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VOL. 43 | NO. 38 | Friday, September 20, 2019

Mayor-elect inherits fight with state comptroller

By Kathy Carlson

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Mayor-elect John Cooper speaks to supporters at the Nashville Palace after winning the mayoral runoff election Sept. 12.

-- Photo By Ap

Nashville Mayor-elect John Cooper, who campaigned on a platform of restoring order to Metro’s finances, is inheriting a file of correspondence from the Tennessee comptroller’s office concerning how the city manages cash and what will happen to its 2020 budget without a key revenue source – privatized parking – which Cooper has said he won’t allow.

Turning the city’s parking meters over to private management would have added an initial payment of about $30 million. That, plus another proposed asset sale worth about $11 million, were part of outgoing Mayor David Briley’s budget, which depended on the sales to balance it, as state law requires.

While $41 million might not seem like much in an operating budget of about $2.3 billion, it has drawn questions from the Tennessee Comptroller of the Treasury, which oversees the budgets and borrowing of local government. Answers to the Comptroller’s questions are due Sept. 20, and both Cooper and Briley have said they’ll provide responses. Cooper also told Nashville’s WTVF-Newschannel 5 last week that dealing with the Comptroller’s questions is his first priority as mayor.

Scrutiny of Metro’s finances comes at a time when the city appears to be booming, with new construction, new restaurants and a flood of tourists crowding downtown sidewalks. How can Metro not have plenty of money for its budget?

‘It’ city in search of money

Former Metro Council member Emily Evans says the disconnect dates back to the administrations of former mayors Karl Dean and Megan Barry, neither of whom agreed to interview requests.

Nashville under Dean and Barry saw spending money on big-ticket, high-profile projects like the convention center, says Evans, who left the Metro Council in 2015 and opposed the Music City Center. A debt refinancing a few years ago also delayed payments of principal, she adds.

When the city was again required to pay on the principal, it strained the system and, given that Dean and Barry didn’t want to raise property taxes, led to one-time asset sales and other measures. The refinancing took place in 2010, Metro financial documents available online reveal, and reduced principal payments for the fiscal years 2011 through 2013.

Briley succeeded Barry as mayor when she resigned in spring 2018 and offered a status quo budget for 2018-19. Property tax rates didn’t rise during his tenure as mayor. Similarly, Cooper has expressed reluctance to raise property taxes.

These days, Evans says, “the message from voters seems to be: Get your financial house in order.” At the same time, she notes, a property tax increase will be a hard sell.

After spending money through borrowing for big projects, it’s tough to come back to the citizens and ask for higher taxes that probably won’t result in any tangible benefits to them, other than digging out of a financial hole, she continues.

Historically low property taxes

Ryan Yeung, a former professor at Hunter College in New York City who co-wrote a book titled “Understanding Government Budgets,” works with CUNY on issues relating to associates’ degree programs. He’s also consulting with Nashville on its Nashville GRAD program to improve the graduation rates of students attending Nashville State Community College.

He says Nashville’s annual financial reports, known as Comprehensive Annual Financial Reports – or CAFRs – show the city’s tax base is expanding and the assessed value of property is not only not keeping pace, it’s falling.

The city’s expenses are up, but there are proportionately fewer revenues because of a lower tax rate, he says. That’s why Nashville is balancing the budget by selling assets.

But the news isn’t all grim.

“Lots of communities would love to be in the position that Nashville’s in,” with growing population and wealth, he points out. “It’s far from catastrophic.”

However, the tax rate is historically low, and if the city doesn’t raise taxes it will remain in the same situation, he continues.

There always has been a relationship between the state comptroller’s office and local governments, including Metro. But news of the comptroller’s recent interest in Nashville’s finances surfaced as Cooper and Briley campaigned for mayor in the weeks before the Sept. 12 runoff election.

In an Aug. 26 televised debate with Cooper, Briley called an Aug. 6 letter from the comptroller’s office on Metro’s borrowing “essentially a political document” orchestrated by Cooper and Council allies. Cooper and the comptroller’s office disagreed, but Briley didn’t back down from the “politics” charge. Cooper went on to win the runoff election.

The Comptroller’s questions

Letters between the comptroller’s office and Metro, made available through a public records request, show the conversation over Metro’s finances – especially on transferring money among Metro funds and borrowing – started in December 2018.

At issue is a frequent problem for many governments: How to smooth revenue flows, which often arrive in fits and starts rather than in a predictable stream.

In Metro, about 36% of the 2018-19 operating budget came from property taxes. They’re billed every October and must be paid by the end of February. Consequently the bulk of property taxes are paid between October and February, but Metro often needs the money before then.

State law recognizes the problem and allows local governments to borrow money in anticipation of the taxes being paid, using short-term debt called tax anticipation notes (TANs). State law requires that the Comptroller’s office pre-approve all TANs. The notes must be repaid by the end of the same fiscal year in which they were borrowed, and the amount that any local government fund can borrow through TANs is limited by law.

