Inconvenient Truths
By Stephen Hoff
Introduction
In this installment, I will walk you through the four competing versions of a new Charlestown Fund Balance Policy. How many of these will actually be on the agenda won’t be decided until the Council holds its agenda meeting on January 5th.
Charlestown collects significantly more money every year than it budgets, but rather than lower taxes, the Town Council, controlled by the Charlestown Citizens Alliance (CCA), chooses to let our Unassigned Fund Balance grow, as well as other surplus pockets of cash inside and outside the General Fund. At issue are four very different views about how to deal with YOUR money that range from the sensible to the ridiculous.
Here is my best effort to help you understand the differences in the four proposals so you can decide for yourself and hopefully weigh in.
Here we go.
There are a number of Inconvenient Truths related to the Budget Commission’s Proposed Fund Balance Policy. The key ones are:
First, the Town
Council has actually received four different proposals for Charlestown’s
first-ever Fund Balance Policy (FBP).
 |
| Council President Carney's proposal was not even considered by the Budget Commission |
1. Council President Carney’s Fund Balance Policy Draft in October
2019
2. Town’s Staff Fund Balance Policy Draft sometime in 2020
3. Government Finance Officers’ Association (GFOA) Risk-Based Analysis
& Stress Test of General Fund Reserve Requirements in May 2021
4. Budget Commission’s Fund Balance Policy Draft in December 2021
Second, before adopting Charlestown’s first Fund Balance Policy, Council and Budget Commission members as well as taxpayers need to examine the major differences in the assumptions made in these four documents, because some of them will lead to higher taxation than needed.
Third, the Budget Commission is wrong when it presumes its version of a Fund Balance Policy is consistent with the GFOA’s Risk Management analysis and that it vindicates their past financial policies and practices.
Fourth, the
Budget Commission provided no opportunity for public comment prior to formally
presenting their written fund balance policy draft to the Town Council for
approval. It was presented by Dick Sartor to the commission and adopted by the
Budget Commission members with less than 25 minutes of internal discussion
without making a single change.
This makes one wonder how often it may have
been previously discussed outside the public arena since their only previous
meeting was in June, six months earlier where consensus had not been
demonstrated.
At this point, we don’t know if the CCA majority on the Council will simply vote on the commission’s proposal or give the issue the care and attention, not to mention public involvement, it deserves.
How the four proposals differ
How much cash do the proposals recommend Charlestown keep in reserve?
2. Town staff proposes neither a maximum nor minimum. This is surprising and concerning, because our professional staff should have had an opinion long before the Budget Commission weighed in on this very important issue. It’s their job and they should have done it even if it carried some political risk for them, such as contradicting the CCA’s laissez-faire attitude.
3. The GFOA analysis recommends we hold a minimum of 14.3% of our budget - ($4.3 million based on the current budget). It leaves the maximum level up to the town based on the town’s confidence it has enough cash on hand to handle reasonably foreseeable risks.
When the GFOA presented its Report to the commission on May 19, 2021, the GFOA manager of the study stated that the Town’s most efficient level of confidence was the range between 85% to 90% of budgeted expenditures or $5.5 million to $7.8 million (See video at time interval 37:30).
The GFOA pointed out that moving past a 90% confidence level to just over a 91% confidence level is increasingly unjustified on a cost benefit basis. For instance, increasing the confidence level to just over 91% from 90% would require an additional cash reserve of $1.2 million or $9.0 million. Remember: the Fund Balance is YOUR tax money. Is a 1% increase in confidence worth a permanent increase of $1.2million in taxes?
Also note that this $9 million is still below the BC’s recommendation of $10 million.
The "non-risk factor"
The Budget Commission is including a non-risk management factor that the GFOA did not itself adopt in its core recommendation.
The risk management factors that the GFOA considered were the types that actuaries consider such as the likelihood of unusual and unexpected events such as hurricanes, floods, recessions, and sea level rise to name just a few.
The Budget Commission appears to be including at least $1 million of reserves to insure that it can always pay cash for large capital projects instead of bonding them.
 |
| An example: We are paying cash for much needed renovation and expansion of the town's animal shelter rather than funding it with a bond. |
For at least the past six years, the Town continued to accumulate un-budgeted surpluses annually (averaging $1 million per year) in order to pay cash for large capital projects instead of bonding them.
