City on the brink: Despite warning signs, Terre Haute descends into pool of red ink

Over the next few years, tax revenues would plunge by millions of dollars because of a new state law setting caps on the amount of money that could be collected from property taxpayers. Millions of dollars once disbursed for use by city government would vanish, leaving officials with limited options in meeting financial obligations.

During a City Council meeting in fall 2008, longtime Councilman Norm Loudermilk assessed the predicament.

“We can’t sit on the beach with our Coronas and watch Hurricane Katrina come in. We’re going to have to batten down the hatches now. If we’re going to have to do something, I’d sure like to be doing it,” Loudermilk told his council colleagues.

“It’s pretty simple math,” he continued. “If you don’t have the [money] you’re used to, then we either have to reduce services or find another source of revenue.”

Seven years later, financial records show the City of Terre Haute has not done enough of either, allowing a turbulent financial atmosphere to develop into a full-fledged storm.

A three-month Tribune-Star investigation into the city’s finances has found that while property tax revenues have declined and this year represent a $10 million loss in the general fund alone, spending remained the same or increased slightly as years went by. According to official figures posted by the state, the city has spent on average more than $2.34 million more each year over the past seven years in the general fund than it has received in recurring revenues.

“We have spent so much more than we have taken in for a number of years, now all of a sudden, we don’t have much of anywhere to go,” said Earl Elliott, a local CPA and former financial consultant to the City Council who is now a candidate for council. “We’ve used all of our cash cushion.”

Among the newspaper’s findings:

• The city began 2015 under water with a general fund deficit of more than $8.2 million (a number that does not reflect the effects of short-term loans taken by the city to maintain cash flow and pay bills). That’s in contrast to the more than $8 million positive cash balance it held in January 2008, the year when tax revenues began to shrink. On the road to its current deficit, the city has started the past five years with a negative cash balance.

• As of June 30 of this year, the city’s general fund was even deeper in red ink, at negative $8.9 million.

• While revenues were on the decline, the city continued to grant increases in wages and longevity pay, including those negotiated through collective bargaining agreements with police and fire unions.  

• The City Council, at the urging of Mayor Duke Bennett, approved budget plans that contained more than $8 million in “miscellaneous” revenue; $6 million of that was projected revenue from the controversial Powerdyne sludge-to-diesel plan, which has not materialized. The Powerdyne project was based on innovative but untested technology, and contracts negotiated as part of the public-private partnership were so flawed — in the city’s own estimation — that the city is now mired in costly litigation.

Unexpected developments also contributed to the troubling financial trend, including a legally mandated pay increase officials did not anticipate in 2010, the result of an adverse ruling for the city in a union contract dispute; unavoidable cost increases, such as for health insurance; and a significant — and surprising — decrease in assessed value in 2012 that had a major, adverse impact on revenue.

In the eye of the storm is Mayor Bennett, a Republican who took office in 2008 as the financial landscape was changing. He insists the city has made cuts in services and personnel and pursued new revenue sources. He says today’s problems would be far worse had he not taken those steps.

Bennett easily won re-election in 2011, but the city’s accelerating financial crisis is creating a difficult political backdrop for him as he seeks re-election again this year. His opponent is Vigo County Councilman Mark Bird.

Although the City Council currently consists of eight Democrats and one Republican, the mayor has been able to coalesce support for most of his initiatives, including annual budgets. Some council members, however, became alarmed at the city’s financial trends in recent years and began challenging Bennett’s budget strategies. They convinced fellow councilmen, over the mayor’s objections, to hire their own consultant — Elliott — to provide information and advise them on budgetary matters.

Even amid growing strain with some council members, the mayor, in an effort to raise new revenue through a public-private partnership, quietly negotiated a sludge-to-diesel initiative that ended disastrously in a $172 million lawsuit against the city.

Also as part of Bennett’s strategy to manage declining resources, the city in 2014 began commingling funds from the city’s Department of Redevelopment, stirring conflict over the city’s authority to do so. More recently, a dispute arose at a council meeting over the pooling of Rainy Day funds into the general fund to pay bills, a practice some members objected to because they claimed those funds could not be used without council authorization.  

Despite the mayor’s efforts in a number of arenas, cash flow problems have persisted — and grown. Earlier this year, an increasing volume of bills from local vendors went unpaid for more than 60 days. And in a stunning revelation in early July, the Indiana Finance Authority provided a stern warning to the city to make its wastewater treatment plant bond payments (including escrow payments) on a timely basis — or else — after the city had fallen almost six months behind in doing so.

