A critical review in November of Metro Nashville’s finances for the current fiscal year revealed a budget shortfall of $41.5 million, prompting state officials to step in and demand action from city leaders.

“During our review of Metro’s current budget, we saw things that—to say the very least—gave us pause,” Tennessee Comptroller of the Treasury Justin P. Wilson said at a Nov. 13 presentation to the budget and finance committee.

Wilson, who described his appearance before the body as “unprecedented,” warned members that his office would have intervened sooner with the city’s finances if not for a personal grace period granted to Mayor John Cooper, Finance Director Kevin Crumbo and the newly elected Metro Council members, all of whom were sworn in Sept. 28 or later.

“It’s really not lost to me that this evening is somewhat historic,” Wilson said. “I’ve been living in the city of Nashville for perhaps longer than anyone else in this room has been alive. I take no pleasure that I’m very likely the first Tennessee comptroller ever to appear before this body to deliver this type of message.”

How the city got here

In his presentation, Wilson said the city is spending more money than it is bringing in; it is also relying too often on nonrecurring revenue to cover its operating expenses, based on budget data dating back to 2013, he said.

The $41.5 million deficit identified by the comptroller’s office stems from two nonrecurring revenue sources that are not yet approved—the outsourcing of the city’s on-street parking and the sale of the city’s downtown energy system in Rolling Mill Hill—in the current operating budget prepared by former Mayor David Briley and approved June 18 by the Metro Council. With Cooper vocally opposed to selling the city’s parking and officials questioning whether the city will sell the energy system, Wilson said both sources of funds are unlikely to go through.

Although Metro Nashville’s general fund revenues increased nearly 26% since 2013—from $875 million to $1.1 billion—the city’s expenditures have increased more than 32% in the same time span, according to Wilson. The city’s debt service funds have more than doubled since 2013 and now total $336.9 million, with less than 91% of cash on hand for the city to cover its debt payments.

“Cash has decreased 91%, and despite all this wonderful growth and this booming economy, we have a Metro government that is cash-poor,” Wilson said. “We see that nonrecurring revenue is being used to pay debt, and that really gets me concerned.”

Wilson also highlighted Metro Nashville’s historically low property tax rate, which has not been raised since 2012. Because property values have increased 37% across Nashville since home values were last appraised in 2017, the tax rate was adjusted downward that same year from $4.51 in the urban services district to $3.15.

Metro Council narrowly avoided a property tax increase in both of the last two budget cycles, leaving Davidson County’s property tax rate the lowest among the state’s four metropolitan areas. Shelby County, which faced a similar financial warning from the comptroller’s office in 2013, has the highest rate in the state for the city of Memphis, according to Wilson.

“In the past, the city would typically vote to exceed that tax-neutral rate to reflect the higher property values, but in 2017, the administration and the [Metro] Council decided to leave the tax rate at $3.15, and that’s where it stands today,” Wilson said.

Wilson, who stopped short of providing a recommendation on property tax rates, said raising taxes is one way the city can increase its revenue long-term. Property tax bills have already been issued this budget cycle, and Wilson said raising the sales tax rate, which has remained at 2.25% since 1989 and accounts for 20% of the city’s revenue, would require a referendum. Cities and counties can levy sales taxes up to 2.75%, according to the Tennessee Department of Revenue.

While it is not clear whether city leaders will push for a sales tax hike, several council members, including Budget and Finance Chairperson Mendes, continue to voice support for a property tax increase for FY 2020-21.

“Metro Finance is working on both this budget and suggestions for the upcoming fiscal year’s budget, which [Metro Council] will vote on in June,” District 17 Council Member Colby Sledge said; Sledge serves on the budget and finance committee. “While I anticipate a variety of suggestions, I expect this council to approve a property tax increase. The question now is not if—it’s ‘how much.’”

Mendes, who has proposed budgets with property tax increases the last two budget cycles, said “not in a million years” will the city undergo a government takeover.