The GFOA ultimately decided to allow Charlestown to continue doing so, apparently because the BC wanted to continue doing what it had been doing, and after all the Town was paying $50,000 for their opinion.
This practice of paying cash for long-lasting capital projects has been sold to taxpayers as prudent fiscal policy, except that it’s not. The GFOA recommends a Debt Management Policy as a best practice just as it recommends a Fund Balance Policy as a best practice, surprisingly which neither have yet been adopted by the town. The GFOA states:
“Utilizing municipal bonds to fund public infrastructure is a valuable strategy for governments to spread the cost of significant long term assets over their useful life. It is also important to involve all stakeholders in the decision to issue debt.”
Why didn’t the Budget Commission or the Council include those stakeholders in these decisions since they are the ones actually paying the taxes?
The GFOA included the “allowance” for Charlestown to continue to use cash instead of bonds only because that has been Charlestown’s peculiar preference. However, it should be stressed that this “allowance” is not a GFOA recommendation, but only an option if the Town chooses to tax residents in advance to maintain it.
Page 7 of the GFOA’s proposal states:
“The Town might wish to use reserves for purposes other than mitigating risks - for example building a capital project using cash financing” as opposed to bonding. Adopting this option in the BC’s FBP would actually be a Debt Policy decision by the Town and not a FB Policy decision. It makes absolutely no sense to adopt a Debt Management Policy disguised as a Fund Balance Policy just to perpetuate a previously unexamined past practice.
How do the four
proposals take into account excess cash reserves held in OTHER accounts such as
legal
reserves, educational reserves, etc.?
1. President Carney’s FBP would keep 100% of the $7.5 million in the Unassigned Fund Balance (a.k.a. surplus) of the General Fund.
Her policy states:
“All amounts approved for expenditure by referendum and Transferred Out of the General Fund to Other Funds for various stated purposes must be returned to the General Fund if those amounts are no longer required for the reasons that they were originally appropriated.”
Carney’s proposal would simply consolidate all the Town’s surplus cash in the General Fund’s Fund Balance. Total Reserves would then be used only for unexpected significant contingencies such as failed annual budgets, catastrophic weather events, and other unusual occurrences including the risk of rising sea levels, e.g. emergencies. It is no surprise why the CCA “disappeared” President Carney’s FBP.
Further, all town
surplus funds would as a result be made accessible and transparent. Currently,
taxpayers have to file an open records request and then be charged exorbitant
amounts just to see how much surplus the Town has in its various pockets in its
various Funds, assuming they know where to look.
What’s not to like about the simplicity and elegance of this solution unless one has ulterior motives?
2. Town staff’s Fund Balance Policy would keep identified cash in the Unassigned Fund Balance of the General Fund but doesn’t discuss what to do with the other possible pockets of cash inside or outside the GF such as counting them toward the maximum surplus amount ultimately determined by the Council to maintain.
3. The GFOA focused its analysis only on the General Fund. GFOA did acknowledge that the ultimate amount required by the Town could be divided into more than one specific location if the Town desired. Unfortunately, this would reduce transparency and make it harder for taxpayers to keep track of all the pockets of cash .
4. The Budget Commission’s proposal would turn the status quo into
formal policy without addressing all the problems I’ve identified above. It
also does not discuss how their recommended number would be adjusted, if at
all, if there are other pockets of cash previously set aside to address the
same risk factors that the GFOA proposal addressed.
How
much cash could be available for appropriation in each of the four Fund Balance
plans?
The amount of cash that could be appropriated would be the difference between the bottom of the range in a FBP and the maximum total amount of cash approved in the same FBP document.
There would be no change in appropriation procedures that call for a taxpayer referendum for any new capital project costing less than $1 million. If over $1 million the capital project would be required to be presented as a separate warrant item for taxpayer approval.
In the Town’s FBP, the cash available is
unknown because the amounts are not specified.
The GFOA’s analysis doesn’t apply.
In the Budget Commission’s proposal, the cash available could be at least $3 million ($10 million less $7 million), and perhaps more if any new un-budgeted surplus falling to FB causes UFB to exceed $10 million.
The commission states, “Any portion of the
year-end operating surplus that contributes to the general fund unassigned fund
balance in excess of the minimum target range will be deemed available
for allocation to:
Replenish any other established assigned, committed, or restricted funds
Transfer to capital project funds for the capital improvement program
and/or deferred maintenance needs
Offset one-time shortfalls anticipated in the general fund operating budget”
There is no provision to possibly return any surplus to
taxpayers. In fact, it is basically
forbidden by stating that the use of UFB in excess of target levels shall not
normally be applied to recurring annual operating expenditures.
