DODGING DETROIT’S FATE

Tough choices saved Toledo from fiscal crisis

City officials say declaring bankruptcy never an option

7/28/2013
BY IGNAZIO MESSINA
BLADE STAFF WRITER
Blight, poverty, unemployment, and municipal debt crippled Detroit, left. Toledo, often compared to the Motor City, took unpopular steps during trying times.
Blight, poverty, unemployment, and municipal debt crippled Detroit, left. Toledo, often compared to the Motor City, took unpopular steps during trying times.

The wheels may have finally come off Detroit this year, but Toledo — although it nearly stalled out in the early 1980s and again in 2010 — never actually broke down.

Bell.
Bell.

Both are Rust Belt cities, and Toledo is sometimes called Detroit’s minidoppelganger because of its proximity, similar reliance on the automotive industry, and parallel economic declines tied to manufacturing. But while blight, poverty, unemployment, and debt crippled Detroit to the point of Chapter 9 bankruptcy on July 18, Toledo leaders say those problems knocked the city down, but not to the same extent.

Finkbeiner.
Finkbeiner.

Toledo Mayor Mike Bell — a political independent fighting off three viable challengers trying to unseat him — said the city flirted with a bankruptcylike situation nearly four years ago, but avoided that by doing some of the same things Detroiters have been hit with by emergency manager Kevyn Orr.

Sarantou.
Sarantou.

“I think we were moving in a direction that could have made it fairly easy to get there,” Mayor Bell said of the Detroit bankruptcy.

Wagner.
Wagner.

“Things we had to do here were very unpopular, and from what I could see, no one wanted to do the unpopular things,” he said. “Without that happening, which is the same principle being used in Detroit, it was going to become a day of reckoning that would have been similar to bankruptcy.”

In January, 2010, Mr. Bell and his top officials looked for a way to fix the budget and one possibility was Ohio’s “fiscal emergency” designation.

Deputy Mayor of Operations Steve Herwat, Mr. Bell’s right-hand man and a longtime city employee, said the designation was a real threat for Toledo that some advocated.

Fiscal emergency would not have invalidated the city’s contracts. That could happen under bankruptcy, but Toledo could not file for that federal protection without the state’s permission and then would still have needed to ask a federal bankruptcy judge.

A city also could be labeled in fiscal emergency if it defaults on any debt obligation for more than 30 days.

Twenty-four local governments and six school districts are under state supervision, according to the Ohio auditor.

East Cleveland, a suburb of Cleveland in Cuyahoga County, is among the cities slapped with that negative label. Akron was under “financial caution” in 2011.

Ohio’s original municipal fiscal-emergency law was enacted in 1979 as a response to a financial crisis in Cleveland. Under fiscal emergency, a state-appointed commission can force a community or school district to come up with a plan to correct its finances — similar to the way Mr. Orr has ordered changes in Detroit.

“We would have flirted with this, with that possibility, if the mayor had not done what he did,” Mr. Herwat said. “A seven-person panel would have been appointed to make decisions for the city if we had gone into fiscal emergency.”

Instead, Mr. Bell persuaded a majority of Toledo City Council members in early 2010 to force concessions from city unions without them agreeing to renegotiate their contracts by approving a controversial measure called “exigent circumstances.” Council had refused the previous year to take that step for Mayor Carty Finkbeiner when the deficit was $27.7 million.

Additionally, council in 2010 swallowed Mr. Bell’s request to increase the city’s monthly trash fee to $15, and it eliminated 75 percent of the tax credit on residents who work and pay taxes outside the city. The trash fee was reduced to $12.50 a month in 2011. Later on, Mr. Bell and council moved Toledo out of the trash-collection business by hiring a private company to collect refuse through a contract with Lucas County.

“It was costing $6 million and now it costs us $5 million,” Mr. Bell said.

The exigent circumstances approved by council meant unilateral cuts for all exempt city employees as well as members of the Toledo Police Command Officers Association, Toledo Fire Chiefs Association, AFSCME Local 7, Toledo Police Patrolman’s Association, and AFSCME 2058. It led to years of resentment from union leaders and a legal challenge from the police command officers union that still is still being waged today. Toledo Firefighters Local 92 avoided the imposed cutbacks by cutting a deal that saved the city $3 million in concessions.

The cost-cutting measures were made a year after Mr. Finkbeiner, in March, 2009, warned that city employee labor-union contracts were pushing Toledo to the brink of bankruptcy, although that option didn’t exist for the city.

Mayor Finkbeiner said he slashed the city budget in 2009 before Mr. Bell took over by laying off about about 40 nonsafety employees and 75 police officers. He then cut back remaining nonunion employees’ pay 20 percent by paying them for 32 hours a week while having them work 40 hours or more.

“Were we ever in a situation like Detroit? We were not,” Mr. Finkbeiner said. “It has gone on in Detroit too long. They have been so wasteful, and they have squandered, and actually illegal — some would say.”

John Sherburne, former Toledo finance director, who worked under Mayor Finkbeiner, said Toledo was never under the threat of “bankruptcy.”

“There were things we had to do to adjust labor contracts and things like that, but our financial group never gave that a thought,” Mr. Sherburne said. “We thought we had other avenues we could pursue.”

