When Mayor Sandy Stimpson’s administration looked at the financial health of the city of Mobile recently, they found it wasn’t as good as hoped, leading the mayor to take action that included canceling a pay increase promised by his predecessor.
“With the assistance of the city’s auditing firm, Smith, Dukes & Buckalew, our assessment of city finances revealed that we have been living beyond our means and corrective action is needed immediately to avoid unintended financial consequences,” Stimpson said. “Luckily we found out at the end of the first quarter. To correct this four or five months down the road would have been much more difficult.”
“Living beyond our means” to the tune of $15,810,643 less than expected is what Stimpson was talking about. The external audit’s preliminary findings show that as of Sept. 30, 2012, the city had a balance of $11,371,036 in the general fund. However, one year later the general fund went to a negative $4,439,607. That means the city ran a $15,810,643 spending deficit last year.
The $15.8 million was due to spending problems “across all departments,” Stimpson said. That could have been in part to some department heads not knowing how much it took to run their operations.
“Under the previous budgeting process, even some department heads were in the dark about the true cost of their operations. From this day forward, each department head will be an active participant in the budgeting process and will be held responsible for managing their expenses,” Stimpson said. “This is truly a time of optimism for our city and we cannot allow poor financial management to undermine our success.”
The ultimate result of the findings is that Stimpson is now reopening the process to try to get the budget in balance, as required by law. This will mean cutting a good bit of money and it also caused the mayor to withdraw an across-the-board pay raise promised by former Mayor Sam Jones during the election.
The raise would have cost $2,347,000 in the first year if enacted. By not giving the raise, it will go to fight the deficit.
Major contributions to deficit
So how did it happen? The deficit of $15.8 million comes from five areas, but one constituted more than 80 percent of the shortfall. By far the largest area hurting Mobile’s bottom line is expenditures and transfers exceeding revenues, which encompasses the operational costs of running the city, according to Budget Director Paul Wesch. This accounts for $12,797,479 of the $15.8 million spent last year.
Wesch described the problem as being like having a salary of $50,000, but spending $80,000 throughout the year. Your expenses would exceed your salary or revenue by $30,000, which would have to come from somewhere such as savings or cuts to your current budget.
Another $3,153,755 million was money the city was budgeting to receive from weed liens, building demolitions and other areas. But these are monies the city had been due for years without collecting.
“We were told the money expected to be received from weeds and building demolitions had been carried over for several years,” Wesch said. “The problem is that will never actually be paid.”
Weed liens are when a lot has become overgrown and the city requires the owner to clean it up. However, when the owner does not, the city cleans the property and then bills the owner. If the owner doesn’t pay, then a hold is put on the property.
Building demolitions are similar in that the structure has become blighted. The same pattern of the city attempting to clean up the property is followed.
The likelihood of the owners of the property or lots to pay the city is very low, Wesch said. Instead of writing off the amount owed, however, the city in the past made it a policy to carry it over.
He likened this to having a friend who owed you money, but then leaving town. The probability of getting your money back is very low and financial logic would say to forget the debt that is not likely to be paid.
Various adjustments in other areas brought in $140,591 to the city’s coffers. However, compared to the city’s finances, it would be like finding change in the couch.
Expenses and transfers more than revenues breakdown
City Hall itself proved to be one of the biggest areas of overspending last year. City Hall overhead was one of the top factors contributing to the shortfall, Wesch explained, saying that city hall overhead includes everything from “copiers to salaries.” Since the audit is still going on, the specific overages are not known yet. However, the total overage is $747,258.
“The auditors are still looking closely at everything, so the exact places where more was spent than budgeted we don’t know yet,” Wesch said. “That will be something we will know later.”
Wesch said he wasn’t sure what should result in such a large expenditure within the city hall overhead.
The Mobile Fire-Rescue Department also spent $518,420 in excess of what was budgeted. Wesch said the city is unsure where exactly that money went within the department.
While some of the costs are controllable, sometimes they are out of the hands of the city leaders.
The largest single overage contributing to the deficit comes from the healthcare plan. The city is self-insured and pays out-of-pocket for its employees’ healthcare. This number fluctuates and in 2013 the number was $2,527,429 more than projected.
The healthcare plan has been a thorn in the side of city’s budget makers for some time now.
When Wesch was over the Mobile Citizens’ Budget and Finance Advisory Committee, he and the other committee members discovered that at the current employee contribution rate, the city is taking in $463,418 less than the average of other comparable municipalities every month. Over a year, that means the city is missing out on $5,561,016 by matching the average contribution made by other counties and cities nearby to their employees.
“We recommend the city raise the total participating costs to match the average, which is a floating number. Even if you raise the amount contributed to the average, then you’ll still be behind the other cities since this was based on 2012 numbers,” Wesch said in August 2012. “We also recommend the city implement the change for 2013, but size the change to allow for the participating percentiles to be in effect until the 2012 calendar year is over.”
The city decided not to heed the committee’s advice though and instead spent $2.5 million more than budgeted.
Technically, the second largest reason for the deficit is a transfer to the WAVE transit system.
The city made two transfers of around $900,000 each to the transit system in fiscal year 2013. The repayment was to be made in the same year, but national politics kept that from happening.