The language above doesn’t discuss cash “available for appropriations” from UFB, but instead uses the term cash “available for allocation”. Does this new language
remove the taxpayers’ right to approve expenditures at a budget referendum or does the language allow for the TC to now approve the cash for
allocation by majority vote?
1. To put this in historical terms, could this allow the TC to move $3
million plus to a generic Construction Fund without taxpayer approval? Out of sight, out
of mind, and perhaps out of taxpayer control?
2. This new language changes and turns
on its head the concept of Unassigned Fund Balance being only for
“emergencies”. If this language is allowed to stand, and
this “allocation” is
made, it will soon follow that tax rates will be increased or remain high. That is because cash will be reduced in UFB
in the GF once it is reclassified, renamed, and/or Transferred Out of the GF
leaving a pocket no longer filled to its maximum. Voids and vacuums
will always be filled.
How does each proposal plan handle all the cash scattered into “Other Funds” so surpluses and appropriations can become more transparent and accountable to the voters?
1. President Carney’s FBP specifically addresses this issue. Anything in excess of $7.5 million would be used to lower the tax rate in the following fiscal year and thus not be available for other uses.” It also requires any surpluses in any other funds outside the GF to be returned to the GF, if not prohibited by Fund restrictions, if it is no longer needed for the purpose for which it was originally appropriated.
2. Town’s Staff FBP does not address this issue.
3. The GFOA’s document does not address this issue.
4. The BC’s FBP does not address this issue.
Once an annual budget is approved, the TC by majority vote can move cash out of the GF to Other Funds, as long as long as the total GF budget is not violated, and authorize its expenditure in any way it sees fit.
Recently, the Town Council took the position that it by majority vote can re-purpose cash outside the GF for uses other than those approved by taxpayers at referendum, such as $415,000 to cover the 100% unexpected increase in the Animal Control Building. By doing so, there is now an added temptation for the TC to prefer surplus cash to be moved out of the GF to Other Funds, thus giving the TC total control of spending decisions that no longer would be required to be approved by taxpayers at a referendum.
That is why there needs to be a mechanism in the Town’s 1st Fund Balance Policy that requires unneeded surplus cash to be returned to the GF. That would allow taxpayers to regain their right to control spending through the budget process or by ballot measure. By allowing the Town Council to re-purpose how our budgeted cash is to be spent without taxpayer approval we give them the incentive to continue setting taxes at higher levels than necessary.
As we’ve seen, high surpluses get used as play money by the Council for pet projects rather than taxpayer-approved projects.
What is the core of GFOA’s Risk Based
Analysis?
Not known: why the GFOA has two categories (#1 and #3) for “Extreme Events.”
The GFOA analysis also analyzes (4) Secondary Risk Factors, i.e. leverage, claims on Fund Balance, expenditure spikes, growth, microbursts, and earthquakes. However, these risks are not included in their core model recommendation because of their deemed low probability of occurrence.
The GFOA analysis also discussed but did not include in their Core Risk Analysis (5) Risk Factors Not Included In Report, i.e. unknown unknowns, non-historical data, and allowing reserves to be used for purposes other than mitigating risks such as building a capital project using cash financing.
It is the use of this option that appears to have caused the discrepancy between the GFOA’s core recommendation and the BC’s claim that its proposed fund balance policy is fully supported by GFOA’s recommendation.
The GFOA then determined that an:
85% confidence level requires $5.5 million equal to 18.2% of the Unassigned Fund Balance (UFB)
90% confidence level requires $7.8 million equal to 25.8% of UFB (an increase of $2.3 million in reserves raises the confidence level by 5.6%)
91%+ confidence level requires $9.0 million
equal to 29.8% of UFB which the GFOA considers to be questionable when
considering its cost/benefit
What types of expenditures should our
total cash reserve be used for?
|
Proposal |
Type of |
|
Deb Carney
proposal |
Emergencies |
|
Staff proposal |
Emergencies
related to economic uncertainty, extreme events and working capital issues
(emergencies) |
|
GFOA core
recommendations |
Emergencies |
|
GFOA Core plus
allowance for Budget Commission preferences |
Emergencies,
surplus accumulations and capital projects |
|
Budget
Commission draft |
Emergencies,
surplus accumulations and capital projects |
What specific language concerns does the Budget Commission’s Fund Balance Policy draft raise?
