The latest news on the financial disaster in the City of New Orleans is that to avoid a state financial takeover the Council may move to draw down the City’s Rainy-Day Fund to keep the lights on until the end of the year.

From their perspective, to avoid the bright lights of a state regulator, this may be the only solution, though for the people of New Orleans it just compounds the problems. A basic rule of government finance is that the use of non-recurring savings or revenues to fund recurring expenses is a terrible idea. It’s like putting a bandage over a melanoma, it looks better but the contagion continues unabated.
The ramifications of such a step will be a serious reduction of the city’s bond ratings that will cost the citizens a lot of added expense and reduce its ability to sell bonds going forward. Further, if a real disaster like a hurricane occurs, the city will have no reserves to use.

To untangle this mess, we must get to the roots of the problem. The talking points of the Council, latched onto by a faithful media, are that the problems were caused by a perfect storm of one-time events (snow, terrorist attack, Superbowl). But in fact, these events merely uncovered the shell game that is and has been the city’s budget. None of those events, even in the aggregate, should have caused a well-planned, well-run city to hit the wall, but they did.

The real problems lie in profligate spending patterns supported by a revenue structure dependent upon unreliable sources, a city economy unable to produce growth, an over dependence upon tourism that produces only limited wealth for citizens, and the out migration of people and business. A short-term fix will do nothing to address the long-term decline that the city is and has been facing.

Let’s face it, New Orleans is an aging city that has half the residents and far less business for which it was built. That translates into enhanced demand for services but ever declining revenues. This was clearly pointed out by the Urban Land Institute in its report post-Katrina, a report that the political leaders of the day chose to attack and ignore. We can debate the social and political context of that decision, but history now proves the validity of the report and its recommendations.

My suggestion is that we view the current fiscal disaster as a second chance to rethink New Orleans. Obviously, the political leadership will jump at the ill-conceived proposal to tap the Rainy-Day Fund, but good government dictates that that is done with caveats. First, there must be a defined date structure and methodology in which the Fund is replenished. Second, the Council must undertake a deep review leading to substantial reform of the programs and policies that have led us to this place, with emphasis on reducing cost to include ensuring that employment is based upon those that are effective and efficient (unlike current practice, city government is to provide services, not an employment agency for the bureaucracy). Finally, the business and civic leadership must insist that for the health of the city, its leadership must realign its focus from social populism to fundamental economic revival.

As I noted, out of the ashes of incompetence could arise the Phoenix of a new New Orleans, or not! Shame on us if, like after Katrina, we let this opportunity escape by allowing political leaders to protect the status quo. So far, the only proposal from City Hall has been to provide succor to the status quo. That won’t work.

Perhaps with some political courage new leadership will see the light. The alternative ending we already know.