Miami Herald: Miami leaders fear a financial meltdown

The Miami Herald published this article on January 31, 2009.

Though the fiscal year has barely begun, Miami leaders are bracing for a budget hole that could nearly wipe out the city’s entire reserve.

BY CHARLES RABIN AND MICHAEL SALLAH

Facing a widening financial crisis, Miami leaders are already projecting a $45 million budget shortfall this year that could force the city to deplete its reserves and sell key assets to stay afloat.

Rising costs, slumping property tax collections and ever-growing pension obligations are feeding a meltdown that’s now forcing administrators to look for drastic new sources of income not needed since the state took over Miami’s books 14 years ago.

“We understand the gravity of the situation,” said Miami Mayor Tomás Regalado.

The findings harken to the bleak days of the mid 1990s, when it was discovered Miami was using bond money shuffled through various accounts to try to cover a $68 million hole.

Today, a reserve that brimmed with $141 million in 2003 could plummet to less than $10 million by the time commissioners are finished with this year’s budget in September, projections show. If that happens, Miami will break its own financial integrity laws — prompting some officials to fear another painful state takeover.

“Unbelievable,” said County Commissioner Carlos Gimenez, who was Miami’s city manager when its reserves peaked in 2003. “They forgot the lessons of the past.”

The financial woes come as federal investigators continue a sweeping investigation of Miami’s budget practices over the past four years, including questions over whether the city disclosed problems to bond holders.

The U.S. Securities and Exchange Commission has demanded all the city’s records, e-mails and shreds of evidence involving more than a quarter of a billion dollars in bond deals for major projects since 2006.

The SEC investigation followed a report by The Miami Herald last summer revealing how top city officials engaged in a financial shell game, moving millions from capital accounts to help the budget stay flush.

City leaders were also tapping into reserves to balance the books even as Miami was reaping record property tax returns during the historic housing boom.

“The problem was they were dipping into the reserve in some of the greatest boom years ever in the city,” Gimenez said.

Based on the latest projections, the trend of siphoning the reserves will have to continue to keep the budget balanced. If that happens, the city would likely have to resort to dire methods to bring millions back in.

“We’ll have to go and sell an asset,” said Regalado, who declined to detail which city properties could be on the market. “That is a potential remedy.”

During its last financial breakdown, the city was so desperate it sold the property on which the AmericanAirlines Arena now sits to the county for $27 million.

LOWER RETURNS

Now, the city would be selling property during an economic recession not seen since the 1930s, bringing far lower returns at a time banks are reluctant to lend money.

The budget reality comes just three months after the city scrambled to seal a $118 million hole for its 2009 budget.

So far this year, budget director Michael Boudreaux’s 2010 forecast shows shortfalls and overspending across the board:

• Overall collections — including property tax receipts — are expected to be $17.8 million below projections.
• Government agencies are on target to overspend by $6.2 million.
• The police department, parks and recreation and risk management face a combined budget shortfall of $15.3 million.

Despite the outlook, city leaders say that if the economy turns slightly, collections could pick up. Also, “There are cuts we can make between now and the end of the year to help us come in on budget,” said Chief Financial Officer Larry Spring.

Still, the implications could be severe.

Besides the possibility of more department cuts and layoffs, a depleted reserve could hinder Miami’s ability to issue bonds worth millions of dollars, including one to build a tunnel to the Port of Miami and another to bankroll badly needed affordable housing.

William Earle Klay, the director of the Askew School of public administration and policy at Florida State University, said rating agencies closely study reserve funds.

“Tapping into reserve funds, and how much you tap into those funds, is something that rating services look at,” he said. “Your credit ratings can go down, and if it’s a revenue bond, they may have to raise the prices.”

ALARMING NUMBERS

City leaders and financial forecasters say even this early, the numbers predicted by Boudreaux are alarming — and raise new red flags for a city already facing the SEC scrutiny.

Commission Chairman Marc Sarnoff was stunned when the mayor revealed the numbers last week, prompting the commissioner to warn that if spending isn’t reined in, the state could step back in and strip the city of its decision-making.

“They took the keys of the Cadillac away from us all because we didn’t have any short-term vision,” Sarnoff said, alluding to the 1990s.

The budget disclosure is the latest blow to a city reeling from financial headaches since last summer.

In July, The Miami Herald investigation found skyrocketing salaries and pension obligations had strangled the city’s budget. The quick fix — transferring millions between capital accounts and the city’s general fund — only raised more questions.

In November, City Auditor Victor Igwe released a scathing report saying Miami skirted financial integrity rules by engaging in “inaccurate and misleading” budget practices to fill budget holes. As part of his report, he questioned the use of $8.2 million in city impact fees to balance the books.

And in December, the SEC officially launched its probe, seeking records of budget practices detailed in Igwe’s audit and The Miami Herald report.

“It’s sad that history may be repeating itself,” said Howard Frank, a Florida International University professor who chronicled the disaster of the 1990s in the book The Miami Fiscal Crisis.

Parallels between the past and today include years of “flat or declining property tax bases” and an inability of city leaders to plan for those declines, he said.

One of the city’s major challenges continues to be lowering its worker-friendly pension obligations. Since 2001, those demands have risen by 400 percent, reaching $67 million last year. This year, that number will rise to $101 million.

Regalado has promised to negotiate with the unions to lower the costs.

But Frank warned that city leaders can’t just blame pension burdens for the present problems. “The pension situation is not just unique to Miami,” he said.

This year’s projections had Sarnoff shaking his head last week. “How could we be so out of budget?” he asked. “We’re in crisis mode.”