.JPG) |
| Richard Sartor of the Charlestown Budget Commission (photo by Will Collette) |
The Commission draft seems intent on adding non-risk management variables that help justify its past financial practice of over-taxing residents annually and using the taxes raised to pay cash for large capital projects instead of bonding them. This additional focus by the BC will cost taxpayers several million dollars more in UFB retention than would otherwise be required.
The BC FBP specifically states that any annual
audited GF surplus that normally would
automatically fall to UFB increasing it beyond the Minimum amount
required to be maintained, would be deemed available
for allocation and could therefore be “repurposed” by the TC either within
the GF or outside the GF, including ultimate allocation to capital projects not
as yet approved by taxpayers at referendum (think Community Center on steroids).
This, coupled with the BC’s statement that the
use of UFB in excess of target levels shall not normally be applied to
recurring annual operating expenditures virtually assures that any future
surplus could not be used to reduce a future tax levy. The Town has recorded a consistent average of
$1 million surplus each of the past 7 years. In 2019, the CCA wanted to take $3 million from Charlestown's
budget to build a "community center" that was not needed and for
which there were no plans, designs or even location. This led to voters
rejecting the entire town budget for the first time in years.
This would not be expected to change if the
above language is adopted and thereby sanctioned by the Town Council. This represents
one example of how the Town’s UFB will be used independent of “emergency”
situations examined in the GFOA’s Risk Management analysis.
By annually transferring un-budgeted surplus’ out of the GF’s UFB into other pockets, the more possible taxation that can occur. That is because the total surplus cash available in all Town pockets could easily exceed $10 million because it would be considerably less visible without any prohibiting language.
Changing the allowance for repurposing surplus cash available for allocation to amounts exceeding the Maximum instead of the Minimum amount would be a constructive change to the currently proposed language if an alternative is required, and there is no consensus that all surplus reserves be maintained in the GF’s UFB.
The BC FBP also specifically states that the Town shall also consider financial resources available in other funds in assessing the adequacy of unassigned Fund Balance in the General Fund.
This is a good step, but falls short of stating that their $7 million to $10 million proposed range of cash to maintain is not just for the UFB of the GF, but would be reduced by the other of pockets of cash that are also set aside for the same risks analyzed in the GFOA’s risk management document, both in the GF and those Other Funds outside the GF.
This additional step would not be required if the UFB in the GF were the only designated location to maintain “emergency” reserves. This would eliminate a great deal of confusion and debate as to what the true number was.
The BC FBP also specifically states, “The Town will strive to maintain an unassigned fund balance in an amount equal to 23% to 33% of its annual operating expenditures and a cumulative probability of adequacy of 90+%.”
However, it should be noted that the
percentage of confidence determined by the GFOA to be 90+% confident is 29.8% of expenditures and not 33% of
expenditures or $9 million, a difference of $960,000 (See Page 6 of the GFOA
analysis).
The BC FBP also specifically states, “Year-end surpluses are an appropriate source for replenishing Fund Balance.”
Yes, they can be, up to a point, but when they are systemically large there is a problem. Over-taxation is not fiction. It can and does exist.
Adopting the above statement eliminates the need for the BC to use a sharp pencil when they are recommending a budget, and it allows the BC to feel justified in doing so.
If the Town needs to increase UFB to be in a desired place within a desired range, then create an unbalanced budget with more revenues (taxes) than expenditures showing that there is reason why a surplus needs to be budgeted and taxed. The taxpayers did just that in reverse a few years ago when $854,000 was brought back into the General Fund after the budget had been voted down at referendum.
While the GFOA compared us to other Towns with similar
demographics, neither they or the BC ever listed even 1 town that had approved
a Fund Balance policy authorizing a 33% level, much less 3 or more towns. Nor did they
provide an example of another similar Town in demographics to Charlestown that
opted to allow un-budgeted surpluses to replace bonding for large capital
projects. In fact, the GFOA never even mentioned 33% in
its risk analysis document.
Despite the often-repeated claim that
Charlestown’s tax rates are very low, I hope I’ve made it clear that they can
and should be lower still. Simply put, our town leaders are holding on to far
more surplus cash than we need to meet foreseeable needs – and that’s OUR
money, and OUR money needs your voice.
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.
