Fiscal Distress — Local Governments

When a local government encounters budgetary problems, it may be placed in fiscal caution, fiscal watch, or fiscal emergency status.

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Fiscal Caution, Watch, and Emergency
Fiscal Caution | Fiscal Watch | Fiscal Emergency

To determine whether a local government has fallen into fiscal caution, watch, or emergency, the Auditor of State will review fiscal practices or conduct a fiscal analysis to determine the severity of the situation. That analysis can be requested by a government entity's leadership, or, in an urgent situation, the Auditor of State can initiate the process.

Local Governments in Fiscal Distress.pdf — Last updated Dec 2024

Fiscal Caution

Declaring Fiscal Caution in a Local Government

Any one factor is needed for the Auditor of State to declare a fiscal caution:

  • When the Auditor of State (AOS) declares that a municipal corporation, county, or township's financial records are unauditable and has issued a letter to the entity indicating the time frame under which those records must be restored to an auditable condition, and the entity has failed to do so within that time frame.
  • When the Auditor of State identifies significant deficiencies or material weaknesses over accounting and financial reporting functions; direct and material noncompliance with applicable laws and regulations; or management letter comments about issues that, in the opinion of the Auditor of State, have a significant effect on the financial condition of the municipal corporation, county, or township.
  • When a deficit fund balance exists at year-end in the General Fund that is more than 2% of that fund’s revenue for that year, and/or when a deficit fund balance exists at year-end in any other fund that is more than 2% of that fund’s revenue for that year, and there are not sufficient resources in the General Fund that may be transferred to eliminate the deficit or in any other fund that may lawfully transfer resources to eliminate the deficit.
  • When a low year-end carryover balance exists in the General Fund such that the balance is equal to or less than an amount representing one month of expenditures (based on one-twelfth of prior year expenditures), and/or when a low year-end carryover balance exists in any other fund such that the balance is equal to or less than an amount representing one month of expenditures (based on one-twelfth of prior year expenditures), and there are not sufficient resources in the General Fund that may be transferred or in any other fund that may lawfully transfer resources to subsidize the fund.
  • When a municipal corporation, county, or township has not reconciled its accounting journals and ledgers with the treasury/bank for more than three months and is unable to reconcile the records within one month of written notification by the Auditor of State.

Fiscal Caution Process and Termination

Once the Auditor of State has determined that the entity will be placed in fiscal caution, the governing body will receive written notice of the declaration. This notification will also request a written proposal from the entity for discontinuing or correcting the fiscal practice or budgetary conditions that prompted the declaration. The entity will be given 60 days to provide the proposal to the AOS.

The Auditor of State may visit and inspect the entity under fiscal caution and may provide technical assistance to the entity in implementing proposals to eliminate the conditions that prompted the fiscal caution declaration. Costs for this support would be borne by the State.

If the entity has not made reasonable proposals or otherwise taken action to correct the practices or conditions that led to the declaration of fiscal caution, the AOS may determine that the entity should be placed in a state of fiscal watch or fiscal emergency.

An entity cannot be released from fiscal caution until the Auditor of State has determined that the corrective actions have been or are being implemented, and that the fiscal caution conditions no longer exist.

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Fiscal Watch

Declaring Fiscal Watch in a Local Government

Any one factor is needed for the Auditor of State to declare a fiscal watch:

  • Either of the following:
    • All accounts that were due and payable from the General Fund for more than 30 days, less the year-end balance of the General Fund, exceed one-twelfth of the General Fund budget for the year.
    • All accounts that were due and payable from all funds for more than 30 days, less the year-end balance in these funds, exceed one-twelfth of the available revenue for the preceding fiscal year from these funds.
  • Total deficit funds, less the total of any balances in the General Fund and in any special fund that may be transferred to meet such deficits, exceed one-twelfth of the total General Fund budget for that year and the receipts to those deficit funds during that year (other than transfers from the General Fund).
  • Money and marketable investments, less outstanding checks, less total positive fund balances of general fund and special funds, exceed one-twelfth of the total amount received during the preceding fiscal year.
  • Based on an examination of a financial forecast approved by the legislative authority, the Auditor of State certifies that the General Fund deficit at the end of the current fiscal year will exceed one-twelfth of the General Fund revenue from the preceding fiscal year.

