Related story: Mayor Bell: Sharing responsibility for the future

On a day when most Toledoans were digging out from a foot of snow, Toledo City Councilman George Sarantou worked on another form of excavation: the mountain of municipal debt that threatens Toledo’s financial stability.

“There is no question that the city faces a fiscal emergency,” said Sarantou in a meeting Feb. 9 in his 21st floor office at One Government Center. “What we need to be concentrating on is finding long-term solutions and not just short-term fixes to the budget.”

The City of Toledo faces a projected $48.2 million budget deficit for 2010, a figure that includes approximately $12.77 million in deficits inherited from 2009, the last year of the Carty Finkbeiner administration. The deficit represents approximately one-fifth of the projected revenues in the 2010 budget.

While publicly Mayor Mike Bell and his staff discuss the need for budget cuts and tax hikes to solve the city’s budget woes, behind closed doors there is increasing talk that the only solution to the budget deficit is to have the state step in and put the city into receivership. Toledo Free Press obtained a copy of an eight-page internal memorandum from acting law director Adam Loukx to deputy mayor Stephen Herwat outlining the processes and conditions by which Toledo might make use of insolvency mechanisms to address its budget woes.

The memo details the background, definitions and possible resolutions of Fiscal Watch and Fiscal Emergency.

Bell reiterated in an interview that he considers receivership a last resort.

“Our expectation is that cooler heads will prevail,” the mayor said in reference to ongoing discussions with city unions. “It is in no one’s best interest for the state to become involved in Toledo’s financial difficulties, and to focus on doom-and-gloom scenarios might cause unwarranted panic that Toledo will run out of money.”

Mike Bell

When cities go broke

Though infrequently used, there exists a legal mechanism by which municipalities might declare bankruptcy. Under the United States Bankruptcy Code Chapter 9 Title 11, municipalities can file for bankruptcy protection with provisions similar to those found in the forms of bankruptcy filed by individuals and corporations.

An important consideration for Bell will be the fact that an attempt by the City of Toledo to file for bankruptcy would necessitate approval by the State of Ohio. Chapter 9 requires that any municipality seeking bankruptcy protection must first secure “specifically authorized” before commencing the process. This clause is because states retain considerable authority over municipalities within their borders due to restrictions under the 10th Amendment and the so-called contract clause in the U.S. Constitution.

Ohio Revised Code 118 provides an additional mechanism by which the state can intervene and prevent a municipal bankruptcy. Under this law, which was adopted in response to the 1979 financial collapse of Cleveland, the state can place a municipality in one of two categories: “fiscal watch” or “fiscal emergency.”

Sarantou indicated that state intervention to help a struggling municipality is preferable to bankruptcy.

“Investors are reassured when the state steps in to help municipalities restructure debt,” he said. “It would be disastrous for the city’s credit rating to file bankruptcy.”

For a municipality to fall under fiscal watch status, the existence of one of a number of possible scenarios must be confirmed. In Toledo’s case, fiscal watch status would occur if the projected general fund deficit exceeds one-twelfth of the previous year’s revenues. Toledo could be declared a fiscal emergency if the projected general fund deficit exceeds one-sixth of the previous year’s revenues.

The current projection of a $48.2 million deficit exceeds both criteria, Sarantou said.

“There will have to be a lot of changes — some of them painful — to get through the current crisis,” Sarantou said. “While the city has not yet defaulted on any major obligations, it is clear that this will not be the case by the middle of the fiscal year.”

Bell called “speculative” any attempt to project a date as to when cash flow problems would occur for the city.

“If we found that the city did not have the ability to raise the necessary revenue, we would make adjustments,” he said. “It will never get to the point where the City of Toledo would not be able to pay its bills.”

Insolvent municipalities

There is a lengthy history of American municipalities and other government entities whose financial woes exceeded their ability to solve shortfalls through normal budgetary measures. Most noteworthy of these is the 1994 case of Orange County, a wealthy California region that was overwhelmed by the sudden collapse of an investment scheme created by its county treasurer.

The losses from the implosion of the investment pool totaled $1.64 billion, and Orange County officials chose Chapter 9 bankruptcy protection to avoid a run on the available revenues that had not been lost in the scheme.