“Due to the federal shutdown the check wasn’t written until October 2013, which is actually in fiscal year 2014,” Wesch said. “The payment came, but it just came in another year. Regardless, the loss in 2013 is still there although the money is there.”
Another uncontrolled cost for the city that ran into the red is the cost of the Mobile Metro Jail, which was over budget by $838,704.
The city pays Mobile County 35 percent of the jail cost.
The Strickland Youth Center and juvenile court are much like the jail. The city contributes 50 percent of the costs, and this year the cost was $735,890 more than budgeted.
The reserve for retirement, employees’ insurance and police & fire pension cost more than expected at $441,315, $479,465 and $478,456 respectively. The funding for the three areas varies much like the jail and youth center.
Workmen’s compensation was another big cost for the city in 2013 in that it exceeded its budget by $797,416.
Wesch said while some costs cannot easily be anticipated, the Jones administration appeared to be using best-case-scenario planning for most areas of the budget instead of aiming for more likely numbers.
Budgeting for the best in 2014, not the most likely
Looking at the budget Jones passed before leaving office, Wesch pointed out five areas that were projected to cost much less than they likely will.
The liability fund, youth center, health care plan, metro jail and workmen’s compensation are all expected to be underfunded anywhere from $5 million to $263,800.
The largest projected shortfall is in the healthcare plan. In the 2014 budget, the plan was budgeted at $25 million, but based on the first three months of the fiscal year the expected cost is more than $30 million, Wesch said. That means the shortage for this current year will likely be $5,033,408 unless changes are made.
The most curious part of healthcare funding is that it was actually budgeted for $1 million less than 2013’s actual cost.
This, Wesch said, is a trend in the city’s budgeting.
The youth center was budgeted for $2.75 million in 2014. However, it will cost nearly $3.5 million based on 2013’s numbers. That means a shortfall of $770,000 would occur at the close of 2014.
The budgeted number for 2014 seemingly was based off the 2011 amount although it was $1 million less than the actual cost in 2013.
The Jones Administration also budgeted the jail at its lowest point since 2011 even though there was a $500,000 difference between 2011 and 2013. Wesch said at current budgeting, the jail payment would be $675,000 more than planned for.
In 2011, workmen’s compensation cost the city $3 million. In 2012 it dipped to around $2,750,000 and then jumped back to $3 million in 2013. However, the 2014 budget allowed for $2.75 million for workmen’s compensation even though the cost was back on the rise.
Wesch expects the cost to actually be $3.75 million in 2014.
“Based on the first three months, workmen’s compensation looks like it will exceed 2013,” he said. “Now this is based on information after the budget was completed in October 2013, but there was no indication it would go back to the 2012 number.”
The liability fund was budgeted in 2014 for its lowest point yet. In 2011 the fund was given $2.25 million and slowly climbed to nearly $2.5 million in 2012 and 2013. However, in 2014 the fund was given only $2 million.
The projected number for 2014 is $2.25 million and if the fund is left at its current funding, it would result in a $263,800 shortage, Wesch says.
“It appears for some time there was a tendency to choose the lowest recent year when budgeting instead of following trends,” Wesch said. “This is part of what got the city in the situation it is.”
Capital fund depleted
Drive down Ann Street or watch rivers form on Midtown streets after a rain and it isn’t hard to see Mobile has infrastructure problems.
The capital fund is to be funded $31 million annually, but for more than a decade the city has been taking from it to pay expenses.
In the 2014 budget, there was just $159,000 used to maintain the city’s 5 million square feet of properties according to Stimpson. That means the city only has three-cents per square foot to take care of the buildings in its care.
“This year there is a $17 million transfer from capital to the general fund,” Wesch said, “Last year checks were being written from capital to cover payroll. If that continues, the city will never be able to repair its infrastructure.
“We are just going to find a way to stop taking from the capital to cover the expenses.”
Stimpson’s administration is in a hard spot — they have to create an amended budget as soon as possible. The cuts will be somewhere around $13 million, but could be more or less. The actual number is still being determined.
Wesch said the mayor and staff are aiming for the end of January to at least have a draft, but typically a budget takes six months to create.
“It’s going to be busy, but this can get us thinking in multiple years since we will be also looking at creating the 2015 budget,” Wesch said.
When the 2015 budget is presented to the council, Wesch said they would also be given a “shadow budget” for 2016 and 2017. That way long term planning would be possible for the city’s finances.
Wesch likened this to someone planning a household budget. If a person had a very large payment once a year for something like taxes, then they would save up to pay it. This is what the city will do since it has large payments like bonds.
“Previously the budget would be encapsulated in one year without looking at what was coming up,” Wesch said. “That doesn’t leave any room for long-term planning.”
The mayor is meeting with department heads to talk to them about the cuts and prepare them for what is to come.
Director of Communications George Talbot said the administration is looking at having weekly or regular meetings with the department heads as well.
Although the administration does not have any concrete ideas for cuts to balance the budget, Stimpson asked the citizens to be behind him during the Dec. 31 City Council meeting.
I need (the citizens’) help. I need you to be willing to embrace the necessary changes,” he said. “At the end of 2014, I want us to look back see that it was a great year for Mobile.
“My prayer is the city and its citizens to be bountifully blessed in 2014.”