State Concerns Blow Up City Budget

By Bill Dries

When the administration of Memphis Mayor A C Wharton Jr. went to the state earlier this year for approval of a $112.4 million refunding bonds issuance, it was the second time in four years City Hall had used a debt tactic known as “scoop and toss.”

Memphis City Council members are working on a budget as the state expresses concerns over the city’s use of “scoop and toss.”

(Daily News File Photo: Lance Murphey)

It set off red flags in the office of State Comptroller Justin P. Wilson. He and his staff stepped in and issued a report in April that became public Monday, May 20, that has scrambled the city’s budget process near its end.

The state office threatened to put the city on a list of cities forbidden from issuing bonds unless it took steps to account for money transferred among accounts with few or no policies for the juggling of money that affects the city’s debt. At stake is not only the city’s debt but whether the city’s budget is truly balanced as required by state law.

The refunding bonds are for “budgetary cash flow relief,” according to the city’s application to the state for permission to issue them. It shifts debt service from fiscal years 2014-2024 to fiscal year 2025 and beyond.

And Wilson’s office was concerned that it was being done for the second time in four years.

It is the second bond series of its kind since 2010.

Mary Margaret Collier, director of the comptroller’s state and local finance office, wrote that prior to 2010 “the city’s debt service would have declined smoothly over time thereby making increasing amount of revenues to be available for future capital projects or operations.”

The alternative to pushing the debt even further out with the 2013 bond refunding action, according to Collier, was “raising revenues, reducing services or reducing expenditures to a sustainable level sufficient to cover the current debt service.”

“Instead by delaying the payment of principal, the city has chosen to shift the tax burden from current taxpayers to future generations,” her May 20 letter reads.

Several Memphis City Council members expressed surprise at the impact of that tax burden. But administration officials other than Wharton were quick to point out that the council voted on the decisions.

“Maybe I wasn’t paying attention for the last two years,” said council member Reid Hedgepeth. “I don’t think anybody (had) on their radar that in 2015 we’ve got to come up with an additional $21 million.”

Earlier in the day at City Hall he asked for a show of hands of council members who were aware of the debt figures whether pushed out to 2015 or 2025. No one raised their hands.

After the 2013 refunding bonds, Wilson said that should be the end of “scoop and toss” refundings “and a clear solution to the city’s excess expenditures exceeding available revenues should be implemented.”

Some on the council question whether it should be approved. It’s a choice that has immediate and long-term effects less than six weeks from the July 1 start of the new fiscal years.

The May 20 letters recapping the report cite a “failure of debt management policy to require specific legislative authorization for principal deferral.”

The council approved six resolutions Tuesday, May 21, that involve moving around $54 million including the use of $11 million in reserves to cure the problems Wilson and his staff found.

And with the six resolutions, the council and Wharton now face a scrambled city budget process that is less than six weeks away from the July 1 start of the new fiscal year.

The remediation plan Wharton took to the council and the council approved will cut into the city 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,” Collier wrote in her 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 the restructuring several years ago. Wharton said Tuesday he’s now taken that out of the budget.

Wharton had billed his operating budget proposal made in April as a “continuation budget” that included a 2.3 percent pay raise for all city employees effective in January, halfway through the fiscal year. It was based on an extra 28 cents on the property tax rate that Wharton said would produce the same amount of revenue the city now gets from a $3.11 tax rate. That change is because of lower property values in the 2013 property reappraisal.

In a side note to the financial news from Nashville, Wharton adjusted the certified tax rate Tuesday to go 3 cents lower to a recertified property tax rate of $3.36 instead of the original $3.39.