principal.

in regard to new debt, congress could guarantee such debt, but, again, Treasury secretary snow’s testimony conveyed the administration’s position. another ap- proach, introduced on october 20, 2005, by representative richard Baker from Baton rouge, was the proposal for a louisiana recovery corporation under the control of the U.s. president. according to the legislation (h.r. 4100): “The pri- mary mission and purpose of the corporation shall be the economic stabilization and redevelopment of areas within louisiana that were devastated or significantly distressed” by the recent hurricanes. The lrc would obtain financing from the U.s. Treasury to buy property and make infrastructure repairs to “maximize the return on acquired real property.” Federalizing the recovery agency became the consensus vehicle for louisiana politicians and civic leaders. however, the White house objected, and the plan died (alpert & maggi, 2006; mcconnell, 2005b; powell, 2006).8

president Bush’s policy preference was adopted as the gulf opportunity Zone act of 2005. The law created a tax credit bond program to help local governments pay their bonded indebtedness. This program was termed “bail-out bonds” by one analyst (sigo, 2006). Under the go Zone bond program, the state is responsible for paying the principal, and the U.s. government, in effect, pays the interest by providing bond purchasers with federal income tax credits. The state must provide a match equal to that of the federal government. These bonds must be general obligation debt and must mature in two years, with all bonds issued within five years of the statute’s enactment date. louisiana was authorized to create and issue up to $200 million of federal tax credit bonds, while mississippi was authorized for $100 million and alabama for $50 million (Joint committee on Taxation, 2005b; office of the governor of louisiana, 2006).

louisiana sold $200 million in gulf Tax credit Bonds and $200 million in general obligation match bonds in July 2006. The proceeds from the sale benefited 13 orleans-area political agencies that qualified for debt service relief (state of louisiana, 2006b). essentially, the state-issued tax credit bonds provided the funds to purchase refunded bonds that were issued by the named local govern- ments, thereby refinancing the local debt at a lower rate. This innovative financ- ing mechanism allowed the state to pay the principal on the bonds, the local government entities to spread out their repayments to the state, and the federal government to provide bond purchasers with federal income tax credits in lieu of paying them interest.

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Tax credit bond proceeds are legally memorialized through a cooperative en- deavor agreement between the borrower and the state. The loan provides critical breathing room for governments that do not have to cover part of their existing debt service payments. For new orleans, the 2006 loan allowed it to start interest payments in January 2012, and principal payments, which would be due each July, starting that year. in 2012, the city can “either apply for a five year deferment, pay the loan in full or make semi-annual payments in accordance with a 15-year debt service schedule that ends on July 15, 2026” (city of new orleans, 2007, p. 26). loan proceeds are held in an irrevocable account by a local bank and distributed to the city’s independent bond paying agent as the city’s debt service maturities become payable (city of new orleans, 2007).

Under the louisiana constitution of 1921, the new orleans Board of liqui- dation–city Debt (2005, 2006, 2007), a component unit of the city but governed apart from the mayor, has exclusive control over the city’s bonded debt. The board issues the city’s general obligation debt and sets the property tax rate to cover the debt service. in addition, the Board sells the revenue and limited tax bonds of several other boards and jurisdictions within the parish. in its December 31, 2005, annual report, the notes to the financial statements confirmed the city’s dire situation. The board used a portion of its reserve funds to ensure debt service ob- ligations through september 2006. in a clear warning, however, the board stated, “There is no guarantee the ad valorem tax collection will be sufficient to service the debt and replenish this [reserve fund] in 2007” (2005, p. 11) . general obligation bond holders were given comfort, however, in the board’s notice that all general obligation bonds are insured. By taking advantage of the gulf opportunity Tax credit Bond loan program to cover debt service, the board’s 2006 annual report did not include the investor warning. in fact, it is the board that entered into the cooperative endeavor agreement on behalf of the city of new orleans for debt service due on the city’s general obligation and special limited tax bonds ($27.6 million in freed-up debt service), and for the outstanding debt for special tax bonds of related entities, including the audubon commission ($11.85 million) and the sewerage and Water Board ($77.5 million).

