Miami Faces Financial Meltdown; SEC Investigates "Financial Shell Game" Asks For Records On All Major Bond Deals Since 2006

With most eyes on California, proponents of the Watched Pot Theory likely thought the first major blowup in the US would be someplace else. That someplace might be Miami.

Though the fiscal year has barely begun, Miami leaders are bracing for a budget hole that could nearly wipe out the city's entire reserve.

Inquiring minds are interested to learn Miami leaders fear a financial meltdown.

Facing a widening financial crisis, Miami leaders are already projecting a $45 million budget shortfall this year that could force the city to deplete its reserves and sell key assets to stay afloat.

"We understand the gravity of the situation," said Miami Mayor Tomás Regalado.

Today, a reserve that brimmed with $141 million in 2003 could plummet to less than $10 million by the time commissioners are finished with this year's budget in September, projections show. If that happens, Miami will break its own financial integrity laws -- prompting some officials to fear another painful state takeover.

"Unbelievable," said County Commissioner Carlos Gimenez, who was Miami's city manager when its reserves peaked in 2003. "They forgot the lessons of the past."

The financial woes come as federal investigators continue a sweeping investigation of Miami's budget practices over the past four years, including questions over whether the city disclosed problems to bond holders.

The U.S. Securities and Exchange Commission has demanded all the city's records, e-mails and shreds of evidence involving more than a quarter of a billion dollars in bond deals for major projects since 2006.

The SEC investigation followed a report by The Miami Herald last summer revealing how top city officials engaged in a financial shell game, moving millions from capital accounts to help the budget stay flush.

William Earle Klay, the director of the Askew School of public administration and policy at Florida State University, said rating agencies closely study reserve funds.

"Tapping into reserve funds, and how much you tap into those funds, is something that rating services look at," he said. "Your credit ratings can go down, and if it's a revenue bond, they may have to raise the prices."

Commission Chairman Marc Sarnoff was stunned when the mayor revealed the numbers last week, prompting the commissioner to warn that if spending isn't reined in, the state could step back in and strip the city of its decision-making.

The budget disclosure is the latest blow to a city reeling from financial headaches since last summer.

In July, The Miami Herald investigation found skyrocketing salaries and pension obligations had strangled the city's budget. The quick fix -- transferring millions between capital accounts and the city's general fund -- only raised more questions.

One of the city's major challenges continues to be lowering its worker-friendly pension obligations. Since 2001, those demands have risen by 400 percent, reaching $67 million last year. This year, that number will rise to $101 million.

This year's projections had Sarnoff shaking his head last week. "How could we be so out of budget?" he asked. "We're in crisis mode."

Pensions To Blame

"How could we be so out of budget?"

Ask a question like that and you deserve to be fired or not reelected, whichever applies. Moreover, those who illegally hid deficits by playing shell games should face criminal investigations.

Pension Math

Pension obligations were up a mere 400% since 2001, to $67 million. Backtracking, we see that pension obligations were $13.4 million in 2001. Pension obligation are now $101 million, up 653% in nine years.

Budget Shortfalls

• Overall collections, including property tax receipts, are expected to be $17.8 million below projections.
• Government agencies are on target to overspend by $6.2 million.
• The police department, parks and recreation and risk management face a combined budget shortfall of $15.3 million.

SEC Investigation

Inquiring minds are reading SEC orders Miami to turn over its financial books.

In a sweeping investigation that could impact Miami's public projects for years, the U.S. Securities and Exchange Commission is probing the city's major bond offerings between 2006 and 2009 and questionable financial transfers used to balance the budget.

A confidential SEC letter, FedExed to the city Friday and obtained by The Miami Herald, demands that Miami turn over reams of e-mails and internal documents showing how it was moving money around to shore up its bottom line -- as well as how it represented its financial picture to bondholders.

Now, the city has been ordered to "preserve all computer resources utilized by Miami, or any other persons working on or involved in any of Miami's activities, included but not limited to hard drives, floppy disks, servers, and all other means of storage."

Also sought: internal communications from six high-ranking city officials, including City Manager Pete Hernandez and Chief Financial Officer Larry Spring.

Former Miami Mayor Manny Diaz, who signed off on all the city's bond offerings between the years in question, couldn't be reached Friday.

The practice of transferring funds between capital projects and the city's general fund harkened to Miami's last fiscal crisis, when it was discovered that the city tried to hide a $68 million shortfall by shifting money between hundreds of capital accounts.

"It's déja vu 1996," said Miami Mayor Tomás Regalado, the only elected city leader who was around during the last financial disaster. "I'm not surprised, but I'm very, very disappointed."

The SEC has also demanded documentation between the city and McGladrey & Pullen, the accounting firm that does Miami's Comprehensive Annual Financial Reports.

The notification also comes on the heels of a blistering audit by city auditor Victor Igwe, who said Miami skirted financial integrity rules by using ``inaccurate and misleading'' budgetary practices as it scrambled to fill budget holes.

Miami Mayor Tomás Regalado was around in the last crisis, and did nothing to prevent this?!

It is amazing the things city officials will do to keep pension scams going, including breaking the law. Let's hope that those who broke securities laws and city covenants face a grand jury investigation, and ultimately a court of law.

I hope this ends up in court, with Miami in default, with pension promises thrown in the fire where they belong. If not, Miami taxpayers are going to take a huge hit on property and other taxes.

This is not about "saving for a rainy day" as some might think. This is about exponentially rising pension costs that could never be met.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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