“It would be easy to be intimidated by the size of the challenge in these situations ... It’s taken years to get here, and it’ll take a few years to get out,” Mendes said. “While it’s fair for people to wonder whether we can fix this, the answer is ‘yes.’”

Next steps for Metro Nashville

On Dec. 11, Crumbo presented to Metro Council members a corrective action plan—a step ordered by Wilson one month earlier—to overcome the $41.5 million budget deficit.

The plan, submitted to Wilson on Dec. 11 and approved the same day, includes previously announced adjustments, including the collection of $12.6 million in payments in lieu of taxes from the Music City Center and $5 million in reduced funding for the city’s affordable housing program.

The plan also outlines new revenue sources such as $10 million in payments in lieu of taxes from Metro Water Services included in the water and sewer rate increases approved Dec. 3; $3.6 million in debt service reimbursements from the Nashville Convention and Visitors Corp.; and $10.3 million in other identified cost savings and reductions.

Crumbo, who said he initially did not expect to have a finalized plan until later in the fiscal year, said he was directed by Mayor Cooper to “immediately execute” the corrective actions outlined in his plan to ensure prompt approval from state officials.

“As we started the analysis of Metro’s finances and looked at cash flow, I was alarmed about the direction we were headed,” he said. “As we were approaching the Thanksgiving holiday ... I saw great signs we could bring forward a plan to the comptroller even if we had to take this action. It seemed like the right thing to do.”

If city leaders had not developed a corrective action plan before the next fiscal year, Wilson said state officials were poised to take over the city’s finances. Section 9-21-403 of the Tennessee code grants the comptroller’s office the authority to take over financial operations of any city in the state.

“Let me be clear: The comptroller’s office does have the authority to step in and determine how you spend your money, but none of us want to see that happen,” Wilson said.

However, with nearly six months remaining in the current fiscal year, Crumbo said the finance department is preparing for the upcoming budget process for FY 2020-21. In his letter to Wilson, Crumbo said he expects the Metro Nashville Council to approve the next fiscal year’s budget at the beginning of June, as opposed to the end of that month, to account for additional adjustments.

In his response to Crumbo, Wilson urged city officials to adopt a “structurally balanced” budget by June 1 that addresses the city’s long-term obligations, such as the payment of bonds and post-employment benefits.

“It should be noted that the proposed actions are no cure for Metro’s long-term budget concerns but are responsive to immediate financial issues,” Wilson said in his letter to Crumbo.

At the Nov. 13 meeting, Wilson urged council members to raise revenue and cut spending to ensure balanced budgets going forward.

“The first and most important responsibility that you have is to pass a balanced budget each year,” Wilson said.

One of the largest questions for Metro Nashville is what will happen to funding commitments already made by the city, including a pay raise deal for teachers reached earlier this year.

Following the comptroller’s presentation, the Metropolitan Nashville Education Association released a statement voicing concerns about whether teachers would see higher paychecks—a 3% raise promised by former Mayor Briley in July—beginning in January.

In a Nov. 25 press conference with Mayor Cooper, MNPS Interim Director of Schools Adrienne Battle and MNPS Board Chair Anna Shepherd, Cooper confirmed teachers will still see a 3% raise in January following approval from the school board and Metro Council in December. The $7.5 million in funding for the raise will be sourced from the district’s budget; another $2.5 million will be contributed by the Metro Development and Housing Agency, Cooper said.

“We’re able to do it this year, and this is our commitment to make it recurring,” Cooper said. “I’m going to need the help of all council members and to work with the school board going forward to get this done now and for the future.”

Earlier in November, Cooper announced a new study on teacher compensation at MNPS which is expected to be finished in February and will provide guidance for the upcoming budget process for FY 2020-21, according to Cooper. Crumbo said the finance department began meeting with education and public safety departments in mid-November to identify their needs for the next cycle.

“We’ll be starting very early to talk about funding sources [for FY 2020-21] and doing things that are thoughtful and logical and that are going to make sense for the very long term,” Crumbo said. “In terms of finding the dollars for the future, that’s the task that is really in front of us. No concrete plans have been made yet.”

Additional reporting by Wendy Sturges