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Berlin mayor, council weigh proposed reserve fund policy

By Ally Lanasa, Staff Writer

Jeff Fleetwood

(July 30, 2020) The Berlin Mayor and Council discussed a proposed reserve policy and a memorandum to reduce the sewer fund balance owed to the general fund during the Monday meeting.

Town Administrator Jeff Fleetwood and Finance Director Natalie Saleh presented a draft of a resolution that establishes a general fund reserve policy.

The proposed reserve policy would not affect the tax rate.

In compliance with Governmental Accounting Standards, the town’s general fund must contain reserves, which are classified as restricted fund balance, committed fund balance, assigned fund balance or unassigned fund balance.

The general fund balance as of June 30, 2019 was $5,163,000, which was divided into $3,431,000 of non-spendable funds (due from other funds), $4,000 of restricted funds (slots revenues), $921,000 of committed impact fees and $791,000 of assigned funds and $16,000 of unassigned (spendable) funds.

Councilman Zackery Tyndall expressed concern about the lack of unassigned funds.

“All we really have, if an issue that’s not budgeted came up, all we really have is $16,000,” Tyndall said. “All we have is $16,000 without going into things that are already committed, and that is factual.”

Fleetwood agreed.

“We’re not in as good of a financial position as we need to be,” Tyndall said.

The resolution would establish minimum fund balances that the Town of Berlin should maintain.

According to the proposed document, the restricted fund balance should be maintained as required by grantors, bondholders and higher levels of government.

As for committed funds, the draft establishes an Employee Healthcare Reserve no less than $300,000 to mitigate the increase in employee health care costs.

“They’re committed in the sense that they have to be used for appropriate services,” said Deputy Town Administrator Mary Bohlen. “They can’t just be shuffled into the general fund and become part of the overall budget. I just wanted to clarify that.”

Saleh added that they are not readily available funds.

“Impact fees were established here many years ago, so that we have income that can then be used to offset impacts from growth and development,” Mayor Gee Williams said.

“I suspect in the next year or two we’re going to have some significant needs for impact fees because of the developments and growth we have experienced,” he continued.

The unassigned fund balance should consist “of all amounts not otherwise expended, encumbered or reserved.”

The Reserve Categories and Target Balances section of the draft states, “The Town shall transfer $100,000 per year from unassigned fund balance to obtain minimum fund balances according to the requirements and in order set forth in this section.”

First, a budget stabilization reserve should be established to continue the town’s general fund operations for a three-month period. Secondly, a capital reserve of $100,000 should be dedicated “to pay for unplanned but essential capital projects.” Both funds would be classified as assigned fund balance.

Thirdly, a debt reduction reserve should be established to pay Berlin’s debt service (principal plus interest) on any outstanding, long term debt instruments for one year. Lastly, a disaster response and recovery reserve of $250,000 should be allocated to pay Berlin’s cost of emergency repairs to or replacements of parts of the town’s infrastructure damaged in any natural or man-made disaster, or to prevent further damage to life or property. Both funds would be designated as committed fund balance.

While reviewing the 2020 fiscal year general fund balance and the projected general fund balance, Councilman Dean Burrell asked Saleh to describe the differences between non-spendable, restricted, committed and assigned funds.

“[Non-spendable amount is] the interfund transfers, so basically it’s a sewer fund what owes back to the general fund,” Saleh said.

The mayor added that it is money loaned from the general fund to a utility fund that over time the utility fund will pay back to the general fund. It is simply money the town owes itself.

“Then, we have restricted,” Saleh said. “Basically, [they are] restricted by somebody else outside of mayor and council.”

Currently, the only restricted funds are slots revenues because they must be spent for specific purposes, Saleh said.

Williams said the slot revenue each year is allocated to paying off the debt of the new police department.

“Assigned monies, which could be spent by you just simply authorizing to spend them, and they are health insurance and community center as of today,” Saleh said.

Tyndall asked for a summary of the current general fund before responding to departmental requests. He also expressed concern about adopting a reserve policy with set minimum fund balances. Instead, he suggests a simpler model that is more easily comprehendible that follows the three-month period practice.

