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VOL. 125 | NO. 24 | Friday, February 5, 2010

MCS Funding Raises Flags for City Budget Audit

Auditors’ review shows funding spat may rock city’s financial foundation

By Andy Meek

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Memphis City Council Chairman Harold Collins, foreground, says the council is still grappling with several of the complex, interwoven pieces of the Memphis City Schools funding debate. Also shown is Councilman Myron Lowery. Photo: Lance Murphey

Resolving the legal spat between the Memphis City Council and Memphis City Schools that’s put millions of dollars at stake probably won’t blow a hole in the city’s budget.

That’s the opinion former Memphis Mayor Willie Herenton’s administration and the city’s legal counsel shared with the independent auditors who reviewed the city’s books during the fiscal year that ended June 30. The auditors noted the city’s opinion in their just-released review of the city’s financials.

On the other hand, it’s possible the final price tag for the protracted feud will noticeably rattle the city’s financial footing.

That’s the auditors’ take on the matter.

At the moment, council members, along with the new Wharton administration, are scrambling to figure out how to close a budget hole related to funding MCS. It’s something that will carry big consequences no matter how they decide to do it.

Auditors from Thompson Dunavant PLC included their not-completely optimistic outlook on the school funding scenario in a letter to the mayor and City Council members at the front of their annual review of the city’s financial statements.

The review was published this month and spans some 200 pages.

Ticking clock

The review looked at the 12-month period that ended last summer. And the auditors’ opinion of the school funding standoff shows how much remains in play and how far both sides still have to go before the dust settles.

The lines in that debate continued to shift this week. Two courts have now ruled the city must pay Memphis City Schools $57 million the City Council voted in June 2008 to leave out of the funding subsidy it approved for the district.

Earlier this month, the council approved a plan sketched out by Councilman Reid Hedgepeth that relies on a mix of city reserves, budget cuts and debt forgiveness to pay MCS $38 million. That still leaves MCS $12 million short of what it wants and believes it’s owed immediately, and school district officials put the council on notice this week by saying the payment clock is ticking.

City Hall officials say George Little, the city’s chief administrative officer, and Roland McElrath, the city’s finance director, are combing through the budget to figure out how to accommodate a funding solution.

Parts of the auditors’ letter – including the city’s 2009 Comprehensive Annual Financial Report, or CAFR – provide the backdrop.

It refers to Shelby County Chancellor Kenny Armstrong’s ruling in the lawsuit MCS filed in 2008 against the city, in which the school district argued the council’s funding decision flouted state law.

Armstrong ruled in the school district’s favor. His judgment was upheld on appeal. The city can still appeal that outcome to the state Supreme Court.

“Management and legal counsel for the city are of the opinion that the original judgment was flawed and without merit,” the auditors wrote.

“Due to uncertainties, it is at least reasonably possible that final settlement (of the school funding dispute) may have a material adverse effect on the city’s financial position.”

In other words, taxpayers, city employees and anyone else affected by the city’s budget may end up feeling the potentially painful effects of whatever solution is implemented.

Uncertainties abound

A large unplanned expense is not always something that can be easily absorbed in a corporate or municipal budget. In the city’s case, that fact is compounded by the specter of a recession looming over critical revenue sources, taxpayers stretched thin and the inevitable increase in the costs of many divisions of local government.

It’s along the lines of that last factor the auditors’ report noted:

“Expenses of the general government and transportation and environment programs increased by (15.6 percent and 26.7 percent), respectively. Public safety also increased by (5.9 percent),” it stated.

“These increases were the direct result of increases in personnel expense due to a 5 percent general increase given to all employees and the filling of vacancies, increased subsidies to the Memphis Area Transit Authority (MATA), increased retiree health care premium expense and prepayments of debt service for the fire and police divisions.”

City Councilwoman Janis Fullilove posted a message to her more than 4,700 friends on Facebook on Wednesday letting city employees know, “There’s talk now of a big hike in your premiums. Please, I know you can’t stand an increase. I can’t either.”

The council not only has to figure out how it will resolve the funding flap that culminated in the 2008 lawsuit. It also has to decide what the funding level will be for the school district going forward in light of the court rulings.

“We know there is an opportunity to resolve the $50 million payment that we’re supposed to give them without a tax increase this year,” said council Chairman Harold Collins. “Now, we know there will probably have to be a tax increase next year to fund them.”

PROPERTY SALES 81 277 20,909
MORTGAGES 85 329 24,074
BUILDING PERMITS 219 672 43,265
BANKRUPTCIES 64 238 13,418