Hamilton finances: Cautionary indicators have increased

That could mean the city is heading toward financial stress, or could imply Hamilton should just keep an eye on those factors, according to the Ohio Auditor’s office, which created the program.

Financially, Hamilton administrators believe the proposed Spooky Nook at Champion Mill indoor sports complex and convention center, to open in the summer or fall of 2021, will trigger a blossoming of businesses and tax revenues that will greatly benefit the city and its finances.

Hamilton is feeling financial strain because of deep cuts the state made to local governments this decade — possibly leading to city layoffs in coming months. But city officials said they aren’t concerned Hamilton is heading toward financial trouble. Some of the factors Auditor Dave Yost’s office tracks can indicate financial issues, but can also indicate smart financial decisions, city officials and Yost’s office agreed.

For example, one red flag was triggered due to Hamilton’s millions of dollars in investments to major projects such as South Hamilton Crossing; the High Street/Martin Luther King Jr. Boulevard intersection; the Main/Millville/Eaton intersection; the RiversEdge amphitheater a bike ramp to the Great Miami River bicycle path; and infrastructure for the Marcum apartments complex, Hamilton Finance Director David Jones said.

Another factor was because Hamilton’s expenses outweighed revenues by about $1 million last year, partly because income taxes were about $300,000 less than expected and the city increased its police and firefighters by about 20 combined positions, Jones said.

“These two factors were the major contributors to expenses outweighing revenues for 2017,” he said.

With one factor, Hamilton had a bond-anticipation note that spiked its debt for 12 months before it refinanced that debt over decades — a caution triggered by timing, City Manager Joshua Smith said, observing that the auditor’s methods for its Financial Health Indicators are relatively crude and don’t take into account a government’s individual circumstances.

Yet another factor was triggered because Hamilton is such an old city, and almost all its assets are fully depreciated, Smith said.

Smith noted city officials met with Kerry Roe, president of Clark, Schaefer, Hackett & Co., who told them of the seven red or yellow factors, perhaps only two were of true concern. Roe was unavailable to comment Tuesday.

One yellow flag was issued because Hamilton’s general fund in 2017 had a lower or declining unassigned fund balance from prior years. Smith said that money wasn’t spent on operations, which is probably what would worry auditors. Instead, “we spent it just for one-time economic-development purposes,” he said.

State law required Yost’s office to develop guidelines that identify conditions that may indicate local governments may be heading toward fiscal watch or emergency.

His office developed the program by looking at Ohio cities and counties that have fallen into fiscal emergency in the past, and went back three years prior to those emergencies to see what indicators provided clues about the problems. They now track data on a yearly basis based on those findings.

Yost’s office this month released its findings for cities and counties across Ohio.

Yost’s office noted that in 2015, the first year data were released, of 17 factors auditors check for every local government, Hamilton had two “critical outlook” indicators, indicated by the color red, and two lesser “cautionary outlook” indicators. Red is worse than yellow.

“Hamilton’s financial outlook has increased fiscal stress, starting with two red and two yellow indicators in 2015, to three yellow and one red in 2016, to four red and three yellow indicators in 2017, which is one away from the eight red/yellow that historically indicates the entity is heading towards fiscal stress,” the auditor’s office wrote.

“Fiscal stress” is not an official legal term, just a loose sense that things may go awry in the future. On the other hand, “Fiscal distress” is an official term, which triggers fiscal watch. Hamilton is nowhere near that, Yost spokesman Ben Marrison said.

Historically, governments that have a combination of eight critical (red) or cautionary (yellow) indicators “may experience fiscal stress in two or three years,” Marrison said. “The city of Hamilton is one indicator away from being two or three years away from experiencing fiscal stress.”

“So they’re not in trouble, but the indicators suggest a close review is appropriate,” Marrison said.

And a government’s increase in yellow-flag or red-flag indicators isn’t necessarily a bad thing. For example, a city may spend down reserves to eliminate debt, which would trigger a caution, even though reducing debt is a positive thing to do. Or perhaps a local government has taken on debt because it needed money to invest in economic development — another positive.

“A single indicator doesn’t mean something’s wrong,” Marrison said. “But in Hamilton’s case, they have had an increasing number of cautionary and critical indicators since 2015, which should make them study what’s happening and make sure they’re comfortable with why.”

The state auditor's 10-page report on Hamilton can be found here.

FINANCIAL HEALTH INDICATORS

Here are Financial Health Indicator reports by the Ohio Auditor’s Office for Butler County governments.

Out of 17 factors examined:

Butler County

2015: Four red flags and one yellow flag

2016: One yellow flag

2017: Three yellow flags

Fairfield:

2015: Four yellow flags

2016: Three yellow flags

2017: One yellow flag

Hamilton:

2015: Two red flags and two yellow flags

2016: One red flag and three yellow flags

2017: Four red flags and three yellow flags

Middletown:

2015: Two red flags and five yellow flags

2016: Two red flags and three yellow flags

2017: One red flag and two yellow flags

Monroe:

2015: One yellow flag

2016: One red flag and two yellow flags

2017: One red flag and two yellow flags

Oxford:

2015: Three yellow flags

2016: None

2017: Three yellow flags

Trenton:

2015: One red flag and one yellow flag

2016: None

2017: One yellow flag

Source: Ohio Auditor’s Office