“If we enact a policy about reserves with these goals and benchmarks in place, when something gets below that level, we have an obligation by the policy we adopt to refill that bucket,” Tyndall said. “And what I’m asking is that if we have that information at the start of the budget, we know what that pot of money needs to be refilled at and it helps us make good decisions, I think.”

Saleh said the reserve policy is a goal to be pursued.

“What we’re trying to do here is establish a policy where, when things go bump in the night, we know we have the reserves on hand,” Williams said.

It will be a gradual process of putting money into the reserves over several fiscal years, Saleh added.

“There are things you can predict and there are things you cannot, but you don’t stop planning for future and investing in the future of the town just because life can happen,” Williams said.

The town aims to make its reserves stronger.

“We have to set achievable goals, I think,” Tyndall said. “And I really think that if we were really good and in a decent financial position to be able to fill these different buckets that are recommended, it would be great. But we’re not.”

The current mayor and council cannot legally bind future councils to the reserve policy.

“So, I mean it’s a goal. It really is. We can call it whatever we want, but it’s a goal,” Tyndall said.

Along with the proposed reserve policy, Saleh and Fleetwood suggested a repayment plan for the money the sewer fund borrowed from the general fund.

The sewer fund balance due to the general fund as of June 30, 2019, which was the last day of the fiscal year, is $3.4 million.

The sewer fund is now operationally self-sustaining.

Sewer and water rates were raised based on projections to cover the operational side of expense. The plan is not to increase those rates again.

“The plan is to reduce that note and have a schedule to repay, let’s say $150,000 a year, back to general fund, so we can basically commit this money or assign the money on the general fund as a repayment back and start building a little stronger reserve of the general fund,” Saleh said.

Saleh and Fleetwood recommend allocating the remainder of the sewer fund amount due to the general fund as an interfund loan to the general fund, causing an established and formal repayment plan, establishing an attainable 10-year repayment schedule to repay the interfund loan to the general fund, and include payments in the annual budget as debt service.

“If we’re using that money to pay ourselves back, when we were presented the report with adjusting the rates, that was just to offset operational costs, which you’ve mentioned, but it does not take into consideration the capital expense and the capital improvements that need to be done,” Tyndall said. “If we’re paying ourselves back at a rate of, let’s just use $100,000, couldn’t that money be better served in investing in the capital things that truly need to be addressed?”

The mayor said the discussion on Monday was mainly to figure out what strategy to pursue regarding the money the utility funds owe to the general fund.

“The utilities are supposed to be self-sufficient and when they aren’t, then they have to be subsidized temporarily,” Williams said. “Then, we go back to adjust the rates and get them back in line and then we go forward. That’s what tonight’s critical decision will be.”

The mayor and council could decide to write it completely off or half of it off for $1.7 million.

“I think better off is having the scheduled repayments, so then we can look at [the] proposed structure of general fund and assign that [$100,000 or $150,000] what would be available and assign to something on the general fund as a repayment plan,” Saleh said.

For several years, there has been a constant deficit in sewer funds.

Burrell asked what to do to try to mitigate a projected deficit and to not have to borrow from the general fund.

The mayor said we need to know projected deficits during the budget process.

“Yes, we need these policies and procedures and this understanding of this plan going forward, but we also need an operational part of that that’s going to support this,” Burrell said. “So, if we’re going to have a plan, it needs to be a complete plan with these policies in place, and this look toward the future. But’s it’s going to take day-to-day operations to get us there.”

Williams followed, saying the quarterly reports need to include the projected deficits of the reserves and the council has to consider how much of the debt that has been accumulated should be written off.

“We’re not in some sort of financial crisis,” the mayor said. “That’s one thing people need to understand about all this. What we’re trying to do is come up with a policy that we can predict in each budget what the reserves will look like at the end of the year and not find out in the audit months later.”

Saleh said the next step is to work on a sewer plan.

The mayor and council will further discuss the general fund policies at upcoming meetings.