I recently received a report prepared by the city finance director that answers a lot of the fiscal questions concerning the state of Oak Harbor’s finances and the need for a declaration of a fiscal emergency.
With the City Council declaring a “fiscal emergency” one of the first actions besides reducing the amount the Mayor and his staff can spend without City Council authorization was the creation by the Council of a special “stabilization account” that established a minimum reserve of $3,000,000.00 or 25% of the the general budget whichever is greater.
Reading the report by the city finance director it appears that Oak Harbor is already above the 25% limit of the new stabilization account, currently the projected reserve balance at the end of the year will be 25.8871% of the general fund budget and the ending balance will be $3,259,056 which shows both figures above the limits set by the Council for the stabilization account. The question does come up with our city finances in such good condition what was the purpose for the declaration of a fiscal emergency? Politics or was there a true need?
From this report it appears that our city Finance Director is certainly on top of the issue and has not taken the drop in revenue lightly. He has correctly identified the problems and taken those problems into account in our budget processes.
This report certainly brings into question the need for the declaration of a fiscal emergency and the ensueing hamstringing of our Mayor and his staff by reducing his spending power. We need to question the City Council as to whether this “fiscal emergency” is a true emergency or is it as suspected just another attempt by the council to hamstring our new mayor and generate political controversy.
I have included the complete report by the city Finance Director below. I am not a financial wizard by any stretch of the imagination so if anyone sees something that I have missed please point it out in the comments below.
From: Doug Merriman, Finance Director
RE: Fiscal position of City at June 30, 2012
Recently, City Council voted to place the City under a “fiscal emergency”, and have implemented certain limitations on purchasing, spending, and general fund reserves. Accordingly, I have been asked to prepare a description of the current financial position of the City. The following discussion addresses the City’s General Fund financial position, in terms of revenues, expenditures, and reserve dynamics, as the General Fund is the primary fund affecting the overall operational function of most non-enterprise type municipal services.
Since 2008, the City has been experiencing revenue challenges due to the significant decline in sales tax revenues. Annual sales tax revenues peaked during 2007-2008, reaching slightly over $3,000,000 per year. Since that time, sales tax revenues have fallen approximately $500,000, or 15%, over the last 3-4 years, with approximately half of this $500,000 decrease has occurring from November 2011 through June of 2012. Accordingly, 2012 will end with sales tax revenues falling about $250,000 below the 2012 budgeted estimate. In addition, the State of Washington has announced that no liquor excise taxes will be distributed to cities beginning July 1, 2012 through June 30, 2013. The effect of this change is a loss of $54,000 in liquor excise tax revenues in both 2012 and 2013. This $54,000 annual reduction in revenues, combined with the unbudgeted $250,000 reduction in sales tax revenues, represents a 2.41% decrease in total General Fund Revenues for 2012. Looking ahead, the 2.41% decline in General Fund revenues, combined with increasing costs at an average 3% inflation rate result in a 5.41% mismatch of revenue and expenditure growth. This mismatch, if unchecked, would most likely result in a General Fund $680,000 to $700,000 imbalance as we begin to prepare the 2013 General Fund Budget, subject to any other fiscal environment changes occurring before 12/31/2012. Unfortunately, all other sources of revenue are experiencing little or no growth that could offset some of the tax revenue shortfall.
As of June 30, 2012, General Fund expenditures for the year are at 54.22% of the total 2012 adopted budget. Theoretically, expenditures should be at or near 50% at June 30th. A review of our spending trends points to the one-time cost impacts of staffing adjustments in the General Fund (severance payments, recruiting costs, leave bank payouts, and interim appointment costs). From a budgetary perspective, the projected costs of these adjustments, net of reserves used for fund leave bank payouts, is approximately 2.9% of the General Fund Budget. If one subtracts the percentage impact of these onetime expenditures, total expenditures for the General Fund are approximately 51.32% of the total annual budget as of 6/30/2012, which is within an acceptable range. All other expenditures are tracking as projected. Looking ahead, the expenditure areas containing unknown variables are the cost of insurance, healthcare, and potential labor costs due to union bargaining agreements.
The City has diligently worked to maintain adequate reserves for the last several years. For the last approximately 3 years, the City has accumulated and held General Fund Reserves in excess of 31% through strict budget control procedures and strategic financial planning. During 2010-2011 discussions on the fiscal environment, Finance presented information to Council reflecting an erosion of reserves due to the combined impact of the economic downturn and inflation – with reserves projected to be reduced to the City’s minimum fund balance reserve of 15% in approximately 4-5 years from that date if revenue and expenditure budget levels remained static. This 15% minimum fund balance was the adopted minimum in place at that time. This projected 4-5 year timeline will be accelerated if the reduction in sales tax and the elimination of liquor excise taxes continue into the near future.
A projection of General Fund Reserves at 12/31/2012 is calculated as follows:
Projected Reserves as of 12/31/2012:
Total Unassigned Assets Available for Appropriation – 6/30/2012: $4,670,578
Total Assigned Assets Available for Appropriation – 6/30/2012: 1,390,238
Projected Revenues July – December 4,024,510
Projected Expenditures July-December (6,826,270)
Projected Reserves 12/31/2012: $3,259,056
2012 Budgeted Expenditures $12,589,491
Projected 12/31/2012 Reserves as a % of Annual Budget 25.8871%
Potential Margin of Variance: +/- 1.1915%
Our 2012 Budget projected an ending fund balance of $3,081,086, which is less than our current projection for the end of the year. Even with the impacts of lower revenues, and unanticipated separation costs, the net softening effect of other dynamics such as cost savings of vacant positions, may minimize the net impact of these issues on the balance of the 12/31/2012 General Fund reserve. Please note that this end of the year project is at 25.8871% – nearly at the 25% Stabilization arrangement balance recently set by Council.
Overall, the City is facing the same economic challenges all cities in Washington are experiencing at this time. Reduced sales tax revenues, and the Governor’s decision to cancel liquor excise tax distributions have added new and significant challenges to our environment as we begin our 2013-2014 budget process. Please note the $680,000-$700,000 revenue/expenditure imbalance discussed in the revenue section above. This amount, at a minimum, will be close to our initial General Fund imbalance for 2013. The current economic dynamics of reduced revenues being unable to keep pace with existing costs will be with us for some time into the future. Continued monitoring of our fiscal environment, combined with flexibility in our approach to the provision of services, should be considered to sustain our level of services as close to the current level as possible.