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VOL. 121 | NO. 56 | Friday, March 10, 2006

Mayor Calls Budget Problems Temporary 'Aberration'

By Andy Meek

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Lots of adjectives are being used these days to describe events that occurred during one of the most dramatic years in recent memory for City of Memphis finances.

On several occasions, city officials have admitted their revenue projections for 2005 were inflated and spending was excessive, even while operating costs soared. They've blamed the national economy for being sluggish. All of that - plus insufficient planning, they admit - contributed to a deficit that nearly wiped out the city's operating fund, its major source of spending money.


Empty pockets

And that's why an adjective by Memphis Mayor Willie Herenton in his 2006 State of the City address may be the most telling indicator of the ultimate financial health of the city. Though Memphis has faced three straight years of operating deficits, Herenton insisted the problems are temporary - a "short-term fiscal aberration." He pledged a surplus by the end of the city's current budget year in June.

And he dispensed an even healthier dose of optimism the week after his January address before the Memphis Rotary Club. There, he promised the city a new budget that includes no property tax increase.

For his administration, it's about accentuating the positive.

"Tough economic conditions have fallen upon many urban cities, including Memphis," he wrote in a letter to Memphis City Council members.

The letter is included in the introduction to the city's Comprehensive Annual Financial Report for the fiscal year that ended June 30. The city's budget problems may be a temporary setback, but as the city's latest financial reporting shows, they have their genesis in decisions and budget circumstances that, in some cases, happened years ago.

How those problems are addressed starting next month when the administration and City Council members begin hashing out next year's budget will determine how temporary they are.


Like herding tigers

The CAFR is significant because it shows the city has a paltry $1.2 million in its general operating fund, compared to $61 million two years ago. Last year, that fund took a hit to the tune of $25.1 million.

The city's revenue came up short partly because of a $23 million variance in local tax revenue. Some of that loss was caused by property tax appeals, refunds and errors in assessments that were processed in fiscal year 2005.

Other items stand out in the CAFR. Personnel costs now make up almost 70 percent of the city's general fund expenses. The city's total debt increased by $69.7 million dollars - or 2.7 percent - during the past fiscal year. The city's general obligation debt is $1.01 billion.

Shelby County Trustee Bob Patterson recently observed the city's finance team has "got a tiger by the tail."

The City Council approved a 27-cent property tax hike last year, and if Herenton makes good on his no-tax-increase promise, that money will have to last through 2007. He's blamed some of the recent financial troubles on accounting mistakes.

"But how many million dollar mistakes can you make?" wondered City Council member Carol Chumney, a fiscal conservative whom some see as positioning herself for a mayoral run possibly in 2007.


Raiding the piggy bank

City leaders insist the battered budget is on the mend, but in recent weeks, all three of the major bond ratings agencies - Standard and Poor's, Moody's Investors Service and Fitch Ratings - lowered the city's credit rating.

"The bond rating affects your ability to borrow money, and there are so many things we're borrowing money to pay for now that I don't think many people realize," Chumney said. "We're borrowing for things like firefighter clothes and equipment, police equipment - basic things you wouldn't expect to borrow money for."

There's no legal limit on the indebtedness the city may incur, according to the CAFR, but Chumney said state officials may ultimately step in if the city's financial situation comes close to repeating its performance over the past couple of years.

Over-eager financial projections may be at the heart of the problem. For fiscal year 2004, for example, general fund expenses were under budget by $856,000. Revenue was $26 million under budget - "significantly lower than budgeted for the years," the CAFR states.

In fiscal year 2005, general fund expenses came in $6 million under budget. This time, revenue was $30 million under.


Keeping things in line

Herenton shook up his finance team in the past few months, and the new staff quickly got to work; long-term debt was restructured and capital expenses were slimmed down. They also requested more frequent reporting from the Sparks Bureau of Business and Economic Research at the University of Memphis, which provides revenue projections for the city.

Dr. Jeff Wallace, a senior research associate with the bureau, said it is now doing monthly, instead of quarterly, reports for the city.

"There is a forecast in the works at the moment," he said. But the bureau is prohibited, by contract, from saying anything about it - even to City Council members - until after it's been presented to the city administration.

Meanwhile, Gale Jones Carson, Herenton's spokeswoman, said he will give his budget address to the council in mid-April.


Editor's Note: If you missed the first installment of this series, it ran March 3. Check it out at www.memphisdailynews.com. Look for the last part March 17.

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 69 357 17,741
MORTGAGES 66 403 20,438
FORECLOSURE NOTICES 18 44 2,689
BUILDING PERMITS 208 696 36,641
BANKRUPTCIES 52 210 11,374
BUSINESS LICENSES 22 115 5,824
UTILITY CONNECTIONS 25 90 6,804
MARRIAGE LICENSES 21 107 4,023