While much of the blame for this crisis belongs to former Mayor Larry Langford, it is not his alone. Current and former city officials, elected and appointed, have contributed to the problem. What’s worse, few candidates in the special-called mayoral election have demonstrated an understanding of what faces the city. Some are altogether oblivious and have demonstrated their ignorance, even as they try to convince voters that they know what’s best for Birmingham.
To make matters worse, the looming financial crisis is compounded and reinforced with each passing day. The Birmingham 2010 fiscal year began in July and the city is approaching its mid-year point. That means roughly half of the city’s resources have been expended already, making them unavailable to patch the gaping hole.
The special-called mayoral election will be held on Tuesday, Dec. 8. With the large field of candidates, 14 in all, the likelihood of a runoff is all but certain. In that event, a new mayor would not take office until after a runoff election on Jan. 19. By then, another 10 percent of the city’s budget will have been expended.
Little time is left. The city must take action soon, but before that happens, everyone, including voters, needs to understand how the problem came about, what it means for the city’s future and what can be done to fix it.
Fund balance is the technical term for the city’s savings. There are other reserve accounts as well, including the so-called Birmingham Fund, but those accounts are specifically for capital projects, such as new buildings or infrastructure repairs. The general fund balance is the only account attached to the day-to-day operations of the city.
The Government Finance Officers Association (GFOA) recommends municipalities keep at least two months of operating cash in fund balance. Such savings are more than just rainy-day funds. They protect a city financially in the event of a natural catastrophe or financial collapse. Disasters are very real. Hurricane Katrina striking the Gulf Coast is one example. Jefferson County’s loss of its occupational tax is another.
In the past, the city of Birmingham has been even more fiscally conservative than the GFOA recommended, keeping three months operating expenses in fund balance.
That changed with the election of Larry Langford.
At first, Langford affected the city’s fund balance in a positive direction. He convinced the city council to raise sales taxes by one penny on the dollar and to double business license fees. This created a surge of revenue. The city was making money faster than even Langford could spend it. Birmingham ended the 2008 fiscal year (June 2008) with a fund balance of $117 million.
Those savings wouldn’t last long. Langford’s first proposed budget increased expenditures by about $100 million.
In the new budget were two peculiar sources of revenue. One was $24.5 million clearly marked “fund balance.” The second was $8 million from a source called “Estimated Unspent Salaries 2009.” The city was projecting the revenue it would not spend on vacant positions. In effect, the city was spending its savings before it saved it.
After years of dealing with Bernard Kincaid, the city council was unaccustomed to Langford’s aggressive style. When a few councilors asked questions about these new supposed revenue sources, they were shouted down by the mayor or decried as namby-pamby obstructionists. Ultimately, the council approved a budget for 2009 with a built-in $24.5 million deficit and a second questionable source of revenue.
It should have come as no surprise a year later, when the council’s budget analysts argued that the city had run a deficit for 2009. Rather than the $24.5 million deficit originally budgeted, though, the city had spent more than $28 million out of its savings.
By June 2009, the $117 million in the city’s savings had been depleted to $89 million.
Remarkably, Mayor Langford and Finance Director Steve Sayler responded with a claim that now appears to be an outright fraud. The mayor’s office insisted that the city would end the 2009 fiscal year with a $13 million surplus, not a $28 million deficit.
The deception was obvious. Numbers produced by the Finance Department’s own accounting system supported the council’s argument. When confronted with those numbers, the mayor’s office claimed the new accounting software was flawed and could not be trusted. In retrospect, the accounting software worked perfectly and these claims were yet more deliberate lies from the Finance Department.
Those deceptions were just beginning. Langford’s proposed operating budget for the 2010 fiscal year contained an old line item with a new name. Instead of clearly labeling one revenue source “Fund Balance,” Sayler renamed this line item “Excess Revenue Over Expenses.” This time, the proposed budget dipped $26.4 million deep into the city’s savings.