Other questions have seemed to erupt almost weekly over the city’s fiscal management. The city’s use of an American Express credit card to pay its $218,000 monthly bill for trash-hauling services recently raised eyebrows.

The underlying cause of simmering disputes, however, has been the city’s continuing practice of spending more than it receives.

The mayor and other administration officials now say they are developing a new plan that seeks to balance the 2015 budget while also reducing the deficit over the next several years.

The deadline for the city to post its proposed 2016 budget is Tuesday. Public hearings will be scheduled, and the council must either accept or reject the budget by early November. If the council fails to pass a budget, law requires the budget to revert to the previous year’s. The mayor said he plans to address the council and present his proposed 2016 budget and new strategy next month. 

Warning signs emerge

CPA Elliott, of Sackrider and Co., began evaluating the city’s financial management as early as 2012, even before he was hired by the City Council as an adviser. At a budget hearing, he raised concerns about the city’s critical “general fund” balance, which started that year $4.5 million in the red. He noted that when Mayor Bennett took office in 2008, the city had begun the year with a cash balance of more than $8 million.

Based on facts and figures available online at the Gateway website hosted by the Indiana Department of Local Government Finance and the Indiana State Board of Accounts, warning signs have been there for several years, Elliott said.

“It’s like when you back out of your driveway and see a spot of oil. If you ignore it, the spot keeps getting bigger. Then the red light comes on. Then it blows up,” Elliott said in a July interview. “They knew in 2013 we were leaking oil. They should have done something, but didn’t.”

Other experts and knowledgeable observers have also pointed to problems.

In July 2012, Larry DeBoer, an economist and local government finance expert at Purdue University, cautioned that it is a red flag when a city begins a year with a negative cash balance. That’s because cities receive one of their two large tax distributions in December. If, in January, a city is already seeing negative balances, that’s a bad sign, he said.

A routine 2013 State Board of Accounts audit also pointed to potential financial issues. “Routinely overdrawn funds could be an indicator of serious financial problems which should be investigated by the governmental unit,” according to the audit. The State Board of Accounts is an oversight agency and audits government units annually. The next Terre Haute audit will be released in November and will cover 2014, the year when signs of serious financial problems became more pronounced.

It was during the first half of 2014, as the city waited for the first of its two property tax disbursements from the state, when discussion arose about delayed payments of some vendors’ bills. At the time, Mayor Bennett insisted the city’s overall financial condition was healthy and officials stated the city was indeed paying all its bills, despite concerns to the contrary.

The subject of commingling, or pooling, of various city funds also first emerged at that time. Cliff Lambert, executive director of the city’s Department of Redevelopment, raised concerns over the practice. Despite Lambert’s complaint to the State Board of Accounts, the pooling was deemed legal, as long as all funds were accounted for at year’s end. 

Since April 25, 2014, the city has withdrawn $7.3 million in total from redevelopment bank accounts, according to information obtained through a Tribune-Star public records request to the Redevelopment Department. Of that amount, $1.9 million was returned to Redevelopment accounts, and at least $5.4 million is still owed, records show.

The city continued to pool funds from other available accounts to meet payroll and pay bills, a common practice around the state, officials stated.

In 2014, adviser Elliott told council members it was time for them to “decide if the bleeding should continue or the healing should begin.”

Problems escalate in 2015

This year, the city’s “red light” that Elliott referred to has grown brighter, indicating escalating problems.

The 2015 budget proposed by the mayor and approved by a 6-3 vote of the City Council included $6 million in “miscellaneous” revenue from the Powerdyne sludge-to-diesel project. But the controversial project stalled, and the money never materialized. Rather than a revenue windfall, the Powerdyne deal produced a costly legal battle. Highland TH LLC and Overseas Lease Group, originally tabbed as a partner with the city and Powerdyne, filed a breach of contract lawsuit in federal court against the city in June, seeking recovery of $172.6 million in projected profits, as well as out-of-pocket expenses incurred, estimated at $1 million.

In response, the city hired an Indianapolis law firm, Bose McKinney and Evans, at more than $400 per hour. Between late April and late July, the law firm had billed the city $69,551 for legal work related to the city’s wastewater sludge drying and the pending lawsuit, invoices show.

That wasn’t the only problem the city encountered this year. In April, Vigo County government officials said they would take the city to court if it did not pay $320,991 by May 15 in fees for the combined city/county emergency 911 dispatch service. The city paid the full amount owed for 2015 — $641,982 — soon after it received its June property tax distribution, according to the county auditor’s office.

