DALLAS — New Orleans is a great city whose municipal finances are in shambles, Mayor Mitch Landrieu said Thursday in his first state of the city address since taking office in early May.

The city is facing a $67 million gap in 2010, Landrieu said, which must be resolved by the end of the year. He outlined $30 million in savings through cuts, layoffs, and minor revenue measures, but warned that other actions will be needed.

“New Orleans is a great city, but she will never reach her full potential, and she will never fulfill her great promise, until we fundamentally change the way we do business,” Landrieu said. “We will not be blind to the state of our city. It is one that has great potential, but one that is in peril.”

Thursday marked Landrieu’s 67th day as mayor of New Orleans. His first annual state of the city address at Xavier University was titled, “Eyes Wide Open.”

“We are here to pull back the curtains and let the sunlight shine in so that, together, we can see, with eyes wide open, a truthful and open picture,” he said.

Landrieu said City Hall is “dysfunctional” and that the 2010 budget that he inherited had been “mismanaged from the top to bottom.” During the transition from the administration of former Mayor Ray Nagin, he said, he was told the deficit was $35 million for the year.

“If that was not bad enough, when my team got into City Hall, we opened the books and after a thorough audit found that the budget deficit was $62 million,” Landrieu said. “Since then, we discovered that the city failed to properly account for a $5.5 million deficit in 2005.”

New Orleans operates on a calendar fiscal year.

With less than six months left in fiscal 2010, Landrieu said, the city must trim its budget by 25% for the rest of the year.

“To deal with this budget shortfall, we have nothing but hard choices to make,” he said. “There are no good options.”

The city’s general obligation bonds are rated BBB by Fitch Ratings and Standard & Poor’s, and Baa3 by Moody’s Investors Service. Landrieu said the current fiscal situation could endanger those ratings.

Landrieu said the city has 655 capital projects in the design phase. The work would cost $1.5 billion, but the city has only $1.2 billion for those efforts.

“If we close our eyes and do nothing, we will face dire consequences,” he said. “We would likely return to junk bond status, which would put all projects in serious jeopardy.”

The city has been spending more than it took in for too long, Landrieu said, and that must stop. New Orleans spent $58 million more than it collected in 2008, he said, and $50 million more in 2009.

“We are living well beyond our means,” Landrieu said.  “In 2007, we had $72 million in reserves. Today, we have zero.”

“We’ve tapped out our loans,” he said. “We have very little one-time recovery money left to get us out of the hole. “

Landrieu said the city also has more than $100 million in unpaid state and federal court judgments and settlements.

“Our day of reckoning has come and it has been laid squarely upon our shoulders,” he said.

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