Chapter 9 Bankruptcy: A primer for the Citizens of Bay St Louis

The notion that the City of Bay St Louis was experiencing financial problems is not by any means new. Just over a year ago the citizenry heard lots on the topic during the municipal election with Mayor Fillingame unequivocally proclaiming the City was in good shape financially. The irony is by that time, the City was already using its trade vendors as its financier. You see folks, when the bills don’t get paid the trade vendors become an unofficial bank. Even worse, it is the kind of unofficial bank that must make forced loans that bear no interest. It was a sign of things to come in a fools game where the passage of time is the ultimate enemy.

The warning signs were literally everywhere and yet for month after precious month the City Council did nothing. Worse, it appears certain members of the Council were simply going along with the Mayor because it was easy. Last October the City Council, at the request of the administration, finally took action on utility rates to fix the problems the administration identified in the Water and Sewer operations. The increase was targeted at high volume water users which it turns out was the very segment of the City’s customer base that was in decline. Now the Administration claims the rate increase was insufficient.

Last January Slabbed published a detailed analysis of the irresponsible budget practices that lay at the heart of the City’s financial decline. Since then the City has spent money it was legally required to set aside for debt service on municipal operations. Broke, the city made a loan with a local bank that it lacked statutory authority to make.  The proceeds of that loan, mistakenly called “a line of credit” by the Mayor and Council, was split between the water and sewer fund and the general fund. Despite being at every meeting the City Attorney was evidently checked out MIA allowing the Mayor and City Council to step out making what Councilman Lonnie Falgout now terms an illegal loan. I fear it’s gonna take the elected officials here to have to pay big dollars out of their own pockets before they’ll learn the value of operating within the law.

Unable to make the scheduled debt payment on Water and Sewer debt due in July 2014, the City Council again kicked the can, refinancing debt dating from the 1990s that had already previously been refinanced.  The City, caught in a downward financial spiral incurred hundreds of thousands of dollars of debt issuance costs that could have been used to pay for City operations.  From a financial management standpoint, the performance of the City’s elected officials really can’t be much worse. Continue reading “Chapter 9 Bankruptcy: A primer for the Citizens of Bay St Louis”

City Auditors considering Going Concern Opinion on Bay St Louis Financials

Four hours into a marathon Bay St Louis City Council meeting that lasted almost five hours, City Clerk David Kolf disclosed to the City Council that the municipal auditors have been in discussion with City officials regarding the issuance of a going concern opinion on the September 30, 2013 City of Bay St Louis financial statements that are included as part of the annual Single Audit of the City’s finances and compliance with applicable laws and regulations. The single audit report for the City is due on June 30, 2014, a due date which Kolf admitted would not be met as the auditors are still waiting on the Administration to provide the firm with crucial information needed in order to complete the report, a complete list of which was provided to the Mayor on  May 6, 2013 when Auditor Jennifer Bell presented the audit firm’s preliminary findings to the City Council.

Mayor Fillingame, who has previously steadfastly maintained the city’s finances were solid, made no public comments on the City’s dire financial situation to the Council before Slabbed’s deadline for publication instead relying on Clerk Kolf to explain the auditor’s proposed  opinion.  Kolf blamed the City’s Utility fund for the financial problems leading to the rare proposed audit opinion, which essentially means the City’s solvency is doubtful absent a bankruptcy filing within one year of the date of the opinion.

Douglas Handshoe, a CPA that is publisher of the Slabbed New Media website explains:

Auditors are reticent to issue going concern opinions as it often represents a financial kiss of death for the entity being audited.  While the academic research on this topic has been fairly exhaustive, it mostly focuses on the instances where an entity fails without the auditors ever issuing  a going concern opinion.  Business solvency, bankruptcy and auditor reports are closely intertwined by operation of the legal system so there is a compelling interdisciplinary interest in this topic.

The academics find that reticence in their study results. Handshoe noted that in a Wall Street Journal article on the topic, Anne Simpson, senior portfolio manager and director for corporate governance at California Public Employee’s Retirement System (CalPERS) said “A going concern warning from an auditor is rarer than a hen’s teeth, you have to be dangling off a cliff, hanging on by your fingernails before the auditor blows the whistle.” Continue reading “City Auditors considering Going Concern Opinion on Bay St Louis Financials”

City of Bay St Louis at financial cross roads: Budgeting hope versus reality

What I witnessed yesterday evening at the City of Bay St Louis budget workshop gave both reason for hope and horror. Let’s start with the hope and not as a budgeting tool.