The city also fell behind on paying some of its vendors. Controller Leslie Ellis acknowledged that as of May 1, the city owed at least $730,281 in bills that were more than 60 days overdue.

Mounting pressures in City Hall boiled over that month when city payroll manager Krystle Riggle cited excessive workload, “office politics” and “incompetency” as reasons she planned to resign later in the month. “I feel I can only be thrown under a bus or made the fall person so many times,” she stated a letter addressed to Mayor Bennett, who would not comment on the matter other than to acknowledge that the controller’s office was understaffed due to the city’s financial pressures.

Riggle’s was one of three City Hall resignations in a one-month period. Board of Pubic Works president Bob Murray resigned over a dispute over ongoing issues related to the Powerdyne sludge-to-diesel project, and City Attorney Chou-il Lee, who had also been involved with Powerdyne issues, abruptly resigned his post, although he stated later that his departure was not related to any phase of the controversy.

In early July, it was revealed that the city had fallen seriously behind in escrow payments over a six-month period related to sanitary district revenue bonds, prompting the Indiana Finance Authority to repeatedly contact the city about its failure to meet its financial obligation. The State Revolving Fund loan program withheld $3.8 million owed by the city to wastewater treatment plant project contractor Plocher Construction until the matter was resolved. In a June letter through an Indianapolis law firm, IFA threatened potential alternative actions if the city failed to make money transfers, including declaring the entire balance be immediately due and payable.

As of June 30, the city’s general fund cash balance remained in the red by $8.9 million, even with an influx of revenue from its property tax disbursement.

The city’s board of sanitary commissioners, in an effort to resolve the conflict and ensure future payments would be made on time, moved forward with a $6.5 million bond-anticipation loan as a means to fully fund sanitary district accounts recently overdue.

The sanitary board’s action prompted Brian Conley, a member of the Redevelopment Commission and former member of the City Council, to question the city’s ongoing financial management strategy.

“That is like me going and paying my mortgage payment with a credit card. It is ludicrous. We need to stop this madness,” Conley said. “I don’t know what is going on in this city. I am not sure we have a clear picture of our city’s financial health.”

The mayor responds

Bennett he acknowledges the financial strains, but insists the city has made many cutbacks since he took office and has continually looked for new sources of revenue. If it had not, he said, the deficit would be much greater. The city has fewer positions than when he first took office — about 535 full-time employees recently, compared to 615 in 2008 (that includes both general fund and non-general fund).

“We’ve had an unofficial hiring freeze for multiple years now,” except for key positions, the mayor said. “We’ve asked our employees to take on a bigger burden of the activity.” There are also fewer police and firefighters, he said.

“We’ve evaluated everything,” he said. Early in his administration, the city began restricting the amount of fuel allocated for each vehicle weekly. When the amount is exceeded, “they have to put their own fuel in their take-home vehicles.”

In other measures, Bennett says the city is saving money in the way it manages worker’s compensation issues and has cut back on the purchase of office supplies. “You pick all the low hanging fruit at the first, then you do the tougher things, then you kind of get down to where there isn’t much left to work with,” he said. He noted that 80 percent of the general fund is salary and benefits.

Unavoidable costs that continue to go up include health insurance, the trash pickup contract and utilities.

The city also has incorporated some new revenues, including more than $2 million annually in “payment-in-lieu-of-taxes,” or PILOT, comprised of sewer user fees from the wastewater utility. (PILOT is for entities that don’t pay property taxes but receive services.)

Bennett has suggested implementing a trash pickup fee on residents to pay for the trash contract with Republic Services. “The council didn’t want to do it,” said Bennett, who still believes its a revenue option worthy of consideration.

Bennett attributes the city’s financial difficulties to property tax caps, which this year will cost the city’s general fund about $10 million in revenues. There was also that significant — and unexpected — decrease in the city’s assessed property values in 2012 that added to the frustration.

When he began in office, the revenue loss from property tax caps had been estimated at a maximum of $3 million each year. The city made cuts, he said, but then the loss of revenue continued to exceed expectations. “All of our planning was based on numbers that we were getting from state government, and they were just wrong.” It’s been a moving target, he said.

Bennett believes the city might have been able to balance its budget, but the 7.5 percent loss in assessed value — and accompanying $2 million revenue loss — set it back once again. “That was the big game changer,” he said. “That was a huge, unexpected setback.”

Asked if the deficit is growing, he said, “A little bit, but we’re managing that. So the goal is to get a balanced budget, and then we’ll work on the deficit over time. The deficit doesn’t hurt us,” he said.

