VOL. 7 | NO. 2 | Saturday, January 4, 2014
Debt and Liability
By Bill Dries
There is rarely a good answer to the question “How much?” in politics.
With issues including the unfunded pension liability, overall debt, and revenue estimates and their validity, City Hall’s overall money problem begins but hardly ends with the question. It won’t be that simple.
The city of Memphis governnment’s larger financial problems on several fronts are certain to dominate the long-range discussions of the City Council in 2014.
(Memphis News/Andrew J. Breig)
Local governments have to be able to walk and chew gum at the same time, as the saying goes. And the funding for different types of undertakings comes with different terms, different financing. But they all affect each other.
Capital funding for construction projects is financed with bonds that are paid off over two decades, ideally. Operating funding is different because it pays for recurring expenses that must be paid each fiscal year and comes in most cases from the general fund budget, which is made up largely of city property tax and sales tax revenues.
For most governments, the vast majority of operating expenses are personnel.
Local government is labor intensive, and any attempt to make it less labor intensive, especially any plan involving the words “outsourcing” or “privatization,” draws vocal organized opposition from that work force.
The property tax rate includes a portion of tax revenue that goes to pay the debt service on the bonds. And it is often the failsafe if other kinds of financing by the city doesn’t materialize.
In the past, Memphis Mayor A C Wharton Jr. and his administration have touted the use of non-property tax revenue as a way to finance projects quickly saying those elements, including revenue bonds, have no impact on the property tax rate.
The reasoning has always been suspicious to some on the Memphis City Council, however.
And when Moody’s, one of the big three bond rating agencies, gave the bonds for Wharton’s plan to have the city buy AutoZone Park a strong rating but the city’s financial outlook a “negative” rating, it was because of “the city’s above-average debt burden.” Moody’s sees that as possibly rising in the coming years. The report also cites the city’s “recent tax base declines” and fixed costs that limit the city’s financial flexibility.
Wharton now acknowledges the ballpark project financing and other projects are connected although he is hesitant to commit to stopping the pursuit of such projects to put the city’s fiscal house in order.
“Theoretically, conceivably, that could be one way,” he said. “But to give the impression that if we simply cut back on these projects we could wipe out this problem – that’s not entirely accurate. But to ask is everything on the block? The answer is yes.”
Standard and Poor’s rated the city’s ballpark bonds as “AA” and the city’s financial health as “stable.”
The bond rating agency struck a more optimistic tone saying the city’s management is “very strong, with strong financial practices.”
But it added: “Recent budget assumptions are more conservative than previously in our view, but at the height of the city’s financial crisis, it became apparent revenue projections under previous management were optimistic and not supported by historical performance.”
Underlying all of the guidelines for the city’s immediate fiscal decisions are longer-term concerns that city government has continued to push its overall debt further and further out in terms of fiscal years.
When the city sought to do that again at the July 1 start of the current fiscal year, it was among the concerns Tennessee Comptroller Justin Wilson had.
His immediate concerns were negative fund balances in some interfund accounts that spoke to the administration’s habit of borrowing from or advancing money from one part of city government to another.
“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 the April letter, which put in writing Wilson’s larger concerns that the city has not been truly balancing its budget.
The report that went with Wilson’s letter specifically talked about the city’s first debt restructuring in 2010, saying “the city’s debt service would have declined smoothly over time thereby making increasing amounts of revenues to be available for future capital projects or operations.”
And Wilson’s office said that would have happened by “raising revenues, reducing services or reducing expenditures to a sustainable level sufficient to cover the current debt service.”
Instead the city sought and eventually got a second restructuring of debt, which Wilson’s office concluded would mean, “The city has chosen to shift the tax burden from current taxpayers to future generations.”
And the report was critical of the city’s debt management policy for failing “to require specific legislative approval for principal deferral.”
It was a point council member Reid Hedgepeth made in May.
“Maybe I wasn’t paying attention for the last two years,” he said. “I don’t think anybody (had) on their radar that in 2015 we’ve got to come up with an additional $21 million.”
He even asked for a show of hands of other council members who were aware of the balloon payment. No other council members raised their hands.
