Under state orders, Flint, Michigan’s leaders will lay out a plan to address findings from a recent audit conducted by the city that revealed it has more than $370 million in unfunded pension legacy costs.
The audit, which examined the city’s finances from July 1, 2018, through June 30, 2019, also found 12 material conditions, including miscalculated balances and a lack of internal controls over purchasing cards. The findings raised questions about the accounting practices when Mayor Karen Weaver was in office from 2015 to 2019.
The audit shows legacy pension and retiree healthcare costs continue to burden the city in Genesee County. The funded status of the retirement plan fell to 30.6% as of December 31, 2018 from 36.3% a year earlier. The state considers a pension underfunded if it is below 60%.
“The city recently completed their audit as required six months after the end of the fiscal year,” said a state treasury spokesperson. “They had some findings and are required to submit a corrective action plan.”
The audit and demand for corrective action comes less than two years after the city regained control of its finances from the state.
On Jan. 2, the state notified Flint that it had 30 days to submit a corrective action plan to address the audit problems and on Jan. 3, the state told the city that it was delinquent in submitting a separate report detailing its 2019 funding levels for pension and retiree health care.
“It’s going to be very hard for the city to make material change on its own without the assistance of the state,” Matt Fabian, a principal with Municipal Market Analytics, said.
Fabian said that it is very unlikely that the state will want to put the city under emergency control again, “and potentially grow their culpability for Flint and also I doubt Flint would quietly accept another emergency manager from the state.”
At a city council meeting on Monday evening, City councilman and finance chair Eric Mays zeroed in on those concerns.
“I have been around long enough to know that when things aren’t done right the state comes in,” Mays said. “I don’t want to carelessly let the state in.”
Fabian said that the state’s involvement is therefore likely to be in the form of direct funding and less oversight and control than what occurred in the past.
On its own, absent state involvement, the city would appear in a slow decline towards bankruptcy, Fabian said.
James Hohman, director of fiscal policy at the Mackinac Center for Public Policy, a think tank on Michigan issues, said the state has a lot of power to assist local governments as they approach the point where they don’t have the cash to pay their debts. But it’s unclear whether lawmakers are going to do anything, or what they might do if they decide to help.
“Local governments are creatures of state policy, and states set the rules for what local governments can and cannot do,” said Hohman.
“State officials have an obligation to prevent local government insolvency,” he said.
“Looking at their longer-term solvency the question will be, ‘Can they avoid bankruptcy?’ and the answer is yes, but somebody has to pay,” said Mary Schulz, associate director for Michigan State University’s Extension Center for Local Government Finance and Policy. “Flint unfortunately has tremendous unfunded liability per capita.”
Schulz said that the city’s capacity to ensure long-term solvency is strained by a deteriorating tax base. Flint’s population fell to nearly 96,000 in 2018 from 111,475 in 2010 and employment in the city has dwindled to fewer than 30,000 in 2017 from more than 90,000 in 2001. Meanwhile property values have been cut in half over the last 15 years, Schulz said. “There’s not a lot of money to shop on,” she said.
The city is also facing potential legal liability to settle lawsuits related to its water contamination crisis. Schulz said that the number of suits are in the high dozens, leaving the city’s finances exposed to a lot of potential liability.
Reduction in taxable value has also reduced the city’s ability to take on debt. Michigan limits the amount of general obligation debt the city can issue to up to 10% of the assessed value of all taxable property within the city’s corporate limits. “So you are in a catch-22 where you can’t even take on debt to address your deferred services and infrastructure,” Schulz said.
Flint regained local control of its finances in 2018. It was under the state government’s emergency management control from late 2011 to 2015, during which the city’s water contamination crisis unfolded. Two of Flint’s former emergency managers, Darnell Earley and Gerald Ambrose, have been criminally charged in connection with the water crisis.
Earley oversaw the decision to change the city’s water source to the Flint River in April 2014. The switch triggered the city’s water crisis in which lead spread through the city water system. A March 13, 2014, order signed by Ambrose for a water main cut-in at the water plant cleared the way for the switch to the river, according to emails released previously by the state treasury.