New Orleans Mayor LaToya Cantrell is asking the City Council to give her the initial approval needed to open a $100 million line of credit due to expected budget shortfalls between $130 million and $170 million related to the coronavirus crisis. On Tuesday, top administration officials joined a virtual City Council budget committee meeting to assure the council that the money would be used responsibly.
“It’s a last and final resort,” Chief Administrative Officer Gilbert Montaño said at the meeting. “The way we’ve discussed the [certificate of indebtedness] is as a gap measure to continue or operations, specifically for public safety.”
And, he said, the requested resolution wouldn’t give the administration final permission to borrow money, only to pursue and engage with financial institutions, apply for permission from the state and hire four companies to guide and represent the city. The Cantrell administration would still need to come back to the council a second time to get definitive approval.
The City Council is scheduled to vote on the preliminary resolution during its meeting on Thursday.
Montaño and Chief Financial Officer Norman White used Tuesday’s meeting to justify the request and answer the council’s questions, taking the council through the Cantrell administration’s current revenue projections and all the different sources they will tap to try and fill the budget hole before they would resort to taking on debt.
To fill the gap, the city plans to continue a hiring freeze until at least the end of the year, tap into a surplus from 2019, cut departmental spending and offer early retirement to city employees.
Among the biggest questions is whether the city will receive federal aid, and how much. Currently, aid from FEMA and the federal CARES Act is available to cover coronavirus-related expenses, but not coronavirus-related budget shortfalls.
Many of the city’s hardest decisions will come down to whether or not federal aid becomes available. But in the meantime, the city is planning to handle the projected shortfall on its own.
“What the city is trying to do is plan for the worst, in that we do not get the amount or the percentage portion that we expect from the federal government, and we need to manage through this for the long term,” Montaño said.
The other big unknown is how large the budget gap is going to be. Most of the city’s losses are still projections, and are subject to change given the vast list of unknowns about how the coronavirus will progress and how quickly the city’s tourism-dependent economy will be able to rebound from global business closures and lockdowns.
At a Monday press conference, Montaño described three scenarios under consideration by the administration that could lead to $130 million, $150 million or $170 million budget gaps in 2020. The administration appears to at least be striving for the $130 million scenario. But according to Monday’s presentation, that is contingent on a number of optimistic assumptions, including the reemergence of large events by October. Meanwhile, Cantrell has warned it is possible the city will cancel Mardi Gras 2021.
It’s these uncertainties that justify taking on up to $100 million in debt, the administration officials argued on Tuesday. Montaño made it clear that the money would be used to solve cash flow issues, not pay for things the city can’t afford with its new revenue projections. He said that while in the long-term the city would have to adjust the budget to match lower revenues, the city had short-term spending obligations it had to fulfill, like salaries and existing contracts.
“The last thing we want to do is run out of cash to pay salaries,” White said.
The resolution on Thursday’s meeting agenda would give the city permission to apply to take on the debt with the State Bond Commission, begin negotiating with financial institutions on the terms of the loan and hire contractors to help the city negotiate. (The Federal Reserve recently expanded a short-term municipal borrowing program — initially only available to the largest cities in the country — to include medium-sized cities like New Orleans. It was unclear if that was among the options being considered.)
The resolution would allow the city to hire four firms for the effort. Foley and Judell LLP and Auzenne and Associates LLC would be hired as the co-bond legal counsel. PFM Financial Advisors LLC and CLB Porter LLC would be hired as financial advisors.
The resolution doesn’t set a limit for how much those firms would get paid. The resolution only includes a pay schedule for PFM Financial Advisors. It’s unclear if the same schedule will be used for CLB Porter, the second financial advisor. The two legal counsel firms won’t charge fees greater than the legal limit set by the state’s Attorney General, according to the resolution.
But as administration officials said repeatedly on Tuesday, the debt is a last resort option if the cities other belt-tightening measures don’t solve the cash flow shortages.