The bond restructuring Wharton later got permission from Wilson and the council to do is not the one his administration originally proposed. It had different terms. But then Wharton delayed pulling the trigger on it because the Federal Reserve’s policy of buying bonds lowered the amount the city expected to save on it.
“Whatever metaphor you want to use – robbing Peter to pay Paul just isn’t going to cut it.”
Tennessee Senate Republican leader Mark Norris of Collierville said there will be a bill in the 2014 legislative session that sets a “maintenance of effort” for local governments in funding pension liability regardless of the city’s plan for its own liability, which the administration puts at $700 million.
He offered no opinion on the emerging Wharton administration plan.
Norris said the goal of the state legislation is to ensure that “the requisite degree of discipline is at work.” And he said the state has a responsibility to enforce that discipline.
“Whatever metaphor you want to use – robbing Peter to pay Paul just isn’t going to cut it,” Norris added.
Norris is a former Shelby County Commissioner who is somewhat sympathetic to Wharton’s idea that City Hall has to try to grow the local economy with projects like the ones Wharton has championed even as the city’s fiscal problems have continued to make their strong presence even stronger.
“We had some heartburn over, for example, the degree to which funding was being diverted that would otherwise have gone to education,” Norris recalled of his time on the commission. “I think you always have to be sensitive to how much should government be involved in private enterprise.”
Norris brought up the past commission concerns about tax breaks impacting the flow of revenue to local public education the same month that the commission approved a resolution supporting a state law that would explicitly forbid tourism development zones from capturing that portion of incremental sales tax revenue that goes to fund public education.
The resolution is a reaction specifically to the Wharton administration’s plan to fund redevelopment of the Mid-South Fairgrounds using such a zone. Commissioner Steve Basar raised the issue of whether the zone would take in sales tax revenue that would otherwise go to schools funding. City Housing and Community Development director Robert Lipscomb denied it would affect schools funding. But county attorneys have said the city’s financing plan for the Fairgrounds would take that share of the sales tax revenue.
Incoming council chairman Jim Strickland pointed to five sets of numbers from the administration on sales tax rebate revenue projections for the proposal to have the city buy AutoZone Park. Sales tax rebate revenues are the largest single source of funding to pay back the bonds proposed to finance the ballpark’s sale to the city.
Wharton has since done what he has done with several other economic development projects – pulled back to get more accurate numbers.
The $100 million a year for 30 years that Wharton and his administration estimate the city needs to allocate to take care of the city’s unfunded pension liability is 16 percent of the city’s overall operating budget, suggesting a major change in what the city chooses to fund.
Most of that would come from what Wharton has called “efficiencies.” When asked about what that could mean specifically, Wharton has talked of resurrecting how the Memphis Police Department handles break-in alarms, many of which prove to be false.
“We’ll look across the board and try to do more in terms of raising money,” Wharton said. “We will look at all of our fees and make sure they are worth even having them on the books. Some need to be updated, get the revenue. That effort is underway to make sure we are collecting everything.”
But similar restructurings and fee hikes in past budget years have brought in several million dollars each – none more than $10 million.
The administration’s attempt to raise the city’s solid waste fee was rejected twice by the council at the end of 2013 – once on third and final reading and again when the administration attempted to move for reconsideration.
In the first vote, Strickland argued that the fee hikes, as well as property tax increases for both city and county, have taken a political toll.
“We are increasing everything we can get our hands on,” he said in a Dec. 3 council discussion before the solid waste fee was rejected by the council. “This needs to stop. The public keeps paying more for the benefit of City Hall.”
Wharton said a property tax hike is an option in the pension liability plan he is working against.
“We have not even looked at that. That would give the impression that we are just in a default mode,” he said. “We are working our tails off to try to find a way to address this without even discussing taxes.”
Council member Kemp Conrad, who two budget seasons ago advocated the city bite the bullet and take a much more substantial step toward paying the $700 million liability, says Wharton isn’t being specific enough.
“We are here because of a kick-the-can governing model,” Conrad told Wharton at last month’s first face-to-face discussion between Wharton and council members about the unfunded liability. “It happened on all of our watches. Please don’t bring us anything that says we are going to explore this more. The time for that was years ago. We need more from the executive branch … to manage through this over the next five years. We’ve got to start saying no to stuff.”