DALLAS - New Orleans Mayor Ray Nagin on Friday vetoed portions of the 2009 budget approved by the City Council, rejected the council's plan to put $50 million into a designated reserve fund, and ordered an immediate hiring freeze for all city departments, including public safety.

Nagin said he took the actions because the council's changes to his proposed general fund budget would endanger the city's ability to issue up to $135 million of general obligation bonds for recovery efforts and imperil the plan to refinance a $171 million taxable pension bond issue from 2000.

"Our key budget objectives were to improve city services, continue to fuel our recovery, maintain an adequate emergency fund for hurricane season, and position ourselves to sell bonds to continue much-needed street repairs and other infrastructure upgrades," Nagin said. "The council's modified budget ... diminishes the likelihood that the city could sell bonds needed for rebuilding projects and other critical purposes."

The mayor said he took the actions to avoid an $18 million budget deficit in 2009 and shortfalls of more than $40 million in 2010 and beyond.

"I had no choice but to make these cuts," he said. "I may be forced to make additional cuts in the very near future."

Nagin said the council also ignored a looming problem with $170.7 million of taxable firefighter pension bonds that were sold in 2000 as variable-rate debt. The $139.7 million of outstanding bonds are now held in a liquidity facility by JPMorgan Chase Bank because of failed remarketings.

New Orleans filed suit in federal court in June against Ambac Assurance Corp., which insured the bonds, and UBS Securities LLC, the remarketing agent, claiming the two breached their contracts. A federal judge stayed all proceedings in the case in late October because the parties mutually agreed to work on a settlement.

In its suit, the city said it now pays 10.5% interest on the bonds, an increase of approximately $400,000 a month in debt service, as a result of the failed remarketings.

JPMorgan Chase has agreed to three extensions to the liquidity facility, Nagin said, but there is no guarantee that it will continue to do so. If not, the city in June 2009 would have to begin an accelerated amortization of the outstanding bonds over 10 semiannual payments.

"These bonds, which were issued by a prior administration, have been unexpectedly called," Nagin said. "The city may be required to repay these bonds over a five-year period at an annual rate of $26 million by 2010. We anticipate a net negative cumulative effect of more than $44 million a year beginning in 2010."

The pension fund will run out of bond proceeds in 2010, according to the mayor. As a result, the city's annual obligation to the retired firefighters of about $19 million a year will instead have to be paid out of the general fund unless the city can refinance the pension bonds, he said.

New Orleans' general obligation bonds have unenhanced ratings of Baa3 from Moody's Investors Service, BB from Standard & Poor's, and BBB-minus from Fitch.

The pension bonds are rated Ba3 by Moody's and BBB by Standard & Poor's.

The New Orleans City Council adopted a $1.16 billion operating budget for 2009 on Dec. 3.

The mayor said he considered vetoing the entire budget, but instead opted to cut specific items with his line-item veto power. In addition to the hiring freeze and the budget cuts, Nagin ordered all city department heads except public safety to prepare for a 2.5% across-the-board spending cut.

Nagin said he controlled the city's $485 million general fund budget, and would make the budget cuts even if the council votes to override his vetoes. He said the council's decision to put $20 million of the sanitation department's budget and $30 million of the housing office's budget into a reserve fund that could be spent only with council approval was illegal and would not be recognized.

New Orleans operates on a calendar fiscal year.

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