Cuts, tapping reserves under consideration
Montaño last month instructed city departments to identify potential cuts for the rest of the year. Those reports were due last week but have not yet been made publicly available. (The city has yet to provide the records in response to a public records request submitted last week.) But administration officials have said that $141 million in planned spending for the year are considered “unobligated.”
However, not all of that money can be cut from this year’s spending. According to White, the city will need those funds for certain legal obligations and settlements. As an example, an earlier analysis categorized nearly half the Orleans Parish Sheriff’s Office’s $53 million annual budget as being “unobligated.” But the amount of money the Sheriff’s Office actually receives from the city can be determined by a federal judge presiding over a long-running consent decree for the city’s jail.
White also said that some of those funds that aren’t currently obligated will become obligated later in the year for essential services.
White said that out of all those unobligated funds, the city would likely be able to scratch $30 million in savings.
The city had a fund balance of $100 million last year. But, just like with the city’s “unobligated” funds, that number is misleading. Not all of that is surplus cash that can be tapped.
Only $20 million to $22 million of that will be available to help fill the budget gap, White said on Tuesday. The remaining money is largely dedicated to unfulfilled contracts and the city’s rainy day fund.
The city has $31 million in its emergency savings fund currently, according to Montaño. In order for the city to use the money, according to the presentation, there needs to be a widespread emergency, significant revenue loss for the city and “a mandate by the United States Government that has been determined by the City Attorney to be in compliance with law.”
But Montaño said that this was another last resort option for the city. He said that tapping the fund would likely affect the city’s bond rating. Recently, the city’s bond rating was downgraded from an A+ to an A by one of the major rating agencies, Fitch’s Ratings.
Savings from hiring freeze, contract cuts and retirement
The city also initiated a hiring freeze for the city on March 19 and plans to extend it through at least the end of the year. That hiring freeze is projected to save the city $16.7 million. That doesn’t include any potential furloughs or layoffs. However, that option isn’t off the table.
On Monday, the city said it would be looking into cutting certain contracts, searching for “low hanging fruit.” Cantrell said that by cutting garbage pickup in the French Quarter from two days a week to just one, the city saved $800,000. A similar reduction could be considered citywide. Other contracts that Montaño mentioned include traffic and parking enforcement services, given that people are staying at home and off the roads.
Montaño also mentioned the possibility of offering early retirement for some city employees. That has drawbacks, however.
On Tuesday, Montaño said there were 297 employees eligible for retirement that are funded by the general fund and currently eligible to collect retirement benefits. If they all retired by the end of this week, the city would save $10.6 million this year. However, those employees would also be eligible to receive a payout for unused sick and annual leave days. That creates a $5.6 million liability for the city.
The city’s decisions would become a whole lot easier if the federal government stepped in to fill the budget gap. While that’s possible, it’s far from a sure thing.
So far, direct federal funding has only been made available to cover coronavirus-related expenditures, not revenue shortfalls caused by the crisis. FEMA will cover 75 percent of all expenditures under a disaster declaration for the state. In addition, Louisiana was awarded $1.8 billion to cover expenses through the CARES Act, 45 percent of which is supposed to go to city and parish governments, Montaño said.
But the city has spent relatively little on the coronavirus response, roughly $6 million, Montaño said on Tuesday. Most of the big ticket coronavirus expenses, like setting up a field hospital in the Convention Center, were paid for by the state.
But Montaño said there’s some hope — as well as confusion — in the constantly changing federal guidance on the approved use of the money. He said that on Tuesday, the city received updated guidelines.
“Some of the other guidance documents, including one we got this morning, is that we’ll be able to use it for public agencies responding to the crisis. So that would grow the number substantially.”
He said that ultimately, he believes that the federal government will expand the approved uses for the federal dollars.
The $810 million out of $1.8 billion reserved for parish and city government expenditures is far greater than what those governments have actually spent.
“If you just do the math, $800 million plus for all the municipalities across the state. New Orleans is the most affected and we’ve only spent to date $5 million to $6 million. I can’t imagine smaller municipalities have spent anywhere near that amount of dollars. So, my point is the expenditures are going to be much less than what’s available for other cities. So it’s going to have to open up at some point.”