The biggest problem for the city was the huge drop in income tax revenues chiefly from unemployment.

The 2.25 percent tax in 2007 generated $169.7 million. After that, the tax revenue began a steady year-to-year decline. It was $154.4 million in 2008 and then down again to $141.5 million in 2009.

“It was pretty dire from the fact we went from $169 [million] to $140 million,” Mr. Sherburne said. “That is such a huge hit and such a fast hit, there was a lot of scrambling ... but bankruptcy was never a serious topic of discussion.”

Don Czerniak, president of service workers union AFSCME Local 7, the city’s largest union, said the union work force should get most of the credit for carrying most of the burden.

“Sure the exigent circumstance were forced down our throats, but when you look at it, our concessions for Local 7 alone were more than $3 million,” he said. “We gave concessions in the previous contract ... and then when times got bad we lost what we had gotten in lieu of raises.”

That union has a wage reopener in Jan. 1, 2014, and Mr. Czerniak is wondering if the city — whether it’s Mr. Bell or one of his challengers on the September ballot — will remember that 2010 sacrifice now that the city’s finances are in better shape and income tax collections are up. Toledo is expected to collect $163.87 million from the payroll tax by the end of this year.

Dan Wagner, president of the police patrolmen’s union, at the time fought vehemently against exigent circumstances.

Now, he is more understanding.

“I think at the time, most of my people didn’t realize the concessions were necessary to make sure the city remained viable,” the police union boss said. “We had a long, contentious fight with Carty, and then Mike Bell took a different approach to it.”

Mr. Wagner said Detroit’s problems are not comparable to Toledo’s in 2009 and 2010.

“Detroit is a whole different story because a good portion of their liability is the city-run pension plan,” Mr. Wagner said. “We are under a statewide pension plan ... and the state recently took measures they saw as shortcomings over a 30-year period.”

During next three years, the union members will contribute an additional 2.25 percent toward their own retirements, he said.

“In Detroit, they have a very different situation than Toledo did,” Mr. Wagner said. “They recently took huge concessions trying to assist the city, and the pensions are completely wiped out — it may be 30 cents on the dollars from what they were expecting.”

Toledo Councilman George Sarantou, chairman of council’s budget committee, in 2009 also said bankruptcy was a “remote” possibility but now says it wasn’t a possibility.

“The difference in Detroit is that they were not making cuts; they were not paying attention to debt, and there was a lot of political corruption,” Mr. Sarantou said. “Toledo has never encountered these circumstances.”

Mayor Bell said the city is rebounding but still shaky and could start to fall again. He said the city started to build up a rainy-day fund under his watch, and he expects a $5 million general-fund surplus from 2012 to be confirmed yet this year.

But Toledo still has a “structural deficit” in that it will take about $14 million from the capital improvements budget to cover spending in the general fund. Last year, the Bell administration used more than the $11 million from that fund.

Mr. Bell said using the capital-improvements fund money was necessary. “In the past, we dipped into our rainy-day fund until we had nothing left, we dipped into our water and sewer funds ... what I have done, even though it makes people mad, is I have told them the truth,” he said. “What we needed to do was raise taxes, but we knew we couldn’t do that because the people who we’d be raising taxes on were also being harmed by unemployment or other problems in the economy.”

Toledo’s financial crisis in 2010 resembled the troubles it faced in the early 1980s, but it was “much worse” three decades ago, said John Bibish, the former commissioner of Toledo’s budget under Mayor Finkbeiner.

“Our financial position was much more difficult in 1982,” Mr. Bibish said. “The structural deficit was a real structural deficit, and there just wasn’t enough money coming in.”

During tense labor negotiations in 1979 with its unions, the city made a final offer for a three-year contract that called for a 2-percent wage increase the first year and raises of 1.5 percent and 1 percent in the subsequent two years.

The unions balked, and the impasse with the city, Mayor Doug DeGood, and City Manager J. Michael Porter led to what many people viewed as an illegal strike by 3,400 municipal employees — including police and firefighters — on the morning of July 1, 1979.

What ensued was a 48-hour gap in public safety that allowed mayhem to rule — countless blazes were set, including the firebombing of the former Plaza Hotel on Monroe Street across from the Toledo Museum of Art; more than $50,000 of city property was destroyed, and a TARTA bus driver was killed while resisting a robbery attempt.

By 1980, the city was in worse financial shape. Layoff notices were issued to 240 employees, affecting staff for parks, pools, trash collection, and the fire department. Grass was not mowed in parks, and pools were closed. Three fire stations were closed and 61 firefighters were laid off — including a young firefighter by the name of Mike Bell.

In June, 1982, voters approved the 0.75 percentage point increase in the income tax, raising the city levy to where it is today — 2.25 percent.

The answer in 1982 was an influx of cash from a new tax, but Mr. Bell has said repeatedly he won’t ask voters for more taxes because the voters won’t accept that. Instead, the city in recent years has tapped into the capital-improvements fund.

“There is no way you are going to go on forever adding debt without a solution to get out of it,” the mayor said. “Typically, if you have a little bit under, what used to happen was in the following year, you could just bury that because the economy kept rising. We can’t do that anymore.”

Contact Ignazio Messina at: imessina@theblade.com or 419-724-6171 or on Twitter @IgnazioMessina.