COLUMBUS — Cuts to local funding and continued economic difficulties could lead to more Ohio municipalities landing in fiscal trouble during the coming years, state Auditor David Yost warned recently during an exclusive interview with the Dayton Daily News.

“There are governments out there that are wounded,” Yost said. “We’re not out of the woods yet.”

Despite no Ohio municipality having been placed in fiscal emergency since 2010, communities have had to cut their budgets to offset revenue reductions including cuts in state funding.

The village of Waynesville in Warren County is the only Dayton area community to be placed in fiscal emergency in the past five years. Yost has yet to declare a fiscal emergency in an Ohio city or village since taking office in 2011.

Instead state auditors have made earlier interventions, declaring states of fiscal caution in the cities of Akron, Portsmouth and East Cleveland and Madison Twp. in Richland County.

“We will start with caution,” he said.

Fiscal caution gives municipalities a chance to produce a plan or correct financial problems before submitting to greater state scrutiny.

The caution option, already available for public schools, was extended to counties, cities, villages and townships as part of Kasich’s first budget.

“We wanted to be sure there was adequate warning at the local level.” Yost said.

In July, Gov. John Kasich said he plans to cut another 25 percent next year from local government funding — already cut 25 percent — draining $14.4 million from governments in Montgomery, Greene and Warren counties, according to the Ohio Department of Taxation.

Also next year, cities and villages will have to adjust to the repeal of estate taxes. In 2010, area communities reported collecting $18 million from the estate tax.

In response, cities have sought new levies, cut staff and services funded through general operating budgets. For example, Centerville began cutting staff about 10 years ago and stopped borrowing to finance capital improvements, City Manager Greg Horn said.

The staff was cut from 190 to 162 workers, and $12 million for a police station and senior center was raised without new bond debt. “It’s not one big thing. It’s a lot of little things,” Horn said. “It’s been an effort.”

Fiscal caution

Under the new law, municipalities still face heavier state oversight after declarations of fiscal watch and, ultimately, fiscal emergency — if they fail to develop adequate plans for fixing the financial problems.

The new law also empowers the state to withhold state funds and disband local governments of fewer than 5,000 residents.

When fiscal caution was declared in Akron in September 2011, the state reported financial problems including an $87.8 million deficit ending 2010. East Cleveland showed $5.9 million in deficits in January 2012, while Madison Twp.’s books were inauditable and accounts showed $78,000 in deficits last week in the latest fiscal caution ordered by state auditors.

None of the cities has been moved to the next level, fiscal watch or fiscal emergency.

From emergency to caution

It has been 20 months since fiscal emergency was declared, on Sept. 16, 2010, in the villages of Leipsic, Putnam County, and Fort Shawnee, Allen County.

The emergency in the village of Alger, Hardin County, was lifted on Dec. 22. That leaves 23 municipalities, including the villages of Waynesville in Warren County and West Elkton in Preble County, in fiscal emergency.

State auditors have declared fiscal emergencies in 59 Ohio municipalities using a law passed after the city of Cleveland’s default in 1979. The state oversight is designed to prevent municipal bankruptcies and the negative effects in the communities.

Before the recent lull, fiscal emergencies were declared in 18 cities, villages or counties since 2005 — 14 during the economic downturn in 2008, 2009 and 2010. Corwin, a small village in Warren County, emerged from its emergency in September 2005, after almost five years under state supervision. In addition to bringing the village books into balance, state auditors ended questionable spending by village officials and other management problems.

In recent years, some Ohio municipalities have enjoyed a resurgence in income taxes easing the task of balancing their books.

Still officials said proposed further cuts in local government funds and elimination of the estate tax will more than offset any income tax revenue gains in Ohio. “I’m nervous about the economy,” Yost added.

Takeover alternative

In Ohio, municipalities have avoided takeovers, although nine of 23 cities and villages in fiscal emergency have been under state scrutiny at least five years. In the Dayton area, West Elkton’s emergency has continued for almost eight years.

“We’re very concerned with some of the communities’ inability to rescue themselves,” Kent Scarrett, communications director for the Ohio Municipal League, said.

Contact this reporter at (937) 225-2261 or lbudd@DaytonDailyNews.com.