The figure is $25.8 million. Memphis mayor Willie Herenton feels confident in saying that is how much the city is in the red. His confidence in that troubling number for the fiscal year that ended in June is newfound. He even allows for some optimism.
“We’re not in a fiscal hole. We have a strong economy here and we have a bright future,” Herenton adds. “We have a temporary aberration on our financial landscape that we’ve got to change.”
It was just three months ago that a somber Herenton told City Council members that he had no idea which end was up when it came to the city’s finances.
“If you were to ask me if I had confidence in my current numbers, my answer to you would be no,” Herenton said.
Setting the spending plan for city government or any local government is a risky enough proposition when the revenue estimates are correct, city divisions are living within their budgets, and there are few surprises. It is the financial equivalent of hitting a $500 million moving target. At least one former city finance director admits that he still gets sweaty palms every spring just remembering the pressure.
Every budget is theoretically balanced when it is approved, based largely on an estimate of likely city government revenues. It’s not uncommon to use some of the city’s reserve fund in the process. But when the revenue estimate is off and city divisions spend more than anticipated for items like overtime or settling a lawsuit, much of the city’s reserve can get used up. When estimates are too far off, services and programs are cut.
For the last three fiscal years, Memphis budget figures have been way off.
The Herenton administration still hasn’t closed the books on fiscal year 2005, which ended June 30th. The estimate of the amount of red ink in that budget has changed four times since September 2004. After the third change, Herenton got a new finance director. The council is now weighing what would be the second round of budget cuts in 10 months.
What happens next will probably be painful. And it is certain to change the concept of what services and benefits city government should provide and how it should pay for them.
One council member is preparing to float the idea of another city referendum on a payroll tax. Another council member says the days of mammoth city projects like The Pyramid and FedExForum are over. Herenton, never the relentless optimist, says the fiscal crunch “could be a blessing in disguise.”
“In the absence of a fiscal crisis, I doubt if the Memphis City Council would entertain the reductions and the austerity program that I am now forced to implement,” he said. “I think now they recognize that we’ve got to change how we do business. I think also my division directors now understand that none of their staff members or organizations can be free from reductions when it’s necessary.”
Tom Marshall, the council’s senior member in terms of continuous service, is much blunter and much less optimistic. He attributes the bad budget numbers to “a basic failure in character judgment and talent assessment.” The character and talent in question belong to the two previous city finance directors.
“I think that we got here through ineptitude,” Marshall said. He also concedes that there is some merit to the idea that the council should have realized something was amiss sooner.
“Unfortunately, our foundation’s been very shaky. We’ve been told things that are not correct,” Marshall said. “I believe that, honestly, the mayor only told us things he believed to be correct and did not intentionally mislead any of us on the council.”
That opinion is borne out by Herenton’s management style throughout his public life. As Memphis City Schools superintendent, Herenton relied heavily on his top deputy, Ray Holt, for every aspect of budget planning, both before the school board and when he pitched for funding before the City Council.
Herenton was then and is now, by his own admission, not a micro-manager. He seldom gets involved in details until he doesn’t like the outcome. The best example of that was when he made known his displeasure with Memphis Light, Gas & Water division president Herman Morris — with Morris, MLGW board members, and much of the City Council in the room.
“I’m into MLGW’s business because there have been some bad decisions,” Herenton said in December 2003.
With Morris out in July 2004, Herenton moved city finance director Joseph Lee from the budget hot-seat to the utility’s hot-seat. But by then council members had already begun asking pointed questions about Lee’s budget figures. It was one reason some council members were reluctant to approve Lee as MLGW president.
Herenton admits that, as finance director, Lee regularly took the best of three sets of revenue estimates prepared for the city by the University of Memphis. “We took an optimistic view of revenues. In Joseph’s last year here, the Bureau of [Business and] Economic Research gave us three scenarios. We took a rosy one. Then you had a downturn in the economy.”
There were also “significant accounting errors” — bad estimates on annual non-tax payments and other revenue too — that added millions more to the red ink.
Charles Williamson became the new finance director in July 2004. He cited an economic downturn for the shifting budget ground in a March 2005 interview with the Flyer.
“We created the budget on the information we had at that point. We had an economy that was on the uptick. FedExForum was opening and would bring in more tourism dollars. And we felt the [Hurricane Elvis] windstorm was behind us and that people would now be able to pay their property taxes,” he said. “Because we were already in the fiscal year, all we could do was reduce our spending to not exceed our revenues. It’s like balancing your personal checkbook.”
