Fiscal Distress

When a local government or Ohio school system 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 distress is a legislative tool used to identify financial problems early and provide support to entities in need.

Ohio’s fiscal distress system began in 1979 with the passage of the original municipal fiscal emergency law, created in response to a financial crisis in the city of Cleveland. Since then, financial planning and supervision commissions have helped more than 50 Ohio local governments that were declared to be in fiscal emergency.

In 1996, fiscal emergency protections were extended to counties and townships through a legislative update. House Bill 462 modified the fiscal emergency statute to introduce the "fiscal watch" status, offering an early warning to entities whose finances were nearing emergency levels.

In 2011, House Bill 153 further updated the statute by creating the “fiscal caution” designation. This status helps identify risky financial practices and budget conditions that, if left unaddressed, could lead to a fiscal watch or emergency declaration.

A: Fiscal distress means a local government is having serious money problems. It’s like when someone keeps spending more than they earn, can’t pay their bills, and starts falling behind. The state of Ohio has a system to step in and help before things get worse.

Three Levels of Fiscal Distress in Ohio:

  • 🟡 Fiscal Caution
    • What it means: Early warning signs of financial trouble.
    • Why it happens: The entity was declared unauditable, had significant material weaknesses or violations of Ohio laws, deficit or low year-end balance in general fund or failure to reconcile.
    • What the state does: Sends a warning and asks the entity to fix the problems before they get worse.
  • 🟠 Fiscal Watch
    • What it means: The financial problems are more serious.
    • Why it happens: May be caused by accounts payable more than 30 days past due or more significant deficit funds.
    • What the state does: Requires a financial plan and watches closely to see if the entity can recover on its own.
  • 🔴Fiscal Emergency
    • What it means: The entity is in deep financial trouble and can’t fix it alone.
    • Why it happens: Significant deficit funds, unpaid bills, defaulting on debt or payroll/benefit payments.
    • What the state does: Responsible for the formation of a financial and supervision commission. The commission provides oversight to ensure that the entity prepares a financial recovery plan and that appropriations and spending are consistent with the plan.

In summary:

  • Fiscal Caution = “You’re starting to slip — fix it now.”
  • Fiscal Watch = “You’re in trouble — we’re watching closely.”
  • Fiscal Emergency = “You’re in crisis — we’re stepping in to help.”