The council’s analysts argued that this line item was actually the city’s savings and that the mayor’s office was hiding a deficit. For more than a month, the council and the mayor were at an impasse. What’s more, shoddy reporting from the media put pressure on the council to pass the budget. The Birmingham News editorial page described the logjam as a communication problem and chided the council for not cooperating with the mayor. It even allowed Mayor Langford space to write an opinion piece blasting the council for being do-nothing obstructionists.
The city council found itself without friends or a general understanding among the public of what it was up against. Relenting somewhat, the council passed a compromise budget that cut the $26.4 million deficit to $13 million.
In the midst of this fight, something escaped everyone’s attention altogether. The fight had provided an opportunity for a fiscal sleight of hand that even members of Langford’s staff did not catch until it was too late. Entire line items had been omitted from the budget altogether.
From documents released by Mayor Langford’s office and acting Mayor Carole Smitherman and interviews with city staff, here is what appears to have happened.
In the spring of 2009, Sayler prepared the mayor’s budget proposal. He did so without consulting city department heads about the needs of their departments. This was not discovered by the mayor’s staff until the budget process was almost complete.
According to documents released this fall by the mayor’s office, Sayler’s first budget included an operating deficit of more than $70 million. Langford’s lieutenants, including Chief of Staff Deborah Vance-Bowie and Chief of Operations Chris Hartsell, rejected this budget outright and demanded Sayler redo the budget by reverting back to 2008 numbers.
Emails given to the media by Vance-Bowie after her termination this fall indicate that she and Hartsell had serious communication issues with Sayler and that they realized only as the budget was about to be presented to the council that it contained serious flaws.
One such flaw was that it zeroed out all vacant positions, including vacancies in the Birmingham Police Department and Public Works. At the time, a new class of cadets was finishing its training at the Birmingham Police Academy. Vance-Bowie and Hartsell demanded to know how these new police officers would be paid if their salaries were being deleted. Sayler responded with a terse email, saying that by virtue of the recruits being employed they would be receive a salary.
The comment seems bizarre, but it makes sense in the context of Sayler’s experience. Much has been made of Sayler’s role in the Jefferson County debt implosion. Sayler served as county finance director during the accumulation of its debt, and he played a major role dabbling in the derivatives and variable rate debt that ultimately backfired.
However, another aspect of Sayler’s work there deserves understanding, even though it means a deep dive into accounting minutia.
Unlike virtually every municipal government in the country, until two years ago, Jefferson County practiced what’s called cash-based accounting. This is a very simple cash-in/cash-out accounting system that would be perfectly reasonable for a small business, such as a flower shop. It’s a simple matter of keeping up with how much money you have on hand. It is not, however, an accepted method for budgeting a municipal government.
Most governments use another system called fund-based accounting. Fund-based accounting is rigid and conservative, but it keeps departments on budget and it provides the public with a clear blueprint for how its tax dollars are being spent.
On a yearly basis, the Alabama State Auditors of Public Accounts would tell Jefferson County to use fund-based accounting instead of cash-based accounting, and each year, Jefferson County would refuse.
The county would prepare a budget every year, but the commission never adopted it. The budget document was ignored, and the county instead spent money as it pleased. At times, departments would run millions of dollars over their allowances. The Finance Department would make up the difference by shifting cash or robbing the county’s savings.
When Langford brought Sayler to Birmingham City Hall, Sayler brought that incredulity toward fund-based accounting with him. That attitude led to something next that will haunt this city for a long time to come.
It now appears that when Vance-Bowie and Hartsell ordered Sayler to reduce the deficit in his proposed budget, Sayler did this by reducing or removing line items willy-nilly, with no basis in fact nor consideration for the future. As a result, the city’s expenditures for the 2010 fiscal year were understated by as much as $35 million, if not more.
While the council and the mayor’s office were warring over the $26.4 million deficit in the mayor’s proposed budget, none of them seem to have realized that necessary and unavoidable expenses for things such as utility bills and legal fees had been left out of the budget altogether.
Sayler couldn’t hide these un-budgeted expenses forever, though, and if his plan was to get away from City Hall before these issues came home to roost, the delay this fall in Mayor Langford’s corruption trial didn’t help him.
