The Charlestown Shell Game

It's only money...YOUR money!

By Steve Hoff

Charlestown's current fund balance policy

Historically, Charlestown has never adopted a written policy limiting the amount of cash it could maintain in its bank accounts after paying its annual financial obligations.  It is often referred to as the Town’s emergency reserves.  In the General Fund (GF) this cash is identified as Unassigned Fund Balance (UFB). It is the total accumulated cash after expenditures available for appropriation and is calculated by the auditors annually and reported in the Town’s audited financial statements. 

However, there is also other cash that has been accumulated for emergencies outside the GF that is not labeled UFB that is also available for emergency expenditures.  A good Fund Balance Policy addresses both visible, semi-visible, and invisible pockets of cash that are available for expenditure and have not been or are no longer needed for the purpose for which they may have been initially appropriated should an emergency arise.  

Determining the right balance of cash for a community to maintain for emergencies is always a controversial issue, but it is a necessary conversation that needs to occur, just as a family needs to determine how much cash it should retain for emergencies regardless if it is in a checking account, gold coins in a safe, or in a tin can buried in the back yard.     

Just having more is not a good answer.  And let’s face it, Town governments will always find new ways to spend extra tax revenues that have been collected. 

Too much spare cash burns a hole in your pocket

Think back to 2019 when the Town Council (controlled by the Charlestown Citizens Alliance – CCA) decided it would be a good idea to build a Community Center in Ninigret Park for $3 million since they had so much excess cash from taxes previously raised that they “suddenly” deemed to not be required for emergencies any longer.  Residents obviously had a different opinion and defeated the budget referendum for the project by close to a three to one margin. 

Subsequently, Town Council President Deb Carney recognized the need for Charlestown to adopt a Fund Balance Policy to cap the amount of emergency cash that was justified to maintain, and prevent taxation of residents for projects that had not been specifically approved at referendums by warrant item.   

She didn’t simply make a statement to this effect.  She did her homework and presented a specific Fund Balance Policy and presented it to the Council as a DRAFT for consideration and adoption.  

The CCA majority on the Council evidently had issues with her proposal because it put limits on and made changes to what had been done historically.  The Council then put $50,000 in the budget to hire the Government Finance Officers Association (GFOA) to assist the Town in crafting a FB Policy. 

Without waiting for the GFOA, the CCA Councilors also created its own DRAFT policy and provided it to the GFOA for consideration when it engaged them in a consulting contract.  

However, Deb Carney’s DRAFT policy was not also provided to the GFOA for consideration, nor was it provided to the Budget Commission for consideration.  Not surprisingly, Deb Caney’s proposal and the CCA proposal were very different.  

Subsequently, the Budget Commission (BC) approved a fund balance policy for the Town on December 3rd that has now been recommended for adoption to the Town Council.  While the BC claims that its fund balance policy is supported by the GFOA’s analysis, there are significant and important differences, just as there are significant and important differences between Deb Carney’s FB policy and the Town’s FB policy. 

At present, NO policy and NO limits

Right now, there are NO limits on how much total cash can be stashed away.  That directly affects how much tax you pay, because at present, the CCA-controlled government seeks to put ever-increasing amounts of cash away in various locations that were never ultimately needed for annual Town operating expenses, instead of keeping tax rates lower by returning unneeded cash to taxpayers.   The same situation will continue to occur even if a new FB Policy is adopted with an unrealistically upper end amount required for emergencies.  

The Town Council should more seriously consider the practical effects of the competing proposals that have come forward dealing with our fund balance: Deb Carney’s Draft Fund Balance Policy, the Town’s Draft Fund Balance Policy, the GFOA’s recommendations for Charlestown, and the Budget Commission’s Draft Fund Balance Policy that has now been presented to the TC for consideration.   

It is more critical than ever that taxpayers be fully informed so they can enter into this discussion with their eyes wide open and understand the key issues involved and how each plan deals with them. After all, they are the key stakeholders involved and it is from their pockets that all the cash will flow from.  

Too many "emergency" funds are bad policy

First, there is the issue of how much the Town should justifiably retain for emergencies and whether that amount is in one lump sum or segregated into multiple pockets in multiple Funds.  

If the amount is set too high it will have the same effect as having no Fund Balance Policy at all.  Clearly, the most transparent solution is to keep it in the General Fund where the outside auditor identifies it as Unassigned Fund Balance (UFB) and the total amount is determined by formal accounting standards not affected by any partisan political maneuvering. 

There is no need to spread it around to more than one location if everyone is in agreement of the total amount required and what it has been accumulated for. 