For municipal bonds backed by a financial guarantee insurance policy, if the underlying creditor does not pay its debt service on time, then the bond insurer has to step in and make the scheduled payment. This is what happened when the school District of orleans parish failed to pay its debt service on time (Van Kuller, 2005). Under the terms of the bond insurance agreement, the school board was obligated to repay the bond insurer, plus interest, for this liquidity feature because bond insurance is not intended to be a liquidity provider. The school district repaid the bond insurer. if, however, the school district defaulted on all future payments and filed for bankruptcy, then bondholders would receive all future payments on the scheduled due date from the bond insurer instead of the school district.

hildreth / The Financial logisTics oF DisasTer 425

although an issuer may not default on the timely payment of principal and interest, there remains a risk that the jurisdictions will trigger an “event of de- fault” by not abiding by some condition of the borrowing agreement, such as not maintaining reserves in an enterprise operation equal to the maximum annual debt service. an occurrence such as the experience of the school District of orleans parish can have a negative influence on secondary prices paid by investors and the cost of future borrowing by the debt issuer.

one option facing fiscally stressed local governments is bankruptcy. Under the U.s. constitution, congress sets bankruptcy law, and chapter 9 of that law (11 U.s. code) is devoted to municipal bankruptcy. The key difference between municipal and business or personal bankruptcy is that creditors cannot force a municipality into bankruptcy. municipal bankruptcy must be voluntarily entered into, and under federal law, the respective state governments must first permit the local government to file for bankruptcy. in louisiana, a state agency must approve any local filing for bankruptcy, and the elected state treasurer, who chairs that panel, announced on several occasions immediately following the disaster that he would not entertain such an agenda item (Ballard, 2005a, 2005b). as stated earlier, two prominent “good government” organizations, while not recommending for or against bankruptcy, declared it an option for severely affected governmental entities. This doomsday scenario was avoided, and in may 2007, moody’s inves-

Figure 5. Fiscal Equilibrium Analysis

Desired state: Stability of finances consistent with fiscal goals

Resisting forces

Destruction of tax base Dispersion of population

Need to repair, restore, reconstruct or replace assets Insufficient liquid public funds (cash)

Existing debt service Fixed costs (including workforce)

Red tape Uncertain protection against future disasters

Need for accountability

Current state (post-disaster): Severe disruption to fiscal plans

Driving forces

Increase in private consumption spending Redesign public services

Adjust debt profile Change tax burden

426 ppmr / march 2009

tors service upgraded new orleans’ general obligation bonds to investment grade (city of new orleans, 2006). louisiana’s bond rating was raised to its pre-Katrina level in mid-2008 (“rating agencies Upgrade,” 2008b).

capital market analysts expressed concern that the magnitude of the disaster, and what it could portend for future events, would have a systemic impact on the state and local government bond market. initial research found little national impact, but substantial impact on the trading of louisiana credits (Denison, 2006; marlowe, 2006). one analyst wondered if credit criteria should incorporate the probability of a natural disaster striking the community and the need for contin- gency reserves (Van Kuller, 2005). There was a prudent call for hurricane-alley issuers to do more preemptive action, such as due diligence in disclosures and disaster planning (Desue, 2006). such efforts are consistent with the govern- ment Finance officers association (2005) recommended practice on Business preparedness and continuity guidelines.

Discussion: A Fiscal Equilibrium Analysis Perspective

a disaster, especially on the scale examined here, shocks the intended financial strategy of a governmental entity (hildreth, 2000; mintzberg & mchugh, 1985). The intended path is no longer viable, if only for the short term (e.g., that quarter or fiscal year). although sales tax revenues may recover, and even exceed prior levels, due to the purchases required to rebuild and to restore personal and com- mercial lives, this stock of funds may not persist for an extended period.

The strategy that emerges begs for reassertion of fiscal stability consistent with fiscal goals. This section of the paper introduces the framework of fiscal equilib- rium analysis to demonstrate the forces that can either drive or resist efforts to reassert fiscal equilibrium. Figure 5 outlines the fiscal equilibrium challenge facing a community following a disaster. The current state of affairs is characterized by a severe disruption to fiscal plans, while the desired state of affairs is stability of finances consistent with (revised or emergent) fiscal goals.