While public safety — including police and fire — make up a substantial part of the general fund budget, it is an area Bennett is reluctant to cut. He maintains that staffing in each department is down from when he started office: Police is down from 166 officers to the current 129, while the number of firefighters has declined from 172 to 135.

Bennett is firm in his approach to public safety spending.

“I’m not going to cut police and fire and jeopardize the public safety of our community because revenues might drop again next year,” he said. “Having a deficit is not the end of the world. Having a deficit that is an unsustainable, growing one, and there’s no effort to address it, that is a serious problem. That is not what our issue is.”

Nor does he believe public safety compensation and benefit improvements have been too generous.

“Absolutely not,” he said. “They deserve much more than what we’ve been able to do. You’ve got to pay people to do the job — you have to come up with the revenue to pay people. We have to keep them trained, you have to have the right equipment — all those things cost money. You can’t just say, we’ll do something different, because there is no different.”

If cutbacks were made in police and fire departments, that could jeopardize public safety, he said.

The city’s crime rate has dropped for the fifth straight year in a row and is its lowest in 23 years, he said. “I’m not about to do anything to put people back in a position that’s going to make crime go up. That’s one of the most important things we deliver is public safety. That’s why a city exists and people live in a city, to feel safe. In Indianapolis, they don’t feel safe over there.

“I’m not letting that happen here.”

Public safety unions representing Terre Haute police and firefighters have shown their appreciation for Bennett’s rock-solid position. They have endorsed his candidacy as he seeks re-election this fall, and as of the pre-primary contribution reporting period, the firefighters union political action committee had donated $3,000 to Bennett’s campaign organization.

Has the city been too generous with compensation increases for all employees, given property tax caps and the recession?

“No,” Bennett said. “Most of our employees are making less in their paycheck than they were when I started because of health insurance increases, payroll tax and other things that have hit them. You’ve got to pay people, especially if you are going to ask them to do more.”

Also, longevity increases being given to police and firefighters “don’t add up to much at all,” the mayor said. This year, it’s a “drop in the bucket,” he said. For 2015-17, police and firefighters will receive longevity increases, but not overall salary increases.

Bennett understands the public’s concerns about the city’s financial issues, he said. But he thinks it’s important that people realize that while the tax caps have decreased city revenue and strained finances, property owners also have more money in their pockets.

“I think it’s important to educate people on how much money they are saving through the tax caps,” Bennett said. “It’s over $25 million this year alone [for] taxpayers who live in Vigo County .... $25 million less [in property taxes] that used to go to county, city, schools, all fire departments, airport, library — all of us are operating with $25 million less, and $12 million of that $25 million is ours.”

No consensus on City Council

While the mayor has been subjected to sometimes harsh and public criticism for his financial management, he also has supporters, including council members such as Bob All, a fellow Republican who was defeated in his re-election bid last spring by Elliott. All is quick to defend the mayor’s performance.

“I don’t think we’re as bad as some of the critics say we are,” All said. He thinks some critics are painting a gloomier picture than is valid. All staunchly supports Bennett and his efforts to deal with the city’s financial difficulties.

“I think Duke, if he gets the chance, will get us through the problems we have,” said All, who will still get a chance to vote on the 2016 city budget before he leaves office. “It won’t be next year, but within his next administration, you’ll see a positive turn financially.”

All’s confidence is not shared by others on the council.

Todd Nation is among those who have watched with concern as the deficit grows. “For years now, we’ve been spending more than we take in and that’s getting us farther and farther into the hole. We started this year with a $5 million-plus deficit, and it looks like we’ll be closer to $7 million at end of this year.

“I think our financial position is bad and getting worse,” he said.

Nation believes the city hasn’t done enough to bring spending in line with revenues. “There are still a number of things we need to look at. I know none of us want to have layoffs. I think that’s probably been the main thing that’s guided policy so far,” he said.

He hopes layoffs aren’t needed, but he acknowledges the possibility. “I think our time of reckoning is here, and we need to be making the tough decisions that have been put off for years now.”

Outgoing councilman Norm Loudermilk, reflecting back on his 2008 comments at the onset of financial problems, believes more should have been done years ago, when officials realized a property tax cap storm loomed.

“We should have looked at things like user fees and reducing public works projects, so we could have saved some of that revenue from when the tsunami hit,” Loudermilk said. “Now, the city’s back is against the wall” and city leaders will have to “make some tough decisions.”

Reporter Nick Hedrick contributed to this story