Formally moving any emergency reserves from the Unassigned Fund Balance outside the General Fund would require changing their classification from UFB to some other classification name, and each new name and amount would need to be tracked closely, and that is not easy for taxpayers to do.  

In addition, the control of each new pocket of emergency cash outside the GF would switch to the Council’s discretion as opposed to taxpayers at the Town’s annual budget referendum.   

How much discretion should the Council have?

Second, there is the issue of how wide the emergency cash reserve range should be that the Council has control and discretion over.  As you recall, in 2019 the Council included a $3 million community center in the budget sent to referendum.  

A majority of the electorate didn’t feel that the project was what they wanted, but had to vote the entire budget down in order to stop it from being approved.  Had the project been added as a warrant item, the budget could have been approved independently and judgement passed on the community center separately.  

How much discretion do the taxpayers want to give to the Council in a Fund Balance Policy, i.e. $1 million,  $3 million, $5 million? 

The Shell Game in action

Third, there is the issue of what needs to happen and when if the Town’s total emergency cash reserve is exceeded and a true surplus exists.  

Historically, when there has been a “feeling” that the Town’s emergency cash reserves have become too large, the Council has moved cash from UFB to other locations (pockets) and renamed them.  In these cases, the total cash was not really reduced, but it was simply shuffled around and the surplus just became less visible.  

This was clearly illustrated several years ago when $854,731 was miraculously discovered as no longer needed for emergency use outside the General Fund in multiple locations.  It was then recommended as a major funding source for the Community Center in Ninigret Park.   This amount was subsequently returned to the GF at the request of the taxpayers after the Community Center project was defeated. 

Most recently, the Council used its emergency reserves that it felt were no longer needed to pay $3 million cash for a road that will benefit residents for at least 20 years instead of bonding it and letting future users of the road share in the cost that the current residents were taxed for and paid for without knowing it at the time.  

The Council did essentially the same thing when paying approximately $800,000+ for the new Animal Control Building. The original cost for the building had been previously estimated and funded for $400,000 at referendum.  However, in FY 2021 the Council determined that the cost of the project had more than doubled and more cash was needed. 

Rather than request the additional money in the FY 22 budget and bringing it to public attention, the Council miraculously discovered $415,965 of cash that was no longer needed in the Kings Factory Road Culvert Fund. 

The Council then determined that there was no need to have the Town’s taxpayers approve the additional expense at referendum, and made the decision on their own by majority vote.  I guess one just has to know where to look when cash is needed, because there always seems to be plenty available.  

These 2 cases illustrate vividly why the GFOA recommends a Debt Policy for Town’s just as it recommends a Fund Balance Policy.  

Had Charlestown had a Debt Policy, which we don’t, serious consideration would have been given to bonding the projects mentioned above that would have reduced current taxation in these turbulent times.  Which begs the question of why we don’t have a Debt Policy? 

If a surplus of emergency cash actually exists, then by definition it is not needed for the purposes it was proposed for in the budget approved at referendum. However, residents were nonetheless taxed for it above and beyond what was required for Town operations. In other words, the lack of sound Fund Balance and Debt Policies increase our taxes. 

The Budget Commission’s options for dealing with this situation in their Fund Balance Policy essentially provides only for renaming and moving the cash to other pockets outside the GF where it can be spent.  It has no provision for possibly returning it to the taxpayers.  

You COULD give it back

On the other hand, Deb Carney’s FB Policy returns the cash to taxpayers by reducing the tax rate in the next fiscal year because it is a “surplus” and wasn’t needed in the year it was collected.  

I observed or attended the three Budget Commission meetings addressing the adoption of a FB Policy and read the GFOA’s FB policy document cover to cover on multiple occasions.  I have real concerns about how seriously the above issues were understood much less discussed in the process of developing the BC’s draft FB policy.  In addition NO effort was made to include public comment prior to their issuance of their FB Policy.   There was no public discussion whatsoever of President Carney’s proposed FB policy. 

This important policy adoption consideration demands public input and not just CCA input and not just in a brief segment of a TC meeting where sound bites and bumper sticker slogans seem to prevail.  There is expertise in the community among Charlestown’s residents worth considering even if those contributing residents may not have passed CCA’s vetting requirements to participate.   Since we get the government we deserve, let’s be inclusive and listen to all parties.

Stephen Hoff is a CPA with an MBA in Finance, a former municipal finance director who has prepared municipal budgets, financial statements for audits and has conducted municipal audits. He and his wife have lived full-time in Charlestown since 2008 but have family ties going back to the 50’s.