Louisiana's swamped economy

The state may get a boost from post-Katrina rebuilding. But for now a budget crisis looms.

In 10 weeks, hurricane Katrina has swept Louisiana toward an economic recession - the fastest downturn to hit a state in modern times.

• The state's unemployment rate has spiked to 11.5 percent, the highest level for any state since the mid-1980s. Personal income is expected to drop 10 percent this quarter and continue falling next year.

• The Legislature began a 17-day special session Tuesday to eliminate $1.5 billion from the state budget. The options: laying off tens of thousands of employees and cutting expenses for everything from schools to wildlife enforcement.

• Pillars of the local economy are struggling. Oil and gas production on state land is still down more than 20 percent. Tourism remains a shadow of its former self, particularly with airline arrivals and departures less than 25 percent of normal levels.

In all, the state estimates that 41 percent of businesses in the state have been adversely affected by the storms.

Fixing the Louisiana economy presents policymakers - on both the federal and state level - with scores of vexing problems ranging from population loss to future land-use issues. Time is of the essence: Lawyers, doctors and working-class people who fled the state are now deciding whether to return to their beloved Cajun country or find jobs elsewhere. At stake is the future of an important economic engine for the nation.

"We're entering new economic territory here," says Greg Albrecht, chief economist for the Louisiana Legislative Fiscal Office. "I don't think we've seen anything that matches this except the San Francisco earthquake and fire [of 1906]."

True, billion of dollars in federal aid may break the fall of Louisiana's economy. The state will also get a boost from rebuilding, which should give jobs to carpenters, electricians, plumbers, and architects. Already, New Orleans employers are advertising for workers to do everything from gutting houses that reek of mold to ringing up sales at the local Talbots.

Indeed, areas devastated by hurricanes often get an economic lift from reconstruction. That's the case in Pensacola, Fla., which was hit by Ivan last year. Unemployment is now down to about 3 percent, and city revenues, bolstered by sales taxes on construction materials, are up more than 15 percent. "If we didn't have the construction and relief workers, I'm not sure what we'd be doing with our economy," says Tom Bonfield, city manager. "Tourism is pretty much way down, and we've lost 50 percent of our multifamily housing and 7 percent of our population."

Louisiana is hoping for a similar bounce. Mr. Albrecht estimates that on an annualized basis, personal income will be $14 billion lower in this quarter, but only $8 billion lower by the third quarter next year. Employment numbers are also expected to improve.

Through sheer determination, some businesses are already getting back up. One of those is Mossy GMC in New Orleans, whose annual automobile sales are usually about $42 million. Joe Mossy, president of the dealership, recounts how he had to buy a generator in Arizona, rewire the entire garage, and buy new computers and a paint bay. He's found and kept most of his employees. "Hopefully, the customer base will come back," says Mr. Mossy, proudly telling visitors that his business had sold its first car since the hurricane on Monday - its first day back in business.

Some new jobs will deal primarily not with rebuilding, but with demolition. The Federal Emergency Management Agency recently estimated some 60,000 houses need to be destroyed.

Although it's not certain if the Lower Ninth Ward will be rebuilt, economists say it's vital to start on rebuilding elsewhere. "The level and speed of recovery depends on the ability to get homes rebuilt," says Loren C. Scott, an economist in Baton Rouge. But, he adds, "Because of the floodwaters and new building codes, it will take a long time to bring back those homes, if they ever come back again."

Such challenges are also on the mind of Steven Psarellis, a maritime lawyer, now living in Houston with his wife and children. On Monday, he returned to New Orleans to look at his home in an upper-middle-class neighborhood. The first floor of his house has been gutted because of the mold from four-foot-high floodwaters.

"This house sits 1-1/2 feet above the 100-year flood-plain zone, but if they change the flood-plain maps, they [the federal government] may require us to raise the house [on stilts]," says Mr. Psarellis.

That's far from the only uncertainty keeping residents and businesses on edge. For example, disagreement continues over how strong to rebuild the levees. The state would like them to withstand a Category 5 storm, instead of a Category 3.

"Business cannot tolerate uncertainty," says Michael Olivier, who tries to woo new businesses to the state as head of the Louisiana Economic Development in Baton Rouge. "We must ensure the integrity of the rebuild, which could take well over 10 years to bring it up to Category 5 standards."

Mr. Olivier also notes that the state unemployment compensation fund, which has already paid out $300 million, will be exhausted by next summer.

"We will see the largest number of insolvencies, both government and private sector, since the Great Depression," he says. "If Congress would just give us the basics that they gave New York after 9/11, we could be well on our way to recovery."

On Monday, the US House removed a provision from a bill that would have given the state money to provide bridge loans. The state had hoped to replenish its own fund, which gave 4,000 businesses a total of $40 million after Katrina. "The Small Business Administration is fighting us," says Olivier. "We make them look bad because they have only approved 2 percent of the requests for loans."

Even before Katrina, selling Louisiana was tough. The state has a history of being unfriendly to business, says Robert Mittlestaedt, dean of the W.P. Carey School of Business at Arizona State University in Tempe. "It goes back to former Gov. Huey Long," says Mr. Mittlestaedt, who grew up in the state and graduated from Tulane University. "He believed corporations pay taxes; people shouldn't."

Olivier agrees that what he calls the state's "antiquated" tax code is due for revision. But, he adds, "It's hard to do a complete renovation while we're asking the federal government to give us subsidies to rebuild. We need taxes we can collect."

Perhaps the biggest draw for Louisiana is the prospect of new opportunities opening up as other people leave. Says Eric Nielsen, a Houston-based managing director of the executive search firm Korn/Ferry: "There will be huge opportunities for people as [Louisiana] comes back."

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