In 2008, the city of Vallejo, Calif., joined a list of municipalities choosing bankruptcy protection to solve their budget woes. At the time of filing for bankruptcy, this city of more than 120,000 people spent approximately 80 percent of its general fund revenues on salaries and benefits to public safety employees. Since the bankruptcy, the city has been forced to cut hundreds of jobs and slash services, and the number of police officers has been reduced by almost 50 percent.

Dozens of Ohio municipalities have made use of state provisions under ORC 118 to avoid filing bankruptcy and to take advantage of the state’s power to assist in debt restructuring. One of the most noteworthy examples was Cleveland, which remained in the category of fiscal emergency from 1980 to 1987. The largest Ohio municipality to fall under the category of fiscal watch was the city of Youngstown, which remained in fiscal watch from 1996 through 1999.

Sarantou noted the advantages of bringing in the state to help solve Toledo’s budget crisis.

“The state can step in and unilaterally restructure union contracts,” he said. “As it stands now the city has to rely on the unions to make any concessions.”

Sarantou bristled at the suggestion that the city has been financially irresponsible in prior fiscal years.

“There is a perception that Toledo has somehow been spending money like drunken sailors,” he said. “But I have been working on every budget since 2002, and every year we have been faced with cutbacks — the focus the last seven years is on ways to cut the budget.”

Sarantou said that contract agreements with city unions in the 1990s have come back to haunt Toledo.

“The city convinced unions to take increased pension payments in place of wage increases,” he said. “This made short-term financial sense, but in the long run the city is now paying a steep price for this negotiating tactic.”

Unlike a bankruptcy case, in which an outside receiver is appointed to oversee disbursements, the City of Toledo would retain a considerable amount of autonomy in any restructuring under the state of Ohio’s fiscal watch or fiscal emergency provisions, Sarantou said.

“In these cases the state acts more like an advisor than anything else,” he said. “The local government is still in charge of its day-to-day operations.”

Avoiding receivership

The preferred outcome for the City of Toledo, according to Sarantou, is that the city is able to solve its budget woes at the local level, and he praised Bell for his efforts to bring attention to and solve the financial crisis the city faces.

“This mayor has been very transparent, and this mayor is trustworthy,” he said. “Mayor Bell has been working diligently to generate ideas on how to fix the situation.”

Sarantou outlined a number of proposals that will reduce the city’s budget shortfall, including more stringent collection efforts on tax receipts.

“We have $21 million on the books in uncollected city income taxes,” he said, adding that some of these debts date back to the late 1970s. “Realistically, $6 million of this debt is collectable.”

Another potential source of revenue for the city is the sale of city-owned properties, such as The Docks and land in Monclova Township.

“This might represent $7 million in revenue,” Sarantou said, adding that these funds would revert back to the capital improvements budget and would also need approval to shift these funds to general revenues.

Sarantou also pointed to the city’s red light camera system as another source of uncollected revenue.

“Violators currently owe the city about $5 million in fines for red light camera infractions,” he said, noting that the compliance rate on paying these tickets is only 44 percent.

“The city has the legal authority to boot [immobilize] vehicles for which the owners do not pay their fines, and the police department is starting to target some of the most serious violators with unpaid fines.”

Bell agreed that enhanced collection efforts on tax receipts and traffic fines is a “key component of the city’s strategy to address the budget deficit.”

Yet ultimately the city’s budget problems revert back to personnel costs, Sarantou said. He outlined approximately $14 million in savings that could be achieved through items like having city employees pay 20 percent of health care costs, an elimination of the city’s pickup of employee pension contributions, and deferring payouts for one year from the comp time accrued by police and firefighters.

“Roughly two-thirds of the annual budget is consumed by components like salaries and benefits,” Sarantou said. “We can achieve some budget reductions through deferring purchases of items like police cars, but the most significant savings can only be achieved in personnel expenditures.”

The mayor described initial conversations with the city’s unions as “an amenable situation.”

“We have removed employee salaries off the table, and this makes any contract changes an easier sell for the unions,” he said, adding that changes to pension and benefit contributions will meet less resistance by city employees than across the board wage cuts.

Sarantou said he believes that a combination of budget cuts and a temporary increase in the city’s income tax can balance the budget, but he added that “all sides have to sacrifice in order to make this work.”

This entry was posted on Thursday, February 18th, 2010 at 11:11 pm and is filed under City of Toledo, Community, Featured.
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