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Steiss, Alan Walter, 1989. Financial Management in Public Organizations. Pacific Grove, CA: Brooks Cole.FINANCIAL EMERGENCY . A legal condition more severe than fiscal stress, but not so severe as to cause municipalities to declare bankruptcy or default on contractual obligations to repay borrowed funds. A financial emergency assumes that a municipality will take appropriate corrective action to prevent bankruptcy or defaults.A financial emergency is more serious than fiscal stress. A government under fiscal stress faces budget cuts, revenue increases, and changes in how it carries out its core responsibilities. Although many municipalities have dealt with bouts of fiscal stress, few have confronted a true financial emergency (Advisory Commission on Intergovernmental Relations 1973, 1985).For our purposes, a financial emergency is a legal condition. In the United States, federal law provides a legal avenue for municipalities to use for declaring bankruptcy, if permitted by state law. An example is the wealthy area of Orange County, California. It filed for legal bankruptcy on 6 December 1994 because of poorly conceived investment practices. Federal law prescribes the resolution of a bankruptcy.The second condition deals with a default of contractual provisions to repay borrowed funds (see entry for defaults, municipal). In 1979, Cleveland, Ohio, defaulted when it could not repay one-year loans backed by the full faith and credit taxing power of the city. For bonds backed by dedicated project revenues, indentures accompanying the bonds clarify the legal rights and responsibilities of bondholders.Under the third condition, state laws specify the terms of a financial emergency. It is the third definition reviewed here. Specifically, this entry uses the state of Ohio's fiscal emergency law to illustrate how a state can respond to municipal fiscal inadequacy. Other state experiences provide useful comparisons.In Ohio, there are six legal criteria, and failure of any single one requires the state to declare the municipality in a condition of fiscal emergency. The first two tests represent failures to meet obligations to other parties: a default in payment to debt holders, and the failure to issue a payroll to employees when due. Four others represent the lack of adequate fiscal controls, including insufficient cash to meet current obligations, excessive deficits, excessive past due accounts payable, and excessive unvoted debt. More specifically, Chapter 118 of the Ohio Revised Code specifies that any one of the following constitutes a fiscal emergency condition of a municipal corporation:
|1.||. a default for more than 30 days;|
|2.||. failure for lack of funds to make all payroll payments to municipal employees within 30 days of when payment is due;|
|3.||. an increase in the municipality's minimum tax levy, affecting the levy of another political unit;|
|4.||. overdue accounts payable of the general fund from the preceding fiscal year exceeding one-twelfth of the general fund budget, or overdue accounts payable from all funds exceeding one-twelfth of the revenues for the general fund and special funds;|
|5.||. an aggregate deficit in all deficit accounts, less cash balances, which can be used to meet the deficits, exceeding one-twelfth of the year's general fund budget and receipts to the deficit funds for that year;|
|6.||. the amount in the unsegregated treasury is insufficient to meet the purposes of the general fund and special funds and the deficiency exceeds one-twelfth of the total amount received into the treasury during the year.|
A municipality may fail certain tests at year-end, but correct its fiscal behavior in time to avoid entangling itself in the legal control. For example, existence of any year-end condition in tests four, five, or six is not a fiscal emergency if the condition no longer exists at the time of the fiscal emergency audit. It might appear that the best time to assess a city's fiscal emergency status is at the time of a regular year-end financial audit, but fiscal problems may emerge earlier in the year. Ohio law requires calculations at the prior year-end and at the time of the fiscal emergency audit. So, if the municipality had corrected its behavior by the later date, the fact that it had an earlier failure is not sufficient to justify invoking the law's remedial powers.