Fiscal Watch Process and Termination

To determine whether an entity qualifies for fiscal watch or emergency, the Auditor of State will conduct an initial review of entity finances. This analysis will commence upon the written request of the entity or at the initiation of the AOS. If an entity is under fiscal watch, the AOS may provide technical and support services to the entity. Costs for this support would be borne by the State.

Once the Auditor of State has issued a written declaration of the existence of fiscal watch to the governing body of the entity, the entity has 120 days to submit a financial recovery plan to the AOS that identifies actions to be taken to eliminate the fiscal watch conditions. The plan is subject to review and approval by the AOS. If a feasible financial recovery plan is not submitted within the time period prescribed, the Auditor of State shall declare that a fiscal emergency exists.

The fiscal watch will be in effect until the Auditor of State determines that the fiscal watch conditions are no longer present and cancels the watch.

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Fiscal Emergency

Declaring Fiscal Emergency in a Local Government

Any one factor is needed for the Auditor of State to declare a fiscal emergency:

  • The same first three conditions as fiscal watch, with the exception that the fraction is changed to one-sixth, with the added requirement that the condition must continue to exist at least four months after the end of the fiscal year.
  • Failure, for lack of funds, to make all payroll to employees that continues beyond 30 days, or a period of agreed-upon extension that can not last more than 90 days from the original time for payment.
  • Default of payment on any debt obligation for more than 30 days.
  • An increase in the inside millage by the County Budget Commission that results in a reduction for any of the overlapping subdivisions or taxing districts.

Fiscal Emergency Process and Termination

Entities declared to be in fiscal emergency come under the oversight of a Financial Planning and Supervision Commission. The Auditor of State is the Financial Supervisor of the commission.

Fiscal emergency is terminated when the following conditions are met:

  • An effective financial accounting and reporting system is being implemented, with expected completion within two years.
  • All fiscal emergency conditions have been or are in the process of being eliminated, and no new emergency conditions have occurred.
  • The financial recovery plan objectives are being met.
  • The entity has a five-year financial forecast that the Auditor of State determines is "nonadverse".
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Financial Planning and Supervision Commission

Members of the Financial Planning and Supervision Commission

  • Treasurer of State (or designee)
  • Director of state office of Budget and Management (or designee)
  • The third and fourth members will be appointed as follows:
    • For municipalities, the mayor and presiding officer of municipal legislative authority (or designee)
    • For counties, the president of the board of county commissioners (or designee) and the county auditor (or designee)
    • For charter counties, the county executive and the county fiscal officer (or designee)
    • For townships, a member of the board of township trustees (or designee) and the county auditor (or designee)

If a municipal corporation, county, charter county, or township has a population of at least 1,000, three additional members will be appointed no later than 15 days after the Auditor of State determines that a fiscal emergency exists. Those appointments will be as follows:

  • Municipal Corporation: The governor will appoint one member; the mayor will appoint one member confirmed by the legislative authority, and the county auditor of the county in which the largest portion of the municipal corporation is located will appoint one member.
  • County: The governor will appoint one member and the board of county commissioners will appoint two members.
  • Charter County: The governor will appoint one member; the county executive will appoint one member; and the county council will appoint one member.
  • Township: The governor will appoint one member and the board of township trustees will appoint two members.

For a village or township with a population of fewer than 1,000 as of the most recent census, the Auditor of State serves as the Financial Supervisor and has all the powers and responsibilities of a commission.

Responsibilities of the Commission

  • The commission is responsible for approving a financial recovery plan containing actions to eliminate fiscal emergency conditions, balance the budget, avoid future deficits, and market long-term obligations. The plan must be submitted to the commission by the mayor, board of commissioners, or board of trustees within 120 days of its first meeting. The commission can either accept or reject the plan, listing reasons if rejected. The above officials then have 30 days to resubmit a plan, and the process is repeated until a plan is accepted.
  • The commission has widespread authority to review all revenue and expenditure estimates to determine whether they result in a balanced budget; require the government by ordinance or resolution to establish monthly levels of expenditures and encumbrances consistent with the financial plan; approve and monitor these levels; approve the amount and purpose of any debt issues; make and enter into all contracts and agreements necessary to the performance of its duties; and make recommendations for cost reductions or revenue increases to carry out the financial plan.
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