Cities Can Go Bankrupt - Lakewood's $30 Million Deficit

[Rick Uldricks]

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[Stan Austin]

Dee-- When it comes to schools deriving revenue from income there are two methods that I am aware of. Both avenues are relatively new, that is available withing the last 25 years. And, both were passed by the state legislature in an effort to give schools another set of options for revenue.

This first and oldest is taxing income. This is done by applying a tax rate to the Ohio income tax form after all of the deductions have been applied. This means that social security, pensions, and some interest and dividend income is not taxed. The Lakewood Schools did try to pass such a tax in the early 1980's and it failed. I think the primary reason that it failed is because most voters were happy with the concept of the separation, if you will, of the taxes i.e. payroll/income for the city and property for the schools. Old hapbits are hard to break.

A second method is a combined city/school income tax. The prime sponsor of this method was our own (at the time) St. Sen. Anthony Sinagra. In the mid 1980's there was a school levy failure. I think there was a feeling that a tax increase sponsored by the city was more likely to pass because of some temporary bad feelings towards the school administration at that time. Hence, the combined tax avenue. There was a proposal by the Harbarger Administration to put such a tax on the ballot with the city proceeds going for sidewalks and the school's proceeds going for general operations. This never made it out of council.

The City of Euclid and the Euclid Schools did pass such a tax about five years ago to mixed reviews of acceptability and effectiveness. To my knowledge no other ciy/school combination in Ohio has since tried to pass such a tax. Once again, I would surmise that because of its "peculiar" nature that the electorate is generally uncomfortable with it.

I would hope that Matt Markling and others would jump in with any necessary corrections.

Stan Austin

[Bill Call]

I'm certain that a lot of the rental properties, particularly the "doubles" are worth less now than they were several years ago -- due to the current market, and in some cases due to the dilapidated condition of the property.

Wouldn't this translate to lower property taxes?

Eventually, yes, in theory. Which is why any budget based on continued annual property appreciation needs to be re-worked.

One of the reasons politicians are so incensed about the "foreclosure crisis" is that they grew fat off 10%, 15%, 20% annual increases in property values. Were all those houses in Slavik Village really worth $100,000?

[Dee Martinez]

I'm certain that a lot of the rental properties, particularly the "doubles" are worth less now than they were several years ago -- due to the current market, and in some cases due to the dilapidated condition of the property.

Wouldn't this translate to lower property taxes?

Eventually, yes, in theory. Which is why any budget based on continued annual property appreciation needs to be re-worked.

One of the reasons politicians are so incensed about the "foreclosure crisis" is that they grew fat off 10%, 15%, 20% annual increases in property values. Were all those houses in Slavik Village really worth $100,000?

But this is where it gets very confusing. Its the SCHOOLS budget, not the citys, which is based mostly on property taxes (and valuation) but the schools only benefit from appreciation when voters approve more levy millage.

A renter living in a $500 a month apt who makes $100,000 a year supports the city far more than the schools. A senior who lives on socia, dividends, and interestl but lives in a $300,000 house is the opposite.

The city is more dependent on increases in income tax revenues and with fewer people here and working that hasnt been keeping up.
Im pretty sure that most people in Lakewood dont know where their money goes or what pays for what.

[Bill Call]

The city is more dependent on increases in income tax revenues and with fewer people here and working that hasnt been keeping up.
Im pretty sure that most people in Lakewood dont know where their money goes or what pays for what.

The City gets 21% of the property tax revenue, the County 20%, the Library 3% and the schools the rest.

The City collects about $10 million in property taxes each year (2005) and about $17 million in income taxes.

One of the bothersome aspects of property taxes is that the schools have to go begging for money every few years while the City and County get automatic increases. I would prefer that they all have to go begging every threes years but If I had to choose one that would get the automatic increases it would be the schools and not the county or city. Those politicians are very clever.

[Tim Liston]

Vallejo, CA is inching closer to a bankruptcy filing, see http://www.bloomberg.com/apps/news?pid= ... xCNoS2DEzE

[Bill Call]

Vallejo, CA is inching closer to a bankruptcy filing, see http://www.bloomberg.com/apps/news?pid= ... xCNoS2DEzE

Municipal bankruptcy is covered under chapter 9 of bankrupcty law. Under that law cities can void labor contracts.

Here is an interesting article from the San Fransisco Chronicle:

http://www.sfgate.com/cgi-bin/article.c ... 9V9M9K.DTL

[Jennifer Pae]

Section 118 of the Ohio Revised Code: http://codes.ohio.gov/orc/118 governs Local Government Fiscal Emergencies, which would occur before an Ohio locality would or could even file for bankruptcy.

This is what the City of Lakewood is attempting to avoid by resolving to pass a structurally balanced budget for 2008 (Revenues=Expenditures).

