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July 22, 2012

Officials at odds over city’s financial health

Councilmen Garrison, Mullican question loan; Mayor Bennett says nothing to worry about

Arthur Foulkes The Tribune-Star

TERRE HAUTE — It’s not always easy to know the financial health of a city. City budgets are complex, including many different revenue sources and many different line items and different accounts.

But, in May, Terre Haute borrowed $5.02 million to help the city cover its day-to-day expenses prior to its twice-a-year disbursement in June of property tax revenue from the State of Indiana. That loan has left at least two members of the City Council seriously concerned: Neil Garrison, D-5th, and John Mullican, D-6th.

They worry the loan is an early sign of financial trouble.

The $5-million loan concerned Garrison enough that he asked city officials in early June for a financial plan, showing how expenses and revenues will be balanced in the future. On Friday, Garrison said he has still not received such a plan.

“I’m not satisfied with what’s been furnished by the administration,” Garrison said.While he has received some figures, “that’s not a plan,” he said.

Around the time Garrison sought his information, Mullican asked how the city determined the $5 million loan was necessary. The city provided the councilman with a copy of a document drawn up by an Indianapolis accounting and consulting firm, H.J. Umbaugh & Associates. That document led Mullican to believe the city of Terre Haute began the year with a big deficit in its “general fund,” which is the city’s primary checking account for paying its ordinary operating costs.

“I was surprised to learn that the city started 2012 over $4.5 million dollars in the hole,” said Mullican, who is also the Finance Committee chairman on the City Council.

Mayor’s take

Terre Haute Mayor Duke Bennett has a different take on the budget figures, including the Umbaugh document.

“It’s a planning tool,” Bennett said of the document showing a deficit of $4.5 million from January to March of this year. “It’s not our actual financial report … [Umbaugh] shows the same [$4.5 million] number at the end of the year. That report did not reflect any budget cuts or internal borrowing done by the city,” he said.

Bennett said the city will have no problem paying all of its bills at the end of the year, including repaying the loan. And there will be money left over, he said.

“We just needed a [short-term loan] to help us just keep paying the bills,” Bennett said. “That way, we don’t have to lay anybody off. We don’t have to delay any projects or expenditures. So for [borrowing costs of] $30,000, we are able to keep functioning as a city as we need to function, at a high level.”

Bennett also notes the Indiana Department of Local Government Finance approved the city’s 2012 budget, something they would not have done if it didn’t appear the city could pay its bills, he said.

“That’s really important,” Bennett said of the DLGF’s approval. “If they didn’t [believe the city could pay its bills], they wouldn’t have done it.”

Buying time

Almost everyone agrees that a city taking out a temporary “tax anticipation” loan is not, by itself, a sign of serious trouble. Such loans are very common, said Jenny Banks, director of communications with the Indiana Department of Local Government Finance. An indication of possible financial trouble would be if a government entity started borrowing soon after receiving its bi-annual property tax distribution, she said.

In Terre Haute’s case, the city received a tax distribution in December 2011 and sought its loan several months later, in May.

Mayor Bennett said Terre Haute will need to borrow another approximately $5 million early next year; however, he said that could have been avoided if the city had gotten the current loan for an 18-month term as opposed to the approximately seven-month term approved by the City Council.

Umbaugh calculated that the city could make the $5-million loan last until the end of 2013, but the council would only approve borrowing for this calendar year, Bennett said. As a result, a new loan, with new borrowing costs, will be faced in March or April, he said.

Bennett believes borrowing approximately $5 million again next year is better than making $5 million in budget cuts. Short-term loans buy time, he said. They allow the city to find new budget cuts and to explore new sources of revenue, such as a user fee for trash, limb and leaf pickup.

“We’re going to have to look at some other revenue sources to pay for specific things to help relieve the burden on the general fund a little bit,” Bennett said.

Overdrawn accounts in 2010

Each year, auditors from the State Board of Accounts come to Terre Haute and plow through the city’s books. The audit of 2011 is finishing up now and auditors plan to meet with city officials on Aug. 8 to report their findings.

That meeting should reveal a lot about the city’s financial picture.

The 2010 audit for Terre Haute, which is available on the Indiana State Board of Accounts website, showed that the city began 2010 with a general fund balance of almost $1 million. Twelve months later, that fund had a negative balance of $553,548. Auditors noted that is a violation of state rules and wrote further that “routinely overdrawn funds could be an indicator of serious financial problems which should be investigated by the government unit.”

