Columbus

Thirty-one Ohio cities including Springfield and Middletown - show signs of elevated financial stress — an indication that they could be on the highway to deep trouble, especially in the event of a recession, according to Ohio Auditor Dave Yost, a Republican who just announced he is running for attorney general.

A large percentage of Middletown’s assets need replacement or significant repairs and it faces a declining ratio of revenue to cover expenses, the report said. Springfield has a critically low reserve of money to cover unexpected costs.

“The bottom line is I’m a little bit concerned about the effect of the next recession,” said Yost at a press conference Wednesday. “But a lot of it will depend on the nature of that recession — how widespread the pain is among Ohio’s local governments.”

Springfield and Middletown are the only local cities on the list. Three counties are on Yost’s list, but none of them are local.

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Using 2015 data in 17 key areas, such as fund balances, revenue trends and debt, the state auditor issued a report to cities and counties on how they’re doing. Yost said he doesn’t like putting local governments into “fiscal emergency” status so he wanted to give cities and counties data that might help them head off trouble.

“Think of this as a fiscal physical,” he said.

Overall, 82 percent of counties and 92 percent of cities have at least one cautionary or critical indicator.

Among local governments that are seeing multiple red flags are Middletown and Springfield, according to Yost’s report. A large percentage of Middletown’s assets need replacement or significant repairs and it faces a declining ratio of revenue to cover expenses, the report said. Springfield has a critically low reserve of money to cover unexpected costs.

Overall, local governments have navigated choppy waters pretty well, he said.

Kent Scarrett, executive director of the Ohio Municipal League, said the report and data “puts a finer point on what we’ve been talking about. That there are great challenges out there in different communities and it’s incumbent on us as local leaders and state leaders to try to address these.”

Yost’s report comes just before Ohio Gov. John Kasich is set to unveil his two-year state budget plan, in which local funding levels will be debated.

MIDDLETOWN

After Middletown Mayor Larry Mulligan Jr. on Wednesday said he appreciated a warning from the state auditor’s office about problems his city’s budget may face, City Manager Doug Adkins criticized the auditor’s report as “old news” and “out of context with the current reality.”

Ohio Auditor Dave Yost on Wednesday named Middletown among 31 Ohio local governments showing signs of elevated financial stress amid concerns voiced by Gov. John Kasich that the state may be headed toward a recession.

State law requires Yost to develop guidelines for identifying fiscal practices and budgetary conditions among local governments that if not corrected “could result in a future declaration of fiscal watch or emergency,” the reason his office published the report. Among the cities named as showing financial stress in the region were Middletown and Springfield.

“We all know that at some point we will see another recession,” Adkins wrote via email in response to Journal-News questions. “We have the ability to curtail spending at any time as the economy and our revenues dictate.”

“We are not in financial distress and if the auditor truly stated that we are on the highway to deep trouble, then I sure hope we stay on this current road as long as possible,” Adkins added. “I’m not sure how we could be improving in all sectors much faster than we are right now.”

Out of 17 factors considered, Middletown had two “critical outlook financial health indicators” (the worst); and five “cautionary outlook financial health indicators” (the next worst). The two critical-outlook areas were the ratio of general revenues being less than being less than 100 percent of net expenses; and the accumulated depreciation being higher than 70 percent of depreciable capital assets.

Yost spokesman Ben Marrison noted the index used to create the report was “based on historical trends of communities that were declared in fiscal distress at some point.”

Adkins recently put a hiring freeze on most city positions and warned city council that layoffs may be required this year.

Adkins and Mulligan both criticized Yost’s office for using year-old data in its report.

“The indicators use the most-recent data filed by Middletown (filed within the past 12 months for fiscal year 2015) and accurately reflect critical fund balances and ratios. When Middletown and other cities file their 2016 financial statements, a new report will be generated,” Marrison said in an email response.

Some of the critical fund balances noted in the report were planned, according to Adkins.

“The City of Middletown has been completing extensive capital projects and has undertaken a number of deferred maintenance projects during the past two years that weren’t completed during the recession,” he said. “Our drawdown on reserves is by design and with a flexibility and understanding of which projects and staffing can and cannot be quickly changed in the event of a downturn in the economy. We monitor revenues and expenses on an ongoing basis …”

“Several of the Auditor’s cautionary outlooks are monetary policy that was executed by the city after careful consideration and by design,” Adkins said. “We are investing in infrastructure needed by our manufacturers to expand their businesses. We have been involved with the land bank on a grant demolition program that reimburses after demolition. We are, therefore, using general fund dollars for demolition but have not received the reimbursement. We’ve opened 32 new downtown businesses in the past two years and three new anchors at our mall. AK Steel is just completing a new $36 million Research and Innovation Center on our east end.”

“This was all accomplished despite the discontinuation of the inheritance tax which cost the city of Middletown about $800,000 per year in lost revenue, and with a steep reduction in the local government fund, leaving the city with an additional $900,000 less operating revenue annually than we had in 2010,” Adkins said.

Marrison contends the tool is not designed to evaluate the decisions of local officials in determining when to retire debt or invest in infrastructure.

Rather, he said, the tool provides a “fiscal physical for communities that records changes in key fund balances and highlights when there has been a sudden drop or a downward trend in a key metric. While each entity’s report is measured using the same formulas, the results can mean different things. For instance, a significant drop in a fund balance may be problematic for one city because it was caused by the unexpected loss of major employer; for another city, the fund drop may be the result of a new strategy to improve infrastructure.”