Kurt lewin’s (1951) force field analysis is a method designed to promote change by highlighting the forces helping and hindering the desired change. re- sisting forces hold back the desired change. Driving forces act to drive activity to the goal state. moving to the desired goal from the current state can be achieved either by increasing the driving forces or decreasing the resisting forces. change theory suggests that lessening or removing the resisting forces is the most effica- cious path. The financial logistics of disasters seems a useful application of this change analysis, and the Katrina case details, in particular, operationalize the force field.

hurricane Katrina and its aftermath destroyed the tax base, caused the disper- sion of the local population, and imposed unparalleled costs to repair, restore,

hildreth / The Financial logisTics oF DisasTer 427

reconstruct, and replace assets. The floodwaters were followed by the lack of budget liquidity (cash) to cover these disaster-imposed costs. given that debt is essentially the securitization of future expected revenue flows (from the property tax for general obligation bonds and from a dedicated tax or charge for a revenue bond), the loss of the underlying taxable item of value (property value on the tax date or the consumption that is taxed) calls into question the existing debt obliga- tions. resuming private behavior in a threatened environment is problematic, and undermines the chance of achieving the desired fiscal state of affairs. concomitant with the flow of disaster recovery funds into a community is the need for account- ability—the funds should be used for the intended purposes in an efficient and effective manner. Tension between the need for speedy action and the “red tape” involved in obtaining Fema reimbursements complicates recovery but is part of the required accountability regime. evidence suggests that congressional oversight matters with respect to Fema’s performance, at least on timely processing of the critical project worksheets for state and local government reimbursement.

Forces that can drive a change in a disaster environment include federal and state grants and loans. however, those programs are designed to cover the im- mediate costs of cleanup and repair, to replace the lost public and private assets, and to provide liquidity and short-term budget relief. Thus, as the case study demonstrated, most of the effort to deal with expenditures, revenues, and the debt profile were designed to decrease the resisting forces, not increase (directly) the driving forces.

research, and this Katrina story, confirms that the post-disaster consumption spending produces large amounts of sales tax revenues but perhaps in a redistrib- uted manner within the region. individuals and businesses purchase taxable items, especially high-dollar durable goods, motor vehicles, and building materials, to rebuild and replace their lost assets. This stimulus spending requires careful at- tention at the governmental level to avoid having it dissipated instead of used in a prudent manner. one option might be to have a regional collection of higher than pre-disaster estimates of sales tax for any particular taxing jurisdiction and redistribute the tax increment back to the disaster site.

Disasters such as Katrina require governments to reconsider prevailing practice. reducing the workforce to deal with the immediate budget crisis does not have to mean that the same service levels and staffing patterns will resume once fiscal stability is achieved. The louisiana response shows how disasters can speed up long-sought changes in government practices, such as property tax administration and levee board oversight. similarly, the distribution of tax burdens imposed by poor tax administration, and the ubiquitous state homestead exemption, can lead to those paying most of the property taxes (income-earning property owners) demanding consideration of drastic fiscal steps–such as local bankruptcy–instead of accepting the higher tax levels imposed on that segment of the taxpaying com-

428 ppmr / march 2009

munity. in essence, these reform opportunities are too good to pass up. Therefore, these and other driving forces can take hold following a disaster in an attempt to move the fiscal equilibrium to a new level.

Fiscal equilibrium analysis is not proffered as a general theory but rather as a conceptual method to help public officials, and researchers, differentiate between and among the forces of change in the fiscal environment following a disaster. Disasters may shift the built community off its foundation; however, the fiscal institutions of government must be flexible but not break as public officials seek to right the ship of state. This tool is a means of clarifying the forces that can advance or retard change toward fiscal stability.

Conclusion

a government’s financial strategy is severely disrupted by a disaster event, espe- cially of the magnitude imposed by hurricane Katrina. Fiscal changes are revealed by changes in revenues, expenditures, and the debt profile. The paper opens with the question of which fiscal strategies can close the gap between the post-disaster fiscal condition and the desired situation governed by sustainable fiscal goals. case study details and a conceptual framework are offered to answer the question.

