An alarming ring...

Wayne Felder's wholesale auto parts business was doing well in August.

Bumpers, fenders, lights and hoods moved easily out of his north Baton Rouge business, casting a coastal distribution net from DeQuincy to Pascagoula, Miss.

In New Orleans and Mississippi, Hurricane Katrina wiped out 35% of his customers. In southwestern Louisiana, Hurricane Rita yanked another 10% of his wholesale business.

Those hits forced him to lay off one-third of his 20-person staff. He listened to St. Bernard Parish customers say they're closing up shop forever. He wonders if some of his Mississippi customers are still alive.

"I don't know about other businesses in Baton Rouge, but it has not been kind to us," says Felder. Forget April, September was Felder's cruelest month--and October is a recurring nightmare.

For all the talk of a post-Katrina boom in Baton Rouge--jammed restaurants, long retail lines, a red-hot real estate market, lawyers hanging shingles in any vacant space they can find--there are more than 2,000 Baton Rouge businesses like Felder's shell-shocked by obliterated markets.

Snail-paced SBA loans can't provide working capital quickly enough for them. And if they do, loans at even 4% interest add harsh debt burdens for those operating on slim margins. A skeptical Congress may never send business relief grants Baton Rouge's way.

Now, an even darker financial side of the hurricane tragedy knocks at the Capital City's door. A projected $1.5 billion state budget deficit may force lawmakers to dramatically slash spending.

In a state where most expenditures are protected by the constitution, what gets cut first is health care and higher education. Already, there's talk of reducing the state's work force, cutting non-essential services.

That's alarming news for Baton Rouge, where state government, health care and higher education dominate. If the worst fears are realized, the potential for 20,000 pink slips and massive funding cuts could throttle the Baton Rouge area economy for years.

"We have one heck of a potential for a natural economic disaster on our hands," says Jim Brandt, president of the Public Affairs Research Council.

A $275 million state cut in higher education would have dramatic and widespread ramifications for LSU and Southern University--and their 8,000 jobs. Carving $300 million from Medicaid would escalate into a $1 billion hit with the loss of matching federal funds. In Baton Rouge alone, those cuts would suck $265 million in annual business sales from the local economy, according to Louisiana Hospital Association models. Not to mention $91 million in hospital salaries.

"If we don't have some federal government bailout for health care, we're going to have a bigger mess than we already have," says LHA President John Matessino says. "It's going to be devastating if we end up having to start cutting health care workers."

Meanwhile, proposed solutions to the state's problems abound. They include massive federal bailouts, converting New Orleans to Las Vegas South, overhauling the state budget, and rewriting the state constitution.

But in the end, the fact remains: The best way to solve the problems of Baton Rouge is to get New Orleans and the rest of the state up and running again. It's a solution everyone at the local, state and federal levels accepts, but recovery efforts remain stuck in the planning stage.

Three anchors of the state's economy--health care, tourism and retail--are under threat. Along with the city itself, the devastation of New Orleans has meant a third of Louisiana's economy disappeared overnight. The inescapable ripple effect means Baton Rouge and other urban centers will also feel the economic repercussions.

And yet, there's this: When the Baton Rouge Area Chamber polled regional businesses in September, 56% of them expected their bottom line to improve in the coming months.

There's little doubt local service firms--especially restaurants, hotels and discount retailers--have seen revenue spike as tens of thousands of New Orleans evacuees restarted their life in Baton Rouge. Yet the looming specter of large-scale cuts to health care and higher education has many worried about the local economy heading into next year.

Bill Jenkins, LSU System president, won't know the toll on Baton Rouge campuses and their more than 6,000 employees for another four to six weeks, after the state's revenue forecast conference and legislators reach a consensus with Gov. Kathleen Blanco.

As the system struggles to resuscitate the University of New Orleans and the LSU Health Sciences Center in New Orleans, mid-year cuts in Baton Rouge are a given.

"On the other hand, we have to do everything we can for the four main Baton Rouge campuses to stimulate the economy: We have to fight back," says Jenkins, who's urging an escalation in grant and research activity while declaring a freeeze on hiring and spending.

This fiscal crisis differs from any past higher education jolt.

