Lost Tax Revenue Impairs Katrina Rebuilding Plans

STEVE INSKEEP, host:

While cities and towns recover from Hurricane Katrina, they're losing tax revenue. That can make it harder to make good on old debts and borrow the new money that local governments need to bring devastated areas back to life. Here's NPR's Kathleen Schalch.

KATHLEEN SCHALCH reporting:

The bond market helps finance everything from city halls to schools and jails to sewer systems. Investors put up the money and municipalities tap tax revenue and user fees to pay them back. But what happens if that revenue dries up? That question now confronts many Gulf Coast towns and cities, according to Monty Humble, president of the National Association of Bond Lawyers.

Mr. MONTY HUMBOLDT (President, National Association of Bond Lawyers): As a result of Katrina, some of these municipalities really don't have functioning water systems, sewer systems, they don't have sales tax revenues. They don't have hotel occupancy tax revenues. They don't have gambling tax revenues. They don't have citizens really, even.

SCHALCH: That can make it hard to pay back current bond holders and attract new ones. Before buying bond to finance a water and sewer system, for instance, investors want to know citizens will return and pay fees to use it. In some areas, it's not clear when or even if they will.

Mr. HUMBOLDT: And yet the citizens can't return until the services are viable.

SCHALCH: The cost of borrowing could jump as well. Already bond-rating agencies have put billions of dollars in municipal and state debt on watch lists, warning investors that these borrowers' credit ratings could be downgraded. Fitch Credit analyst Steve Murray says New Orleans Sewer and Water Board and Jefferson Parish's government are now on the watch list. So is the more than half a billion dollars owed by the agency which runs the New Orleans Convention Center.

Mr. STEVE MURRAY (Analyst, Fitch Credit): Debt is repaid almost entirely from hotel occupancy taxes and some other tourism-related taxes. So that credit certainly is of great concern to us going forward.

SCHALCH: Louisiana and Mississippi state governments are on Fitch's watch list as well, according to state ratings manager Richard Ratheo.

Mr. RICHARD RATHEO (Fitch Credit): The metropolitan area of New Orleans encompasses about a third of the population and employment base of the state, and when you're talking about this much economic activity being displaced and therefore the revenues being interrupted, obviously that has a major effect both on the local and the state governments.

SCHALCH: Likewise, Mississippi will lose much of the $100 million it's collected annually from now-battered casinos. Officials in Louisiana and Mississippi say holders of state bonds need not worry.

Mr. TATE REEVES (State Treasurer, Mississippi): We don't anticipate any problems paying off our debt.

SCHALCH: Tate Reeves is Mississippi's state treasurer.

Mr. REEVES: In Mississippi, we have about $1.1 billion in special funds and trust funds.

SCHALCH: Mississippi can borrow from them. Municipalities have reserve funds as well, but they may have a tougher time servicing their debts. Many are insured, but their premiums could soar, and investors could shun their bonds or demand higher interest rates in the future. Monty Humboldt of the National Association of Bond Lawyers says the federal government should come to the rescue with short-term loans for cash-strapped local governments.

Mr. HUMBOLDT: For the longer term, Congress should authorize the secretary of the Treasury to guarantee new bonds issued that are to be used for reconstruction.

SCHALCH: He warns that if local governments can't borrow on the bond market, the federal government could end up footing much more of the bill for reconstruction. Congress may heed this advice. It's expected to take up legislation to shore up local governments' finances as early as next week. Kathleen Schalch, NPR News, Washington.

INSKEEP: This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne. Transcript provided by NPR, Copyright NPR.