public budgeting in disaster recovery and reconstruction tests the commitment of all stakeholders. citizens and businesses want a quick return to pre-disaster conditions and routines. public officials must contend with changes in nearly all aspects of their fiscal affairs. cash is king. spending occurs before reimburse- ment can be negotiated. capital assets are impaired. revenues dry up and then spring forward at a rapid pace. some employees earn large overtime payments while others lose their jobs. priorities change, as they did in new orleans, from culture and recreation to larger budget shares for public safety and public works. The financial benefit accruing from the receipt of federal aid is offset by the ac- countability regimes imposed. more debt is required while current debt service is at risk. new opportunities to push repayment off a few years can create current budget flexibility but saddle future taxpayers with larger burdens. While the norm of adopted fiscal policy guidelines, including policies on minimal fund balance and the use of limited debt instruments, can place a community in good shape to face a disaster, it will be the unused capacity created by those professional prac- tices that will provide public officials with the flexibility they need to deal with disaster recovery, even at the expense of violating their own pre-disaster fiscal policies for a short period.

The case study reveals the complexity, hurdles, and decisions confronting fed- eral, state, and local officials as they deploy financial resources in the aftermath of a disaster. officials, at least when a major city undergoes a disaster with the impact of Katrina, should expect wide variation in revenues, expenditures (both in

hildreth / The Financial logisTics oF DisasTer 429

the cost of government and its composition), performance results, and debt. This case is a cautionary tale of the fiscal impacts of disaster recovery.

Disasters, at least as showcased here, suggest that efforts to move the fiscal equilibrium to the desired state of financial stability require more attention to the removal of resisting forces rather than efforts to increase the driving forces. That is not to say that driving forces, such as redesigning public services and adjusting the tax burden, are not important, because surely they are, but those efforts by themselves are unlikely to move the equilibrium to the desired state. The utility of fiscal equilibrium analysis should be tested in other environments. community disaster recovery is a topic that deserves the attention of fiscal analysts because it is the movement of monetary resources that will ensure that recovery occurs with respect to the stability of finances consistent with fiscal goals.

Notes

1. Katrina symposiums in the following journals were reviewed: Annals of the American Academy of Political and Social Science (2006), Public Administration Review (2007), Public Choice (2006), Public Works Management and Policy (2006), Southern Economic Journal (2007), and State and Local Government Review (2007).

2. “louisiana suffered 67 percent of the major and severe housing damage and received 62 percent of the cDBg funding, while mississippi suffered 20 percent of the damage and received 33 percent of the funding” (pike, 2007, p.7).

3. assistant attorney general alice s. Fisher stated in prepared testimony: “i can think of few other circumstances where the federal law enforcement community pulled together so cohe- sively, and so quickly, to bring about a palpable and effective message of deterrence” (hearing Before the committee on homeland security and governmental affairs, 2006, p. 2).

4. The millage levy was rolled back starting in 2007 due to higher gross assessments, such that by 2008 the tax rate (23.80 mills) was lower than in 2005 (28.40 mills), according to the new orleans Board of liquidation–city Debt (2007, p. 37).

5. The bankruptcy filing of orange county, california, and its relatively quick reentry into the capital markets would suggest the penalty may be short-lived.

6. information collected in september–october 2005 based on the (then) most recent au- dited financial statement, available either on a jurisdiction’s web page or from the legislative auditor, as updated by bond disclosure documents where available. actual amounts outstanding at the time of the disaster may vary from these published amounts. The new orleans Board of liquidation–city Debt serves as the issuer and debt service fund for city-bonded debt, and the revenue and limited tax bonds of certain boards and special districts.

7. For comparison, the 2006 median debt per capita for all cities with a Baa moody’s rating was $1,883 (moody’s investors service, 2006a).

8. moreover, the president avoided appointing a recovery czar, as others had suggested, in- stead appointing a coordinator to serve as the president’s representative in the recovery effort.

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W. Bartley Hildreth, Ph.D., is the Kansas Regents Distinguished Professor of Public Finance in the Hugo Wall School of Urban and Public Affairs and the W. Frank Barton School of Business at Wichita State University. He serves as director

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of the Kansas Public Finance Center and was interim dean of the Barton School in 2007–8. Before joining WSU in 1994, he held tenured positions in the business schools at LSU and Kent State, and service as director of finance for the City of Akron, Ohio. He is the editor-in-chief of the only journal devoted to state and local government finance and the municipal market, the municipal Finance Journal. In 2008, the Association for Budgeting and Financial Management awarded him the Aaron Wildavsky Award for lifetime scholarly achievements. He can be contacted at [email protected].