"It's harder for me this time, because there's so many unknowns--how much the Federal Emergency Management Agency can and will do, how much the Office of Risk Management can do on the insurance side and how much we'll get in federal support is very critical," Jenkins says. "The state itself has very limited avenues available to it."

Baton Rouge campuses do have more students, an echo of the business trends showing more shoppers.

"That's going to offset things a little bit, especially for the retail and services side," economist Loren Scott says. "The other thing is: Although higher education is very big in Baton Rouge & when it comes to cuts, it's going to be a very interesting political process."

Do you cut institutions equally across the board? Probably not.

Selective cuts could be made, factoring in higher enrollment at Baton Rouge campuses and, for the near-term, much lighter demand on New Orleans campuses.

"And I think the same thing applies on the health care side," Scott says. "If New Orleans is substantially smaller than pre-Katrina, when it comes to health care cuts, do you do it across the board? How many of these people have moved to Baton Rouge?

"I think from a political standpoint, [higher education and health care] will have to take a hit in Baton Rouge. I'm just not sure how big it's going to be because it's a political issue."

The business sector outlook may be equally grim. Business relief packages are stalled in Congress. The fear of many is there won't be any significant business recovery plan approved before Thanksgiving.

In the case of Felder, his 20-year-old business can survive until December. But he knows that's not the case for many other area business owners. "Other businesses that haven't been open that long? They won't survive."

Some, like Felder and Cathy Griffin's The Silver Sun, a fine silver and jewlery retailer on Coursey Boulevard, worked deals with their banks to buy time on loans.

Under normal circumstances, Griffin would be expanding his full-time staff ahead of the Christmas shopping season. Instead, she's cut her staff.

"We're economically impacted," she says, "What small business in Baton Rouge needs is funds to sustain operations to get through this. We can't make our regular big payments."

How many others are troubled by lost market share and wayward workers? The Baton Rouge Area Chamber estimates 10% to 15% of 18,000 local businesses lost significant market share when New Orleans went off-line.

Meanwhile, a much-maligned $24 million SBA computer struggles under the strain of more than 50,000 disaster applications. SBA's response rate was supposed to be 21 days; two months after Katrina, far less than 1% of the applications had been approved.

The New Orleans businesses that could revive Baton Rouge companies like Felder's Collision Parts are on the highly endangered list. Crescent City firms could experience failure rates of 40% to 65%, says John Anderson, a partner in SSA Consultants of Baton Rouge.

"The strategy for recovery after 9/11 was to go to a few of the large businesses and prop them up--and then go after the small businesses," says Anderson. "In the New Orleans area, you have a large domination of small, family-owned businesses, so the failure rate could be much higher."

Congressional resolve to stem business failures doesn't extend to business grants, viewed as an unconventional fix on Capitol Hill.

Rich Carter, a spokesman for House Small Business chairman Donald Manzullo, says Congress has appropriated $62 million in aid through FEMA and pledges more help is on the way. "At the same time, members of Congress are getting pressure from their constituents not to break open the bank. here's going to be a huge debate over loans versus grants."

U.S. Sen. David Vitter knows any recovery package will come only after a tough legislative fight. "To be honest, all of this is very uphill, particularly when you talk about direct appropriations for private businesses."

The problem, says U.S. Rep. Richard Baker, is many in Congress fear the precedent they would set by doling out billions in business aid, with none of it secured by loan terms.

In response, Baker and others are working on legislation that creates more flexible, long-term financing than the SBA currently offers. But he understands the reluctance of colleagues to make outright business grants. The concern: "Do we know when we write a $500,000 check to Corporation X that Corporation X wasn't in trouble to begin with before Katrina began?"

Conversely, banks know their customers' creditworthiness. And a new guaranteed government loan program through banks could convert, say, a $200,000 eight-year business loan to a $280,000 15-year loan with essentially the same monthly payment.

"If we get this government-guaranteed [loan] backstop, we can make additional credit available to you, given the fact that we know who you are and given you're going to work your way through this," Baker says.

Grants of about $1 billion to Manhattan firms came months after 9/11 and were used as incentives to lure businesses back to Ground Zero. But mention 9/11 and its 16-acre disaster zone, and LED Secretary Mike Olivier becomes animated.