Periodically, budget amendments appeared on the council agenda. In piecemeal, the Finance Department was sneaking in the deleted line items and funding each of them out of the city’s savings.
Through October 2009, the city’s records indicate that the council and Mayor Langford approved $14 million in new expenditures through these budget amendments.
These budget amendments alarmed both the council and the mayor’s staff. According to Vance-Bowie, she ordered the Finance Department to create a spreadsheet of underfunded or unfunded line items. That spreadsheet showed that another $21 million of mostly necessary and unavoidable expenses had been excluded from the budget.
After the conviction of Mayor Langford, acting Mayor Smitherman released this information to the public. What’s more, she ordered Sayler to give her a report of the city’s true financial condition. In his report, Sayler projected that if the economy does not improve substantially, they city will miss its revenue projections by about $15 million.
When combined together, all these numbers indicate the city is headed toward a fiscal disaster.
• The city council approved a $13 million deficit in the 2010 budget.
• Since then, the council has approved $14 million in expenses from fund balance in the first quarter.
• Just last week, the council approved another $1.7 million of fund balance money for election and legal expenses.
• The city has to determine what to do with the $21 million of unfunded line items.
• If Sayler’s prediction is correct, the city will have to meet these costs with $15 million less than it had originally projected.
• One piece of good news: The Finance Department accidentally excluded $2.5 million of lodging taxes from the budget.
Add all this together and it come to a $62.2 million deficit, if the numbers hold true and the city does nothing to fix what’s happening. In that scenario, the city would have depleted its savings from $117 million to about $27 million in just two years.
That would be bad enough, but the city’s troubles don’t stop there. The city has that policy to keep three-months operating expenses in its reserves. That means the city has obligated itself to keeping a fund balance of roughly $100 million — $11 million more than where it started the year and $73 million more than where the city could be headed.
The city has an operating budget of roughly $400 million. By December, half of that budget will be spent. If the city wishes to balance its budget or merely reduce its expenses, it will have to make those cuts from the $200 million or so left in the second half of the year. Using some very rough, back-of-the-envelope math, the city would have to cut 30 percent of its budget for the second half of the 2010 fiscal year. It’s difficult to see how that would be possible.
There are three places from which the city could cut.
First, it could cut projects. Langford set in motion major capital projects, including Fair Park, the Railroad Reservation Park, the Rickwood Field baseball museum and the domed stadium. What’s more, Langford funded these projects out of the city’s operating budget, not the capital budget as is the appropriate practice. If the city suspended these projects, at least until the economy improves, it could free up tens of millions in operating cash. Just last week, the city council approved $27 million in contracts on the Fair Park renovation. If the city can stop that appropriation, it would go a long way toward solving this problem.
Second, the city could cut people. Personnel comprise the largest portion of the city’s operating expense. If deep cuts are necessary, layoffs or furloughs may become unavoidable.
Third, the city could cut fund balance. Yes, the city has a policy to keep three months operating expenses in its savings, but it is already in violation of that policy. The city could raid its savings and replenish them slowly after the economy improves. However, this option could run major risks. If the Wall Street ratings agencies do their jobs, they would downgrade the city’s credit rating. This could adversely affect the city’s debt structure and payment schedules. The city probably would not face a crisis like Jefferson County, but the city should war-game the consequences before making that decision.
The Langford administration was negligent and possibly malfeasant. The damage cannot be fixed, only mitigated. Last week, Councilor Valerie Abbott sent a memo to her colleagues outlining all these issues. It was a warning bell.
Birmingham’s ship of state is about to slam headlong into the proverbial iceberg, steered on that course by a madcap captain and crew who have since fallen overboard. Fourteen candidates are asking voters to let them replace Langford at the helm, but none of them have shown an appreciation for or understanding of the disaster ahead. Several candidates have even pledged to continue Langford’s mission.
There’s only one order that can stave off a total disaster. Someone has to call for an all-stop.
War on Dumb is a column about political culture. Write to email@example.com.