Williamson helped guide the layoffs and service cutbacks that were supposed to get the city through the 2005 fiscal year with a balanced budget. Herenton and the council both got an earful about what became the symbol of the long, hot fiscal summer — uncut grass in city parks and median strips. Against that backdrop, Williamson’s first budget proposal arrived before a wary and combative City Council in June with a 54-cent tax-hike proposal attached.
There were problems from the start. Budget committee chairman TaJuan Stout Mitchell sent the city’s budget book back to Williamson because it didn’t include specific line items under each department.
Neither Williamson nor council members ever brought up Lee by name. But Williamson acknowledged that the previous year’s budget figures relied on what he termed “aggressive” revenue forecasts. Williamson told the council the administration was now relying on “conservative” figures.
Mitchell led the council panel in a focused and intense examination of the operating-budget proposal that accepted no assumptions and parsed every explanation. Myron Lowery did the same as chairman of the Capital Improvements Projects (CIP) committee.
Council member Jack Sammons wondered aloud whether the city shouldn’t offer a 401(k) investment program to city employees instead of a pension.
Council member Carol Chumney put forth a proposal that came within one vote of wiping the Memphis Area Transit Authority’s light-rail project from the CIP.
Lowery talked about a more realistic way of scheduling construction projects. For years, council members and the administration have known that it is not possible to start every CIP project on the books for a given fiscal year. But the line item is something council members and the mayor can point to during election years.
Mitchell’s committee targeted an efficiency study the administration wanted at an estimated cost then of $600,000. It was the centerpiece of Herenton’s June presentation to the council of a long-term financial solution. But Williamson didn’t put up much of a fight when it appeared the council would eliminate it.
The efficiency study was back on the table after the city’s bond rating was downgraded by bond-rating agencies. This time the study had a price tag of approximately $500,000. It was the first sign that there were still problems with the administration’s picture of the city’s finances.
“I don’t think this is anything that happened only under director Williamson,” Mitchell said. “If you trace this back, those numbers probably were faulty for some time. Now we’re in the process of trying to get some kind of true picture of what our financial situation looks like.”
Nevertheless, Williamson became a casualty of that process in September.
“I quite frankly lost confidence in the accuracy of his financial managements and recommendations. Therefore, I had to change leadership,” Herenton said in his only direct reference to Williamson, who is now in the finance department of the city’s division of Housing and Community Development.
Herenton returned Roland McElrath, city finance director from 1996 to 2001, to the post and teamed him with Robert Lipscomb, the city’s housing and community development director, who is now doubling as the city’s newly created chief financial officer. McElrath was Herenton’s original choice for finance director when he began his fourth term in 2004. But he was one of four Herenton appointees rejected by the council in the acrimony following a New Year’s Day prayer breakfast speech in which the mayor declared some City Council members “enemies” who were “plotting” against him.
Lipscomb and McElrath seem to have the confidence, so far, of most of the council, who see McElrath as the numbers part of the team and Lipscomb as the big-picture half. The council has given the duo until next month to give them an accurate read on the city’s finances and come up with a plan to right the city’s fiscal position.
“We’ve got to restructure government. We’ve got to look at how we do business,” Lipscomb said, without casting any blame for the bad numbers. “I think they [the numbers] were somewhat aggressive, but I think the economy was different at that point in time.”
Lipscomb’s long-term strategy includes the politically difficult task of reining in some of the autonomy of the boards that govern some financially significant city services, such as MATA.
“I think it’s going to be a dramatic shift. They all are funded by taxpayer dollars. … It’s almost like looking at a company with multiple divisions,” Lipscomb said. “We need to be planning together for capital expenditures, so we’re not duplicating. Let’s look at everybody’s needs, and we plan for those things together.”
Marshall said the council is unlikely to accept a budget fix without debate and a lot of explaining from McElrath and Lipscomb: “These two people are on trial as far as I’m concerned. The mayor has offered them up as his wing men to help us understand our current situation.”
Complicating the drive for a true picture of city finances, Marshall said, is a competition within city government to dodge the ax that is about to fall, whether by the mayor’s hand or the council’s hand.
“One agenda is to bring the budget back in line to represent what the citizens of Memphis can afford. Another underlying agenda is what I call the CYA [Cover Your Ass] agenda,” Marshall said. “Division directors are trying to make sure that it’s not perceived that they contributed to the misinformation given to the council. Then we have a third agenda from division directors who want to make sure that they don’t become the scapegoats of the budget crisis.”