"We don't have the same circumstance here," he says of Louisiana's 960-square-mile disaster zone, an area with more than 200,000 damaged or destroyed residences and 81,000 displaced businesses representing 40% of the state's commercial enterprises. "My God, just seeing that tells you we're in a heap of hurt."

Still, Olivier believes 9/11 can be a good model--if extrapolated to meet Louisiana's needs. In New York, more benefits went to those in the immediate disaster zone.

The same will be true here: Flooded New Orleans businesses figure to reap more aid, but help will emerge for Baton Rouge businesses affected by lost market share and vendor problems.

"We think they'll be eligible for some benefits," Olivier says.

An aggressive LED plan floated in early October may not materialize into anything close to its proposed $10 billion in business grants, $30 billion in hurricane recovery bonds and huge tax credits. Olivier, however, remains cautiously optimistic Congress will approve some of the plan.

Blanco's chief of staff, Andy Kopplin, now directs the Louisiana Recovery Authority created by the governor in mid-October. A bailout package is essential, says Kopplin, who's hearing from businesses suffering lost market share as far north as Shreveport and Monroe.

"We just frankly think it's a necessity," he says. "The governor has not pulled any punches about this: We need to have a comprehensive relief package for Louisiana passed by Congress before they come home at Christmas time."

There are sobering financial lessons from 9/11. One of them is congressional appropriation does not equal instant funding. One year after 9/11, the New York Comptroller's Office reported the city had received only $2.7 billion of $21.4 billion appropriated to it by Congress.

At the Baton Rouge chamber, Moret argues business grants should come more swiftly than after 9/11 and they can include accountability.

"That's the piece we're most interested in for the Baton Rouge area," he says. "That would allow us the opportunity [to help area businesses] on a case-by-case basis."

Toss in the state's fiscal crisis and the alternatives aren't attractive for Baton Rouge if it fails to win significant business relief from Congress.

"My guess is if we exhausted all the state funds we've got, we'd be able to plug the budget," Moret says. "And that would be a horrible thing."

Horrible, because the state constitution allows only one-third of the state's $461 million rainy day fund to be spent in a given year.

Horrible, because the $984 million Louisiana Education Quality Trust Fund yields $65 million a year in scholarships, grants and professorships. And cutting into the principal would harm those programs while also requiring a state election to change the constitution.

Horrible, because pillaging $1.2 billion in tobacco funds raises another red flag. Per the constitution, only the fund's interest can be spent for health, education and TOPS scholarships.

And who wants to think about an election in times like these?

"Can you even hold a constitutional election?" asks Greg Albrecht, chief economist for the Legislative Fiscal Office. "With the diaspora we have, I'm not even sure of the logistics of that."

Baker doesn't advocate the state spending itself into oblivion, but he believes Louisiana must show good faith. "What's a rainy day fund for if we haven't just had one?" Baker asks. "I think others in the country want to hear Louisiana is making a contribution to its own recovery. We can't expect the rest of the country to make its working families sacrifice without us expending resources of our own."

Congress will help Louisiana with major infrastructure expenses, he says, but that aid will come incrementally.

John Davies, CEO of the Baton Rouge Area Foundation, says Baker's new legislation for a seven-member Louisiana Recovery Corp. offers a good model for reviving the state. It takes the monkey off Congress' back by avoiding the appropriation process. U.S. Treasury bonds would be sold on an as-needed basis and timed to avoid competition with other federal securities. The LRC board would move quickly to resolve homeowner mortgages, allowing them to transfer equity for newly redeveloped land.

Baker believes the sooner redevelopment takes place, the sooner New Orleanians will return home and support Baton Rouge vendors anew. As in 9/11, incentives would lure businesses back to rebuilt areas.

Bond costs would be steep, and the recovery corporation won't come close to paying its way without later federal help, but Baker sees the plan as the best way to kick-start Congress into doing real rebuilding beginning in early 2006.

"Whether it's $50 billion or $100 billion, it's too early to say," Baker says.

As that happens, Baton Rouge's next big challenge will be training and edifying tens of thousands of storm victims who now call the city home, says Davies of the Baton Rouge Area Foundation.

"We're going to need to build a more robust economy, but there are questions we really don't have answers for yet," he says. "This is a 3-D game of chess. There are way too many moving parts for us to understand what the challenges are and what our response should be."

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