Critical State Report Remakes City Budget

By Bill Dries

An April report from the Tennessee Comptroller of the Treasury critical of city finances threw the budget season at City Hall into remake mode Tuesday, May 21.

Memphis Mayor A C Wharton Jr., with Chief Administrative Officer George Little, took a plan to remedy critical points in a state comptroller’s report to the Memphis City Council Tuesday. The remediation plan scrambles the ongoing city budget season.

(Daily News File Photo: Lance Murphey)

The bottom line for the budget is a remediation plan that will increase the city’s long term debt, force the city to use its reserves, and take reserves below the 10 percent level considered key with bond-rating agencies.

“We were already going to have a bad budget year,” said council member Shea Flinn as he projected total debt of $63 million by 2019 on the debt from the fix. “There ain’t no magic left in the hat.”

The comptroller’s office gave the council until May 28 to take action.

And council members Tuesday evening approved a set of six resolution that were recommended by the comptroller's office to cure the problems including setting parameters and guidelines for interfund loans, a prime problem area cited in the report.

Several of the council resolutions approved were grant antipation loans to cure balance problems in specific city accounts. The amount of money moved around by the council totaled $54 million including the use of $11 million in reserve funds.

Now the council and administration begin the work of reconfiguring the city budget to account for the changes forced by the state report. The council passed a resolution that included a requirement that Wharton bring to the council an alternate budget that is based on a stable $3.11 city property tax rate. That would be in addition to the reconfigured budget Wharton plans to present May 30 based on a $3.36 property tax rate.

The new rate is what the city estimates it will take to produce the same amount of revenue for the city based on revenue lost in the 2013 property reappraisal process.

Over the weekend, Memphis Mayor A C Wharton Jr. alerted council members to the critical comptroller’s report, which requires the city to correct a “negative fund balance” in the New Memphis Arena fund, a fund related to the debt surrounding FedExForum.

If the council hadn't approved the fix, the city could have lost its ability to issue debt.

A debt restructuring or refunding referred to as “scoop and toss,” which would increase the city’s debt in years to come was what triggered the critical state report.

“This corrects a problem going back nine to 10 years,” Wharton said. But he faced pointed questioning from council members about why his administration just now learned of it.

The report listed non-compliance issues that included interfund loans that didn’t get the proper approval or authorization. And the deficit fund balances of which the comptroller is critical included not only the New Memphis Arena fund, but also the fleet management and unemployment compensation funds.

“Local governments must have adequate internal controls to safeguard against and to detect promptly expenditures in excess of funds available,” the comptroller’s report reads. “The city described in its communication internal control deficiencies related to budgetary controls and its pooled checking account. Without these safeguards, interfund loans to cover deficits were improperly made.”

The interfund loans cover a recent city practice of advancing funds from what amounts to one pocket of city government, to another. It’s a practice that some council members have questioned in the past.

The report is also critical of the city for failing to file reports on debt obligations for those interfund loans and failing to maintain a balanced budget on a cash basis for each fund.

A May 20 letter to the city from Comptroller Justin P. Wilson recapping the report also cited a “failure of debt management policy to require specific legislative authorization for principal deferral.”

And the report criticizes the city for “aggressively using (payments in lieu of taxes) and other property tax incentives for economic development purposes which have cut into future property tax revenue growth.”

The remediation plan Wharton presented to the council Tuesday will cut into that general fund in a budget season in which the city already faced less revenue because of the 2013 property reappraisal.

“This office strongly encourages the council to look at the fiscal needs of the community, including those that have been less visible due to the interfund borrowing,” Wilson wrote in his letter.

Wharton’s original budget proposal for the fiscal year that begins July 1 had planned for a $10 million increase already in the city’s debt from a restructuring several years ago. Wharton said Tuesday he has now taken that out of the budget.

“There was a wave that was projected,” Memphis' Chief Administrative Officer George Little said of the increased amount. But the comptroller’s report makes that wave bigger and unanticipated.

Council budget committee chairman Jim Strickland urged Wharton to pull his entire budget proposal and reconfigure it.

Flinn said the complications in future budget years puts the city “on the precipice of a lost decade” in terms of city finances for a council that, since it took office in 2008, has set a goal of steadily rolling back the city’s property tax rate.

The financial fixes to establish the required fund balances of millions of dollars require council approval. Several council members talked Tuesday of adjourning the day's council session in order to reconvene in a special meeting, possibly as early as later this week, to take the votes.