The City Council, at least 4 of ’em anyway, are providing the kind of financial oversight the taxpayers deserve in this time of fiscal crisis. A Water & Sewer bond payment the City can’t afford is due in less than a month, as is the City’s audit to the Single Audit Clearinghouse. Part time City Clerk David Kolf is officially missing in action, out on medical leave according to the Mayor and certainly une victime de la guerre. The City Council’s oversight is vital and that is where we get to the horror part.

It appears Mayor Fillingame’s financial plan to deal with the crisis is hope – hope that the rains stops so people will water their yards more and use more water, hope that unrealistically budgeted revenues will be realized, hope that no one notices the almost $1MM in salaries the Mayor is expending in the Water and Sewer fund, which fund City Council sources are indicating to Slabbed the Mayor has pushed salaries the general fund could no longer afford to pay. Even worse is he contradicts himself with his financial explanations. Frankly folks, I’m not sure if Hizzoner is that slick or that financially clueless but either way the results are proving disastrous.

Lest people think I am gratuitously bashing Les what we need is a real life example and it is encapsulated in one exchange between Hizzoner and Jennifer Lenain, a free lance writer for the Sun Herald. Jennifer was looking at the latest budget actual report and she evidently did some homework and nabbed the 2013-2014 approved budget from the City’s website. Slabbed covered the financial concepts behind Lenain’s question to the Mayor back in January such question as salient today as it was then. Continue reading “City of Bay St Louis at financial cross roads: Budgeting hope versus reality”

PSA: Town Hall Meeting for Bay St Louis Ward 2 residents and business owners

Councilwoman Wendy McDonald will be hosting a town hall meeting for residents and business owners in Ward 2 next Thursday evening, May 22, 2014 from 5:30 to 7:00 PM in the Bay St Louis City Council Chambers.

Topics for discussion may include parking, speeding, activities and events such as runs, festivals, Second Saturday etc., noise, harbor opening and other topics of interest to the residents and business owners in our Ward. Because there will be a 2 ½ hour workshop related to the city budget starting at 3 PM on Tuesday, May 20, 2014 with a council meeting to follow at 5:30 PM we will not get into the budget at this meeting but use this time to address other concerns such as those outlined above.

Mike Favre, Councilman at Large and Les Fillengame, Mayor are attending this meeting as well and are interested in your input and feedback as it relates to Ward 2. Please feel free to send in topics of interest ahead of time if possible so we can allow time to cover topics of interest and for participation from the residents and business owners.

Wendy McDonald, Councilwoman Ward 2

Writing checks that can’t be cashed: Bay St Louis is broke

Horrifying isn’t too strong of a term to describe what I witnessed back on May 6th during the City Council’s finance workshop.  Hopefully I’ll be able to explain why I was horrified as the subject matter is somewhat technical in Mississippi Municipal Finance.  From a big picture standpoint, financially the City of Bay St Louis is a rogue municipality, making loans without any statutory authority to do so while spending fantasy tax revenue, unrealistically budgeted and never received.  Worst of all is the Mayor is in deep denial – either that or he gets his kicks from telling whopper after whopper about the state of the City’s finances. It does not serve the public interest.

To me, there were two moments that encapsulated the entire two hour workshop the first was when auditor Jennifer Bell was giving her presentation on the internal control and legal compliance findings.

To set up her finding on purchasing, rumors have been swirling since last August the City was financing its deficit using what is most commonly known as its trade payables, or in Mississippi Governmental parlance its claims docket.  Whether a local government or a struggling business, when cash gets tight the first way operating cash flow is financed without a bank is to simply let bills ride until the money comes in to pay them.  Robbing Peter to pay Paul is a time honored way of buying time in the business world for cash starved entities public and private. Unfortunately Mayor Fillingame and City Clerk David Kolf have been telling whoppers about the City’s cash flow being A-OK for months so when the rubber met the road the Mayor essentially accused the auditor of fabricating her results.  Dwayne Bremer’s story on the workshop made it sound like it some sort of difference of opinion.  Here is the salient snippet:

Falgout said the draft audit states that the city is experiencing a cash-flow problem and that bills were being paid in order of priority, rather than order received.

Fillingame said that he challenged the assertion and pointed to the fact that the audit is not yet complete.

