Top Bell aide says Toledo likely to face 'fiscal emergency'

‘If you cannot make payroll for 30 days, you are there. You are in fiscal emergency.

Jeremy Wadsworth / The Blade
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Unless there is a fundamental change in the way Toledo's government operates, the city will likely be unable to pay its employees before the year is through, a top official in the Bell administration warned.

That looming financial disaster leads people such as Mayor Mike Bell and Councilman D. Michael Collins to throw out words like "bankruptcy" or "receivership," two feared terms but ones that are not likely to become reality.

The truth is that receivership or bankruptcy is probably not an option for the city anytime soon. But being slapped by the state as a "fiscal emergency" municipality is a real threat - a label some dislike but others advise Toledo to embrace given its $48 million deficit.

"If you cannot make payroll for 30 days, you are there. You are in fiscal emergency," said Deputy Mayor of Operations Steve Herwat, Mr. Bell's right-hand man.

"If we don't get this budget balanced, and the imbalance is enough, and yes it is, we are at risk," he said.

Mr. Bell has proposed a number of options - including the controversial legal maneuver to claim what lawyers call "exigent circumstances" to get concessions from city unions that they have so far been unwilling to even entertain.

‘If you cannot make payroll for 30 days, you are there. You are in fiscal emergency.

"Our general fund base salaries are roughly $90 million and we have $8.87 million in concessions on the table," Mr. Herwat said. "At some point in this year, October, November, we would be in position not to make payroll."

Fiscal emergency would not abrogate the city's contracts.

There is confusion about what fiscal emergency would mean for Toledo - even among some of the city's leadership.

Wilma Brown, the most senior member of City Council and its president, mistakenly said the city would "go into receivership" if the budget is not balanced by March 31 and the union contracts would be "null and void."

That could happen under bankruptcy, but Toledo could not file for that federal protection without the state's permission and then would still have to ask a federal bankruptcy judge.

Mr. Herwat said he had not directed City Law Director Adam Loukx to prepare for the long process of a municipal bankruptcy.

Mr. Loukx himself declined to discuss the matter or Mr. Bell's attempt to have council declare exigent circumstances since unions such as the Toledo Police Patrolman's Association are expected to file a legal challenge.

"I think receivership is probably a misnomer because I am not aware of any process for receivership," Mr. Loukx said. "I doubt if there is any lawyer in the city of Toledo that has first-hand experience with Chapter 9 [bankruptcy] but there are famous cases from across the country."

Donato Iorio, a lawyer for the Toledo Police Patrolman's Association , declined to talk about what strategy the union would take should council go through with declaring exigent circumstances.

"There is no legal basis for doing so," Mr. Iorio said. "It hasn't been done in Ohio before, and there is no basis for doing so."

Mr. Bell, even before his election in November, has said Toledo's labor spending is unsustainable because the city could not afford the three-year contracts signed last summer.

While they saved money for the 2009 budget under then-Mayor Carty Finkbeiner, the agreements started costing the city more money this year, Mr. Bell said.

The mayor said council would vote to let him change the agreements because of the record-high deficit the city faces this year.

John Hartgen, a spokesman for the American Bankruptcy Institute, said it is rare for a city to file bankruptcy, which is covered under Chapter 9 of the federal bankruptcy code.

Detroit is attempting to close a massive budget deficit, and while it has not taken steps to reorganize under Chapter 9, officials there say it could be an option. That would allow Mayor Dave Bing to break union contracts.

Nationally, only six municipalities filed for Chapter 9 protection in 2007, five in 2006, and 11 in 2005, according to the American Bankruptcy Institute. One of the largest and most well-known municipalities to seek bankruptcy protection was Bridgeport, Conn., in 1991. It withdrew the petition.

Orange County, an affluent area in southern California, declared bankruptcy in 1994 after sustaining losses of about $1.6 billion from bad decisions in a principal investment.

Ohio's original municipal fiscal emergency law was enacted in 1979 as a response to a financial crisis in the city of Cleveland. Since then, financial planning and supervision commissions have aided more than 50 governments declared in fiscal emergency, said Chris Abbruzzese, spokesman for Ohio Auditor Mary Taylor.

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

Longtime Cleveland Councilman Michael Polensek, who first took office January, 1978, and stayed through all seven years of the city's fiscal emergency, said it proved to be a tough but beneficial experience.

"What it fiscally did was force the city government to be more responsible, and we had to segregate accounts because there had been commingling of funds from one department to another and our enterprise funds," Mr. Polensek said. "There's some down sides, yes. We could not build or buy much of anything so we were greatly restricted, but having gone through it, I think it was a very worthwhile learning experience."

If an Ohio city is declared in "fiscal emergency," a seven-member financial planning and supervision commission would be empowered to advise a city on its spending decisions, Mr. Abbruzzese said.

The commission would have the power to enforce its recommendations by preventing a city from borrowing money.

It would be made up of the mayor, the president of council, the state treasurer, the state director of budget and management, and three people appointed by the governor from a list of nominees provided by the mayor and council president.

The commission would have much power to investigate and oversee spending, requiring detailed plans for getting back into solvency. Ultimately it could bar the city from borrowing money.

However, it could not replace city officials, erase or change contracts, or order specific spending decisions.

Cleveland defaulted on $15 million and spent one of the longest periods in fiscal emergency. The city of East Cleveland spent the longest with the label, more than 17 years from September, 1988, to February, 2006.

"I came in as a freshman councilmen when this all imploded and the bad decisions that were made dated back years before," Mr. Polensek said. "I can't recall if it was called fiscal emergency at the time, but it was in essence fiscal takeover, and we had to be accountable for everything we did."

His advice for Toledo: "Reset your priorities, deliver the important services, cut out any frills, address quality of life issues and accountability."

Toledo Councilman Adam Martinez, who took office in January and is council's newest member, said few people have a good handle on Toledo's future with or without the fiscal emergency declaration.

"My biggest surprise is the disconnect between people and the city," Mr. Martinez said. "People think we on council have a lot more authority than we do, that we spend money frivolously, and that there is one big piggybank we draw from."

Like some of his 11 colleagues on council, Mr. Martinez said he is disappointed that the city union leaders haven't been more receptive to givebacks.

"But I understand," he said. "I think the best way to streamline the city is start asking the unions' opinions on how to best consolidate and measure performance from the bottom up."

Mr. Collins, the only independent on council, said Mr. Bell will likely have to fall back on the contingency plan he announced last week, which includes massive layoffs and shutting down whole departments such as parks and forestry.

"The bottom line is none of this works unless he has concessions from the bargaining units," he said.

Garfield Heights, a Cleveland suburb in Cuyahoga County, has about 30,700 residents and it's currently the largest city in fiscal emergency.

Finance Director Richard Obert said that city balanced its budget with some of the same things Mr. Bell wants to use in Toledo.

Council was hesitant to dig into the taxpayers' pockets and put it on the mayor to cut his way to a balance budget, Mr. Obert said.

But after the state stepped in, council approved a new trash collection fee and installed red-light cameras to generate money.

"Your first option is always going to be layoffs, so the suggestion was to lay off 15 percent of the staff and we had overtime that we had to cut by half," he said. "We started charging $15 [a month] for residents' garbage pickup and $10 for those with a homestead exemption.

"Being in fiscal emergency was not as bad as I thought," Mr. Obert said. "The state was very cooperative, they did a performance audit that took about five months, and there were some very good things there."

Contact Ignazio Messina at

imessina@theblade.com

or 419-724-6171.