The auditors found three other city accounts to be overdrawn at the end of 2010: The Hulman Links [Golf Course] non-reverting fund, the Rea Park non-reverting fund and the COPS Grant Fund. In all, the funds totaled $2.7 million of red ink.

The city, in its written response to the audit, stated that the general fund showed a negative balance  because the Terre Haute City Council voted to create a special account for $1.4 million the city received from the State of Indiana for help pay for upkeep of U.S. 40. Otherwise, that money would have been used to keep the general fund in the black, the city stated. The park imbalances, meanwhile, stemmed from “several years of negative balance activity” dating to years prior to the Bennett administration and the COPS grant was awaiting a federal reimbursement, according to the city’s response.

It is not clear what the 2011 audit will show. Mullican and Garrison believe, based on the Umbaugh report, that the general fund will again be in violation of state rules and be deep in deficit. Mayor Bennett said he does not yet know what the general fund balance will be as of December 31, 2011, but believes the city did not begin this year with a $4.5 million general fund deficit.

Other cities

Terre Haute has not been alone in seeking short-term loans. Umbaugh & Associates provided the Tribune-Star with a list of 27 cities, towns, school districts and other taxing entities that have taken out such loans in recent years.

The list included the cities of Brazil, Indianapolis, Highland, Gary, Greenwood, Marion, Mt. Vernon, Porter, Portage and Valparaiso. Internet searches indicated those loans were taken out over the past several years, dating back to about 2005. Many took place more recently.

Larry DeBoer, an economist and local government finance expert at Purdue University, said some cities routinely borrow. A warning sign is if the amount borrowed grows each year, he said. Another warning sign would be if a loan were taken out for more than half of a city’s bi-annual property tax distribution.

This year, Terre Haute will be receiving bi-annual property tax distributions of about $12 million. The loan was for less than half of that figure, $5.02 million. DeBoer also said that if a bank is willing to make a loan to a city, that city’s financial situation is probably not outside of the realm of what is considered normal. Terre Haute’s current loan is at an interest rate of about 1 percent, city officials have stated.

But, if a city begins a year with a negative cash balance, that would likely be a red flag. That’s because cities receive one of their two large tax distributions in December. So, if in January a city is already seeing negative balances, that’s could be a bad sign, DeBoer said.

Kokomo’s case

Mayor Bennett has told the City Council that the need for a loan stemmed from diminishing cash balances, or reserves, at the end of each year. That’s a result of Indiana’s property tax caps, which Bennett said have hit Terre Haute especially hard.

Since taking office in 2008, Bennett said his administration has cut the approximately 500-person city employee roster by about 25 full-time positions. Several part-time jobs have also been cut, he said.

Mayor Greg Goodnight of Kokomo, a city of similar size to Terre Haute, said his city also faced a loss of revenue after the state’s property tax caps took effect.

“We’ve done a lot of downsizing in city government,” Goodnight told the Tribune-Star. The City of Kokomo employed 521 people when Goodnight took office in 2008. It now employs about 442, he said.

“We came in and had to really make some difficult decisions,” Goodnight said. “We put in pay freezes [including the mayor’s salary], layoffs and job consolidations.” Kokomo also eliminated paid lunches for city employees, trimmed health care benefits and even changed sick leave policies. Goodnight even eliminated election day as a paid holiday for city employees.

Those decisions were tough, but Kokomo is now enjoying a relatively stable financial situation. While implementing a trash pickup fee was talked about a couple of years ago, it is no longer discussed, he said.

But property tax caps did not hit all parts of Indiana equally, making comparisons between even similar cities problematic. Some areas, where tax rates were higher, have seen larger cuts to local government revenue. According to figures provided by DeBoer, Vigo County has seen some of the greatest impact in the state due to the caps.

More revenue or more cuts?

Rather than make deep cuts in the city’s budget at this point, Bennett said he would prefer to borrow money in the short term and keep the city functioning at “a high level.” Hence the short-term loans.

Eventually, Bennett has said, more savings could be found or more revenues raised. In addition to a trash, limb and leaf pickup fee, he would like the community to at least consider some other revenue sources, such as a local income tax of 0.25 percent for police and fire services. A food and beverage tax could also be a possibility, he said, adding he would like these measure to be county-wide and placed before voters as ballot questions.

“As a community, we have to make decisions,” Bennett said. “I’m fine with living with a leaner budget. But, if you want more, you’re going to have to pay more.”

Reporter Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

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