Audit results are true/false propositions folks. Either the City has delayed paying its bills for 100 days or they didn’t. And since business do not run their bills late 100 days for no reason, a cash flow problem would be the only reason it would do so.  Here is the draft finding: Continue reading “Writing checks that can’t be cashed: Bay St Louis is broke”

My Professional Opinion: Horrifying

Yesterday’s Bay City Council finance workshop was horrifying on two levels in fact folks. I put the workshop out on Twitter yesterday via my smartphone while Dwayne and Jennifer took pages of copious notes old school style. The long and short of it is the City is broke and has been broke for several months. Now the Mayor is pitching a new plan to refinance the City’s debt just weeks after telling Dwayne that City finances were groovy. The plan hizzoner is pushing will plunge the City deeper into debt to paper over the accumulated deficit the City has been financing off the back of its trade vendors and claims docket.

Accounting, legal compliance and related financial concepts are arcane, sometimes mind numbingly so thus I get a charge when audit presentations are recounted by the print media. I’ll be back with a detailed post on this exact topic but first here are the takeaways from the other two media organizations in attendance on this issue of vital public interest:

Bay eyes audit; tax hike may be near ~ Dwayne Bremer

Bay St. Louis council passes measure supporting LGBT residents ~ Jennifer Lenain

No word in either story on whether the City Council authorized the Mayor to begin discussion with Butler Snow to begin the bond refinancing process as proposed by Mayor Fillingame. In fairness to the Echo, Dwayne was fighting deadline issues.  The Sun Herald is not in the game.

Sunday Links: May 6th looms larger, Oooops Greenlit no more, sorry plus new GOP bagmen

First up from denial is a very dangerous thing file:

Mayor says no shortfall for Bay ~ Dwayne Bremer

Fed judges: ‘Jammer1954’ wasn’t federal prosecutor ~ John Simerman

All eyes now on Aircheck.

Finally this blast from the recent past that is well worth highlighting:

The Real Face of Mississippi Government ~ James @ Jackson Jambalaya

Steppin’ out: Those “new” wards will be the death of me……

Wards 5 and 6 were annexed around 2007ish 2006ish so better late than never……

Mayor says residents’ failure to pay bills is keeping Bay behind ~ Geoff Belcher

Speaking of better late than never I also have this:

Three defendants settle out of court in Bay Tech lawsuit ~ Cassandra Favre and Geoff Belcher

Court documents raise questions about Bay-Waveland School District’s purchase of the old Bay Tech Building

Last month the Seacoast Echo reported the Bay-Waveland School District had purchased the Old Bay Tech building on Second Street in Old Town Bay St Louis to house the district’s administrative offices and alternative school. This purchase would mark the beginning of the final phase of school district’s recovery from Hurricane Katrina and breathe new life in a building that has sat empty since the storm.

In a way that piece also encapsulates the state of the school district in 2012, which has found itself at odds with local good government activists over several issues that I will not go into on this post.  That said today the FEMA funded transaction the district executed to purchase the Bay Tech building will be examined in detail because the Seacoast Echo got it wrong, which is strange considering the editor of the paper is married to the school board president. To kick-start things let’s visit with that story I linked above:

The Bay St. Louis-Waveland School District has purchased the old Bay Tech building in Bay St. Louis, hoping to turn it into a new district office and alternative school.

The building and 1.6 acres of land located at 200 N. Second Street were purchased for $580,000. According to county tax records, the previous owner was Magnolia Group LLC of Shorewood, Ill.

Now when I say the Echo got it wrong I do not mean the reporting was lazy, as I think the reporter faithfully reported everything that was said in the meeting. We need to examine another snippet though, before Slabbed tells the in-depth story:

Project Coordinator Brad Barlow said buying the building made sense for the district.

“We’ve explored many routes and found that this was a cost-effective way,” he said.

Although the project has been delayed over other projects, Ladner said, the district wanted to get the schools rebuilt first.

Funding will come from FEMA proceeds and district funds.

I’ll admit I saw this piece last month and came away thinking $580K for a building and 1.6 acres of land in old town was a bargain. That is until I learned that it was sold on June 7, 2012 by the Magnolia Group to a LLC owned by 3 local business people for $325,000, that public records show owned the property around a month before flipping it to the school district for a $255,000 profit. Let’s establish that via the Multiple Listing Service aka the MLS.  I have made certain redactions to protect certain individuals that I do not believe were involved in the transaction: Continue reading “Court documents raise questions about Bay-Waveland School District’s purchase of the old Bay Tech Building”