The use of TANs is common among local governments, says Irfan Bora, assistant professor of professional practice and director of the master of accountancy in governmental accounting program at Rutgers University. Bora is the former chief financial officer and director of finance and management at the New Jersey Meadowlands Commission.

Governments may decide to transfer money between its own accounts on a short-term basis if the cost of borrowing from a bank or other third party exceeds what the city could be earning in interest by making a short-term investment, he explains. Governments should take care to adhere to any restrictions on funds before shifting them to another fund.

For example, he said, money in a debt service fund should never be transferred to another fund.

Generally speaking, TANs can be a useful part of a local government’s overall financial management strategy when used as part of an overall investment policy that guides the city, meets legal requirements and follows best practices in governmental accounting and finance, Bora continues.

It would be best practice for a city of Nashville’s size to have a formal cash-management policy as part of its overall financial and investment policies.

Is moving money borrowing?

Correspondence between the comptroller’s office and Metro in December 2018 states Metro was smoothing out its cash flows by moving money between accounts without making use of TANs.

The Comptroller’s office, reviewing Nashville cash flow schedules, had learned “Metro has entered into interfund borrowings to pay for expenditures of the General Purpose School Fund (GPSF) prior to receiving property tax revenues.” Metro had asked the state office to help it ensure that interfund borrowings complied with state law, the letter stated.

The cash flow schedule for that fund indicated there wasn’t enough cash in it “to meet current obligations for the months of August through December” of 2018.

Metro employees told the comptroller’s office that “cash from a number of various funds, including the GPSF, is deposited and pooled in one cash account; therefore, if cash from a particular fund is not sufficient to pay an obligation the cash from another fund(s) in the pooled account is used, or borrowed, to cover the deficit.”

The Dec. 28 letter said the state considered the transfers to be “nonconforming obligations” under state law on borrowing because they weren’t preapproved.

Metro Finance Director Talia Lomax-O’dneal responded to the Dec. 28 letter, acknowledging Metro didn’t seek prior approval for the interfund borrowing. She stated Metro was taking corrective action and that it would request prior approval for future borrowings by funds supported by property taxes.

In January 2019, Briley requested retroactive approval from the state for $391.7 million in TANs for fiscal 2019. The Comptroller’s office approved the request.

John Dunn, spokesman for the comptroller’s office, said “most local governments request approval before issuing TANs. It is a somewhat common practice for local governments in Tennessee to use TANs as a way to meet expenses as they await the receipt of anticipated revenues (usually property taxes which don’t start rolling in until October-February).”

Déjà vu on money transfers

Fiscal 2019 ended June 30, but correspondence with the comptroller’s office states Metro hadn’t submitted the Fiscal 2020 budget to the state as of July 17, even though Metro Council passed it June 18.

The comptroller’s office received draft cash flow projections for the new fiscal year from Metro on July 26, a Friday. That same day, the comptroller’s office emailed Metro, stating: “Based on the cash flows several funds need to borrow the (TANs) now. Can you get the approval request to us Monday along with the other cash flows?” Monday would have been July 29.

In a letter dated July 31, Briley once again requested retroactive approval for TANs, this time in the amount of $220 million. He also requested preapproval for another $80 million in TANs, a total of $300 million.

The comptroller’s Aug. 6 letter approved the $300 million in requested TANs in response to the July 31 letter. It also set out the additional disclosure requirements that Metro must make by Sept. 20.

It didn’t refer to the December 2018 letter on the requirement to issue pre-approved TANs instead of simply transferring money between funds.

Metro still had roughly $150 million in additional TAN borrowing capacity for the 2020 fiscal year under state law. Briley requested preapproval Aug. 23 for the remaining borrowing, which the state approved in an Aug. 30 letter.

That letter also raised the prospect of Metro having to report the TAN borrowing to the Municipal Securities Rulemaking Board.

Earlier in September, the Briley administration was reviewing whether it needed to make the disclosures.

State law allows the comptroller to assess penalties against local governments issuing nonconforming obligations. The comptroller also can opt to waive penalties. There’s no indication that the state has assessed penalties against Metro for the 2018 and 2019 nonconforming obligations.

$1 in $7 for debt service

Meanwhile, the percentage of Nashville’s expenses taken up by debt service has ebbed and flowed over the years. The Fiscal 2020 Metro Treasurer’s Presentation to Council tracked total debt service as a percentage of Metro’s operating budget between Fiscal 2011 and 2020.

The percentage has risen in all but one year, starting at about 9% in 2011 and ending at more than 14% in 2020. The percentage dropped slightly in 2016.

The 2019 Metro Treasurer’s Report (a separate document from the Treasurer’s Presentation) stated that Metro’s total debt – principal balance - will rise by 21.6% under the 2019-20 budget. News reports have said Metro has twice as much debt as the state of Tennessee.

As a new mayor takes office and the conversation on Nashville’s finances continues, former council member Evans observes that “a whole lot of things are happening in town without public money being involved. It makes you question whether public money was needed in the first place to transform Nashville.”

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