October 12, 2006

The News will print several articles about issues which have emerged in the
community around the proposed property tax levy. This article, about fiscal
watch and emergency, is the first.

By Diane Chiddister

What is fiscal watch? What is fiscal emergency?

Yellow Springers keeping up with Village Council business in the past few months may have wondered what, exactly, these two phrases mean. As Council has wrestled with a potentially significant budget deficit, which has led to putting an $8.4 mill property tax levy on the Nov. 7 ballot, there has been much talk of what would happen if the Village’s budget does not balance in 2007. Some have suggested that, if the Village ends up in the red next year, the state of Ohio auditor’s office will step in and take control of Village finances so that Council is no longer able to make its own choices.

Based on interviews by the News with three communities currently in fiscal watch and one in fiscal emergency, being placed in these categories affects communities in different ways. According to those interviewed, neither situation results in a municipality losing complete control of its finances, although communities in fiscal emergency do yield to state recommendations if they wish to get out of the fiscal emergency category. In fiscal watch, the communities interviewed took steps toward reducing budget deficits, but did not feel pressure from the state as to how they did so, according to three different finance professionals.

“They don’t come in and take over,” New Carlisle Finance Director Richard Sexton said in an interview last week. That community has been in fiscal watch since 2003, Sexton said, and during that time, “They pretty much let us do what we wanted to do” as long as the city was working toward improving its solvency.

“We went in with the intention of not reducing services to the community,” Sexton said, and the state has not pressured them to do so. The services the community provides include parks and a pool which is a “money loser,” Sexton said, “but the manager and Council are fanatics about having the pool and parks no matter what.”

Communities in fiscal emergency also maintain ultimate control over their finances, according to City Manager Thomas Brock of Monroe, which has been in fiscal emergency since 2004, when the city discovered a $6 million deficit out of an operating budget of $8 million.

“I wouldn’t say you lose control. It’s still up to Council to approve budgets,” Brock said in an interview this week. “What you have is an oversight committee by the state.”

Fiscal watch and fiscal emergency are the two categories used by the state of Ohio to identify, and to intervene with, municipalities which are experiencing significant budget shortfalls, with fiscal emergency the most serious. In recent Council discussions, the two categories have been used interchangeably, with both identified as necessary to avoid. It makes sense to discuss the two categories together, according to Village Manager Eric Swansen last week, because if a community is in fiscal watch it increases its likelihood of moving into fiscal emergency.

“We’re not going to get to fiscal watch or fiscal emergency. We’ll make cuts before that,” Swansen said. “It’s important that the two of those should go hand in hand. The difference between them is one month’s worth of operating expenses.”

Even if fiscal watch does not mean losing control of finances, being placed in that category would look bad to potential businesses that might move to Yellow Springs, Swansen said.

“It sends a message to prospective employers that things are not in order,” he said.

According to the state auditor’s office, communities are placed into fiscal watch if one of a number of triggers is present, which involve the community’s General Fund deficit exceeding one twelth of the General Fund budget. Communities are placed into fiscal emergency if the General Fund deficit exceeds one sixth of the General Fund budget.

The main difference between the two categories is that, while the state may provide technical and other support services, at no cost, to communities in fiscal watch, it convenes an oversight committee to oversee the budget of a community in fiscal emergency. The committee is composed of a representative from the state treasurer’s office, a representative from the state office of budget and management, the mayor and council president, and three community members appointed by the governor, according to an e-mail from the state auditor’s office.

While Yellow Springs in 2006 had a General Fund deficit of $368,848 out of a total budget of $2.2 million, the Village did not operate in the red because it was able to draw down reserves from special revenue funds. Although Council will not discuss the 2007 General Fund budget until its budget workshop on Oct. 19, it appears that the 2007 General Fund deficit would be about $415,000 if the levy does not pass, Swansen said this week. It is not entirely clear yet, without final budget figures, if Yellow Springs would be a candidate for fiscal watch or emergency, since in 2007 the Village will still have some limited reserve funds to draw on. It appears most likely that the Village could be a candidate for fiscal watch if the levy does not pass.

According to the state auditor’s office Web site, currently five Ohio municipalities are identified as in fiscal watch, with the longest having been there for six years and the shortest for one and a half. Seventeen municipalities are in fiscal emergency. According to the Web site, all of the municipalities in fiscal watch requested that status, while the state placed most of the fiscal emergency communities in that category. Most of the communities in fiscal emergency have also been there for several years.

The amount of attention from the state auditors varies with communities on fiscal watch, according to several finance professionals. In New Carlisle, the auditors have visited the city two or three times a year to look at financial reports, Sexton said. But in Lorain, which has been on fiscal watch for four years, the state auditor’s office has yet to visit, according to city auditor Ronald Mantini.

In New Carlisle, the financial troubles came from a former city manager who spent more than $1 million that the city could not afford, landing the General Fund about $700,000 in debt, Sexton said. Since going into fiscal watch, the town has cut costs by changing its utilities billing procedures, increasing water and sewer rates and cutting “frivolous” spending, according to Sexton. The city was not required to turn its budget around within any given length of time, he said, but was closely audited by the state to determine that it was moving in the right direction.

An old industrial city of 68,000 people, Lorain ran into financial troubles when it lost a Ford plant, Mantini said, which translated into a $1.7 million deficit in its General Fund. Since entering fiscal watch, the city’s General Fund deficit has grown larger due to more plant closings, Mantini said, but it has still stayed out of financial emergency. The city has worked toward decreasing its deficit by raising income taxes and cutting some services, he said.

While the state does look closely at annual audits, “There has not been much contact from state auditors,” Mantini said. “We have to watch ourselves.”

The city did request a performance audit from the state auditor’s office, he said. “It’s like having a consulting firm come in at no cost.”

A city official in Norwood, in its second fiscal watch, said that “The community has not been affected” by the fiscal watch. The official, who asked to remain anonymous due to political infighting at city hall, said that overspending had led Norwood into a $2 million shortfall out of a $16 million General Fund. Since that time, state auditors have brought in an accounting firm to help the city set up a workable budget, the offical said.

“It’s not as serious as it sounds,” she said. “They won’t force you to make changes.”

In Monroe, the city is ready to present a budget that Brock believes will move it out of the fiscal emergency category, he said. While he stated that Council still had ultimate control over budget choices, they needed to heed the finance commission’s recommendations if they wanted to get out of the fiscal emergency status. Monroe officials wanted to do so, and they worked hard to make changes, including reducing administrative and public works staff by one third, and cutting down on overtime.

He’s glad to be ready to leave fiscal emergency, Brock said.

“They were very helpful in producing reports and analyses. I had a positive experience with them,” he said of the oversight committee. “But I’d rather not have been in fiscal emergency.”

Contact: dchiddister@ysnews.com