Letter from the State Comptroller

The Mayor and Council Members received this letter from the State Comptroller today. I am hurrying to get thoughts out before our Council meeting this evening. Please excuse any typos. Please email me about anything that doesn't make sense.

What's the context of this letter?

Sometime in the last approximately 6 months, the State let Metro know that a long-time financial practice was not being handled correctly. Metro has for many years shifted money from one fund to another to pay bills while waiting for property tax money to come in. Then, before the end of the fiscal year, Metro would settle up this inter-fund lending. Pretty boring stuff.

The State let Metro know sometime recently (I don't remember when) that Metro needs to prepare "Tax Anticipation Notes" or "TANs" to document this inter-fund informal shifting of money. And the State told Metro that the TANs need to be approved by the Council and the State.

The Metro Council approved the first of the TANs in June and then Metro apparently then sought State approval. Today's letter is in response to the request for State approval.

In summary, I think the practice of borrowing money by one Metro fund from another during a fiscal year is fine. The State recently told Metro to follow a different practice in documenting the loans and that's what led to this letter.What does this letter mean?

It's pretty technical stuff, and I'll be happy to have someone from the administration tell me otherwise, but I think that the letter is definitely not "good news." I think it presents a situation that is serious, but manageable.

The entire first page and most of the second page look to be a summary of facts explaining in technical terms the same things that I am explaining here -- Metro has funds that borrow from one another, Metro has approved some TANs to document the borrowing, and now the State is responding to a request for approval of the TANs.Beginning toward the end of the second page, the letter says that Metro's TANs are approved if the State receives two things by September 20, and a third thing in November.

By September 20, the State wants to receive: (1) updated cash flow forecasts for all Metro funds; and (2) "A summary that explains the impact of the sale of assets, including property and parking rights, on the fiscal year 2020 budget in addition to the actual status of these sales."Taken together, I interpret the State to be saying that it plans to keep a careful eye on whether Metro's own cash flow forecasts match up with the possibility that the planned sale of assets (including parking rights) might not happen. In other words, I read the letter as basically asking how Metro plans to balance its budget if the planned asset sales don't happen as laid out in the Metro operating budget.

Then, in addition, by November, the State wants Metro to approve a cash management policy "establishing minimum cash balances needed for Metro’s operating and debt service funds that are sufficient to meet unplanned fluctuations in revenue and expenditures." I read this to mean, "Hey Metro, your cash reserves are too low for a city that is relying on the future sale of assets to make ends meet...so we're going to need you all to provide us with a written cash management policy."The letter wraps up with a reminder that state law requires Metro to maintain a balanced budget.

What happens next?

Metro has until September 20 to respond to the first two demands -- for a current cash flow forecast, and a summary that explains the planned property sales.

Metro Finance will do the cash flow forecast, I would assume. The September 20 timeline is very interesting. That will be after the mayoral runoff, but before the mayor is sworn in. One would expect that the cash flow forecast would depend a lot on whether the Mayor intends to pursue the parking enforcement outsourcing or not. We'll need to ask the administration how they intend to respond to this.Similarly, coming up with a summary of the budget impact from the proposed sale of assets and the current status of the sales will depend a lot on who is going to be mayor. We'll need to ask the administration how they intend to respond to this one too.I suspect that the November deliverable -- a cash management policy -- will also be impacted by who wins the election.

Does this mean anything for the mayoral runoff?

I don't know. This is some dense, technical stuff. The most accurate, non-political thing I can say about the letter is that the State of Tennessee's Comptroller has questions about Metro's cash balances and Metro's reliance on the one-time sale of assets to balance the budget. Beyond that, I imagine both sides of the Mayor's race will have a lot more to say.

Are there any other conclusions to be drawn?

I think this should a wake up call that this city just can't keep balancing its budget using tens of millions of dollars per year of revenue from potential asset sales.

I think this also is the State implying that Metro's cash balances are too low.

Earlier I called the situation "serious, but manageable." By this, I mean that we should take notice that the Comptroller is paying attention to Metro and making demands for more information and more policies. It will take political will to address the factors that have led to this unwanted attention from the Comptroller.

This post reflects my initial thoughts about this. I'll post more if I learn more.