Here is a summary from the Auditor of State's Website http://www.auditor.state.oh.us/

LOCAL GOVERNMENT FACT SHEET FISCAL EMERGENCY/FISCAL WATCH LAW

History
The original municipal fiscal emergency law was enacted in 1979 as a response to a financial crisis in the city of Cleveland. Since that time, financial planning and supervision commissions have aided 45 Ohio local governments declared in fiscal emergency. As of December 31, 2007, 14 remain under stewardship.

In 1996 fiscal emergency protection was extended to counties and townships through a law (House Bill 462). HB 462 modified the fiscal emergency statute to create the "fiscal watch" status to provide early warning to faltering entities whose finances are approaching emergency status. Entities now enter fiscal watch when essentially a deficit is in existence in the General Fund or other funds and such deficit exceeds one-twelfth of total General Revenue Funds - the previous marker for fiscal emergency. As of December 31, 2007, 18 municipalities have been declared in fiscal watch, and 5 have later entered emergency.

Any One Factor Needed for the Auditor of State to Declare Fiscal Watch

The existence of either of the following:
All accounts that were due and payable from the General Fund for more than 30 days, less the year-end balance of the General Fund, exceeded one-twelfth of the General Fund budget for the year.

All accounts that were due and payable from all funds for more than 30 days, less the year- end balance in these funds, exceeds one-twelfth of the available revenue for the preceding fiscal year from these funds.

Total deficit funds, less the total of any balances in the General Fund and in any special fund that may be transferred to meet such deficits, exceeds one-twelfth of the total General Fund budget for that year and the receipts to those deficit funds during that year (other than transfers from the General Fund).

Money and marketable investments, less outstanding checks, less total positive fund balances of general fund and special funds, exceeds one-twelfth of the total amount received during the preceding fiscal year.

Based on an examination of a financial forecast approved by the legislative authority, the auditor of state certifies that the general fund deficit at the end of the current fiscal year will exceed one-twelfth of the general fund revenue from the preceding fiscal year.

To determine if an entity qualifies for fiscal watch or emergency, the Auditor of State would conduct an initial review of entity finances. This analysis would commence upon the written request of the entity or at the initiation of the Auditor of State. If an entity is under "fiscal watch" the Auditor of State may provide technical and support services to the entity. Costs for this support would be borne by the state.

Any One Factor Needed for the Auditor of State to Declare Fiscal Emergency

The same first three conditions as fiscal watch, with the exception that the fraction is changed to one-sixth, with the added requirement that the condition must continue to exist at least four months after the end of the fiscal year.

Failure, for lack of funds, to make all payroll to employees that continues beyond 30 days, or a period of agreed-upon extension that can not last more than 90 days from the original time for payment.

Default of payment on any debt obligation for more than 30 days. County budget commission increases the inside millage which results in a reduction for one or more other subdivisions or taxing districts.

An increase in the inside millage resulting in a decrease to any of the overlapping governments.

A declaration of fiscal emergency can result at the time of review if any of the six conditions are met. Entities declared in fiscal emergency come under the oversight of a financial planning and supervision commission.

[Dee Martinez]

The city is more dependent on increases in income tax revenues and with fewer people here and working that hasnt been keeping up.
Im pretty sure that most people in Lakewood dont know where their money goes or what pays for what.

The City gets 21% of the property tax revenue, the County 20%, the Library 3% and the schools the rest.

The City collects about $10 million in property taxes each year (2005) and about $17 million in income taxes.

One of the bothersome aspects of property taxes is that the schools have to go begging for money every few years while the City and County get automatic increases. I would prefer that they all have to go begging every threes years but If I had to choose one that would get the automatic increases it would be the schools and not the county or city. Those politicians are very clever.

From what I saw, your numbers are off just a little. The city budgeted $18 million in income taxes in FY2007 vs $7.5 million in real AND PERSONAL property taxes. The second part is important too because the state is phaseing out the personal property tax to my understanding.

The bigger issue tho is that it looks as if ALL revenues grew only 5 percent over 3 years. A private business whose revenue grows at that pathetic rate puts up a "Final Liquidation" sign. Spending cuts will be a bandaid there must be some larger changes, dont you think?

You are emminently correct about the cleverness of politicians.

[Bill Call]

Spending cuts will be a bandaid there must be some larger changes, dont you think?.

The recent peer cities review reported that Lakewood has about 80 more employees than its peer cities. If Lakewood offered the same level of services as Mentor, Cleveland Heights or Cuyahoga Heights the City would save about $5 million per year. If action was taken 4 years ago instead of a deficit the City would have $20 million in reserves and a surplus.

You are emminently correct about the cleverness of politicians.

Note that I said clever, not smart!