The council’s most vocal dissenter is Chumney, who believes it could be too late to fix the problems by January and that the latest projection from Lipscomb and McElrath — a $1.2 million surplus by June — is “way too low.”
“Based on the history of the administration and its inability to keep within the spending guidelines set by the council, I think we need a much bigger cushion than that,” she said. “We need to make more cuts now so we will not be in that position next June.”
At the last council session in November, Chumney proposed whacking $20 million to $30 million more from the city’s operating budget. She believes it is possible state government might get involved if the city can’t balance its budget.
“I know that may involve some things that are painful now. But on the other hand, how painful will it be on June 30th if assets have to be sold in order to issue bonds to pay for operating expenses,” Chumney said. Her motion in council committee was met with overwhelming silence and died for lack of a second. Chumney was furious.
“I’m assuming the administration is doing the right thing,” said council member Myron Lowery.
“Unfortunately, I’m not — based on the last three or four years,” Chumney shot back.
Privately, several council members echoed Chumney’s concern. But they also accused her of trying to score political points for a 2007 bid for city mayor by making proposals that are premature, knowing they will fail.
Chumney has repeatedly denied any political motivation.
Political considerations at budget time are part of the political DNA of City Hall. They are not unique to this mayor or this council. And they are not limited to city election years. The irony is that Herenton came into office in 1992 vowing to restore the city’s reserve fund, which had been depleted to $3 million in part by using reserves to avoid property-tax hikes.
With two property-tax hikes in his first two years in office, Herenton’s speeches for at least 10 of his 13 years in office rarely failed to mention the building of the city’s reserve fund under his watch.
The reserve stood at $69 million when the problem with the budget numbers began. There is now just under $600,000 in the reserve.
Herenton concedes that is much too low. But he says the function of the reserve fund is exactly what his predecessor, Dick Hackett, was using it for.
“We could have kept the $69 million in the bank,” he said. “But do you know what the tax rate would have been? You know this community could not absorb a tax hike, so what do you do? You use your reserves to prevent the community from experiencing tax increases every year. That’s what we did,” Herenton said.
Mitchell says it’s not that simple. “Some of the decisions we were making were spending decisions, and that impacts the budget as well as revenue,” she said. “I think we fell into that hole last year, when you look at the fact that we had to lay off people while we were still building facilities. I admit there was a problem here. I’m not going to hide from that.”
Marshall agrees: “The days of three-inch-thick CIP budget presentations are over. There will be no more glitzy and glamorous CIP projects. There will be no more FedExForums. There certainly will not be an aquarium. Even the riverfront will be scaled back.”
Even the most basic city services are not above scrutiny, Marshall said.
“Nothing is sacred. Before we had, ‘Don’t interfere with fire or police strategies.’ We came to find out that some of those CIP projects in the fire department, for instance, don’t even have strategies.”
Mitchell hopes to put another payroll-tax referendum on either the August or November ballots for city voters. If approved, it would still require the approval of the state legislature. And, she says, this time around the referendum would have safeguards the 2004 proposal didn’t have.
“Hopefully the council, with a broad-based citizens group, will look at how we can structure a referendum that will [have] a cap, a time limit, a guaranteed lowering of the property tax,” Mitchell said.
The likelihood of that idea as well as all of the other ideas tossed around in this turbulent political environment depends on what sacrifices are made between now and mid-January and to what degree they calm the waters.
“I see this as a short-term challenge,” Herenton said. “But it does force government to look at doing business differently and restructuring. That, I think, is a positive result of this crisis — this challenge.”
A City Budget Primer
The current fiscal year (2006) began July 1st and ends June 30th.
The city’s operating budget is composed of basic government services and programs as well as pay and benefits for city employees. The vast majority of line items are continuing expenses for the city from year to year. The current revised FY2006 operating budget totals $505.5 million. After November’s proposed budget cuts, the target budget would total $484.5 million.
The city’s Capital Improvements Plan (CIP) budget is a five-year spending plan dominated by construction projects. This includes all one-time expenses, from police cars to new buildings. Larger projects are spread over several fiscal years. The CIP budget for FY2006 totals $261.9 million. The five-year CIP is $1.9 billion.
To pay for these projects, the city floats bonds and then pays off the bonds over time, usually 20 years. Using the bonds represents a debt for the city, and a portion of the property-tax rate, around 20 percent, is devoted to paying down that long-term debt.