Draft audit rips county budgets

By HEATHER NELLIS

heather.nellis@recordernews.com

FONDA — An unofficial draft of the state audit of Montgomery County’s finances says the board of supervisors hasn’t adopted realistic budgets that are structurally balanced in the past three years.

Instead, the board relies on appropriating fund balance, a non-recurring revenue, to finance recurring expenditures, the state comptroller’s office says in the draft, a copy of which was obtained Tuesday night. 

It notes the county incurred operating deficits in the past two of three years.

“The county’s declining financial condition is the result of poor budgeting and financial management practices, and the board’s failure to develop and use long-term financial plans,” the draft says. 

The audit is based on the period from Jan. 1, 2010, to May 31 of this year. 

In addition to the use of fund balance and the operating deficits, it says the county’s financial condition may be further affected by several factors, including the negotiation of expired collective bargaining agreements, and recent changes to the county’s health insurance. 

“The county has not developed plans to address the potential financial repercussions of these activities,” the audit says.

A memo indicates the draft was released to supervisors Sept. 4. The comptroller’s office website says once the draft is provided to local officials, they have 30 days to respond. 

The site says the board chairman has to sign the response, and should tell the office the board’s position concerning the findings, such as whether officials agree or disagree with what was reported.

The audit looks at three areas: fund balance, cash flow and contingency appropriation.

Fund balance

The difference between revenues and expenditures accumulated over time. The key measure of the county’s financial condition is its level of fund balance, the comptroller’s office says.

The draft report discussed the county’s fund balance on two terms : its decline and its use.

• On the decline, the draft audit says the county’s total fund balance in the general fund decreased 41 percent between January 2010 and December 2012. It dropped from $19.2 million to $11.4 million in that time period.

Officials expect the total fund balance (which includes restricted accounts and surplus reserves) will decrease to $9.5 million by the end of the year, according to the draft audit.

“Fund balance declined primarily because the county relied on the routine appropriation of fund balance to help finance the next year’s budgeted appropriations, causing the county to incur operating deficits in 2010 and 2011, which further eroded the fund balance,” the draft says.

Those deficits were identified as $4.2 million in 2010 and roughly $4.3 million in 2011. In 2012, a $2 million operating surplus was realized, but “the fund balance was decreased by $1.3 million to adjust for a reduction in grant proceeds the county had received in prior years.”

The report says there are issues in the reported balance of uncollected taxes from city of Amsterdam residents; some of the bills are at least 30 years old. Once those are written off, it will likely further decrease the fund balance, the draft says.

The county reported a receivable balance of more than $2.7 million as of Dec. 31, 2012, for county taxes on city residents. County taxes on city residents are collected by the city and paid to the county. 

“We reviewed the composition of this receivable and found than more than $500,000 of the balance is for taxes levied over 10 years ago,” the audit draft says, noting more specifically, the account includes taxes not received for amounts levied as far back as 1982. 

Officials reportedly discussed the balance with county Treasurer Shawn Bowerman, “who agreed that some of these taxes are likely uncollectable, and should be written off. Any amounts written off will further decrease fund balance.”

• On fund balance use, the comptroller’s office says it’s considered a “one-shot” funding source, but it’s an “acceptable” practice when a government has accumulated an adequate level of surplus fund balance.

In the past four years, the board used between $1.9 million and $7.9 million of fund balance to finance annual operations. County officials reportedly told the comptroller’s office it was to minimize real property taxes, which the comptroller’s office deemed a “laudable” effort.

“However, if the county continues this practice, it may deplete fund balance entirely, and be forced to increase revenues, such as real property taxes, or decrease appropriations, which could reduce services,” the draft report says. “Appropriating fund balance without a plan is not prudent financial management and leaves the board without a clear picture of long-term repercussions.”

Cash flow

What the comptroller’s office identifies as an “essential component” of financial condition in ensuring sufficient cash resources are available to meet obligations. At a minimum, the office says a county should have enough residual cash on hand at any time to pay its bills, and meet payroll over a 30- to 60-day period.

Montgomery County, however, had less than 30 days of average expenditures in average cash at the beginning of 2011, 2012 and 2013, the draft report says.

Cash declined by more than 50 percent from $14.5 million on Jan. 1, 2010 — more than twice the average monthly expenditures that year — to $6.3 million as of Jan. 1, 2013. That’s $369,000 less than the average monthly expenditures.

The decrease of cash was primarily caused by operating deficits in 2010 and 2011, the draft report says. Such a deficit is planned this year, officials told the comptroller’s office. 

“The board did not consider the cash position of the general fund when they appropriated fund balance in the last four budgets,” the draft says. “During the budget process, the treasurer did not provide the board with cash flow reports, and the board did not request this information.”

Contingency operation

A cushion or safety net for unexpected events, or when budget estimates prove unfavorable, the comptroller’s office says.

In 2010 and 2011, the county’s budgets included $200,000 in contingency accounts, and $150,000 for 2012 and 2013.

Those amounts represent .25 percent of total spending in 2010 and 2011, and less than .2 percent of total spending in 2012 and 2013, “leaving the county with limited flexibility in the event of unforeseen circumstances,” the draft says, later identifying it as an insufficient safeguard.

It has been reported that the county’s $150,000 contingency account for unplanned expenses was emptied by June in spending authorized by the board of supervisors.

That doubled to $300,000 by August.

Bowerman said in August the supervisors have budgeted $150,000 in the contingency account for the past several years, but it was much more in years past.

“If you go back to 2004, they budgeted $800,000 in the contingency account,” Bowerman said in that interview. “But if you look at the past few years, contingency is the first line they jump on to cut, because it’s a place to trim without cutting people or services.”

Bowerman said because of the lesser budgeted amount, the supervisors have tended to empty the contingency account before the end of the year.

“There should be more in that account,” he said. “They’ve burned through it pretty regularly.”

The comptroller’s office also pointed out all four of the county’s collective bargaining agreements have expired, but the 2013 budget doesn’t include provisions for potential increased costs associated with settling new contracts.

“By underfunding the contingency appropriation, the county’s ability to pay any liabilities which may arise from contract negotiations in 2013 will be limited,” the draft audit reads.

The comptroller’s office also warned of the county’s self-insured health insurance plan. The county decreased health insurance appropriations in the 2013 budget by nearly $1 million because claims have tended to cost less than premium equivalents.

The office reportedly found the budgeted amounts to be “reasonable,” but added health insurance claims can be “volatile,” and officials should be prepared to make adjustments.

“Decreased cash balances and the lack of an adequate contingency appropriation restricts the county’s ability to react to external influences such as economic downturns and emergencies,” the audit draft says. 

The report then notes parts of the county were significantly flooded after the comptroller’s office field work.

“The county will incur costs as a result of this, and it is not clear how much, if any, of those costs will be reimbursed by emergency management agencies and/or insurance,” the report says.