About a week ago, the Village of Dolton, Illinois issued a statement that it had failed to make full payment of interest and/or principal on five of its outstanding bonds.
Dolton lies on the southern border of Chicago.
Bond defaults don’t happen every day. Is this a unique situation? Or an early symptom of something afflicting other parts of Chicagoland?
The latest audited financial statements for Dolton can be found here. One red flag in there is on the top of the Independent Auditor’s Report, which is dated June 14, 2016 – over a year after the fiscal year (April 30, 2015) for which the report applies. Another red flag is in that auditor’s report, which included a qualified opinion due to material weaknesses in basic financial controls.
How about the reported financial results themselves? One thing of interest is a “dog that didn’t bark.” Dolton’s latest Statement of Activities (the income statement, in state and local government financial reporting) showed total revenues exceeded expenses significantly in both 2014 and 2015, leading to a positive change in net position.
The balance sheet was another story, however. Dolton’s “unrestricted net position” (basically the share of net assets not legally restricted for pledged uses) came to a negative $29 million in 2015 – a pretty massive amount given Dolton’s reported assets ($34 million).
A default does not a bankruptcy make, of course. But back in early 2015, amidst debate over state legislation allowing for municipal bankruptcies, a local analyst (Marc Joffe) surveyed the landscape and identified five local governments as candidates -- including Dolton.
Back then, Joffe took note of Dolton’s then-small-but-negative unrestricted net position, and its general fund balance relative to GFOA guidelines. Joffe noted that the village received a qualified audit opinion and had very limited general fund reserves. Dolton’s latest financial statements once again contain a qualified opinion, and all of its general fund reserves were “Nonspendable” (a fancy word for unavailable).
Since then, new accounting standards have made some of those old statements and guidelines, well, obsolete.
Let’s take a peek a bit further north from the south suburb of Dolton, for some perspective.
Granted, a less-than-equal comparison, but …
In its 2014 Statement of Net Position, before those new accounting standards arrived, the City of Chicago reported its unrestricted net position at a negative $11.7 billion. In 2015, that (negative) amount ballooned to (negative) $30 billion, with the arrival of new, massive pension liabilities. On a per-resident basis, that 2014 result of (negative) $11.7 billion for Chicago amounted to over four times as high as the negative unrestricted net position in Dolton.
How about interest expense? In its latest fiscal year, Dolton reported about $1.5 million in interest, in a community with about 23000 people. In 2015, the City of Chicago incurred over $860 million in interest expense – nearly $400 per resident, about five times as high as the per-capita amount incurred in Dolton.
Maybe the City of Big Shoulders can shoulder all this debt, and interest expense.