By John Kiesewetter
The Cincinnati Enquirer

MONROE - A state audit of city funds was requested by Mayor Michael Morris on Wednesday, the first step in a process that could result in the state declaring a "fiscal emergency."

A team from State Auditor Betty Montgomery's office was asked to review the city's books because of "several deficit fund balances" in 2002, the letter said.

Poor internal controls and accounting practices led to a $3.1-million deficit discovered last spring, resulting in the departures of the city manager and finance director.

Although the city has "taken aggressive action to stabilize those funds" in the past eight months, the letter said, a representative for Montgomery's office had told the city to seek the review.

After the four-to-six week audit, the state could declare a "fiscal emergency," a "fiscal watch," or decide to do nothing, says Eric Hargrove, spokesman for Montgomery.

A "fiscal watch" means the city deficits exceed one-12th of its total general revenue funds. A "fiscal emergency" means deficits exceed one-sixth of general fund revenues, according to Montgomery's Web site.

Under a "fiscal emergency," a two-year oversight commission consisting of state and Monroe officials, and three at-large members, creates a financial recovery plan.

The commission has "widespread authority to review all revenues and expenditures," according to the Web site.

Under a "fiscal watch," the auditor provides technical support to end the financial crisis. "Ultimately, we're trying to help a city reach financial stability," Hardgrove says.

Monroe's financial troubles date to 2000, according to Jay Stewart, acting city finance director. "The negative balances were created - and never caught for three years," he said.

"Since they came to light in March, we've made some cuts and attacked them aggressively. We're financially stable," Steward said. "But if they (auditors) look at the 2002 numbers, it looks like we have a big problem."

City officials have stressed the city had an auditing problem, not a cash problem.

"We're not missing $3 million. It was on paper, this $3 million deficit in police and fire accounts," he said. "We just have to pay ourselves back, and the funds will balance."

The state's review should be completed by late December or early January, as three new City Council members take office.

Since 1979, fiscal emergencies have been declared for 32 Ohio local governments, including Norwood and Lincoln Heights. Lockland has been in a fiscal watch since September, a process Silverton went through from 1997 to 1999.

E-mail jkiesewetter@enquirer.com