|  |
 |
|
Squishy Numbers and Moving Targets |
Mike Stoll | 5/12/08
|
|
|
|
|
|
|
|
|
|
On April 28, interim Archuleta County Administrator Greg Schulte addressed a gathering of elected County officials, department heads and members of the public and outlined a proposed Interfund loan to cure deficit balances in several County funds — see my previous Post article, “A Transparent Step in the Right Direction”. The plan at that time was to formally present the proposal to the County Commissioners for their consideration at the May 6 BoCC meeting.
Prior to the May 6 meeting the loan proposal was removed from the agenda. A special meeting was held this past Friday to explain the delay and to clarify the need, as Schulte put it, to harden the data.
The reason for the delay appears to have been caused by some concern about cash flow in the latter part of 2008.
 The circumstance that led to the proposed loan is readily explained. Several County funds ended fiscal year 2007 with deficit balances — in most cases, deficit balances that were several years old. Even though the County pools its cash and has money in the bank, County Treasurer Lois Baker legally cannot allow checks to be written from funds with a deficit balance. That means those funds cannot legally meet their financial obligations. The existence of deficit fund balances also means that the County is out of compliance with Colorado statute. All of which creates a situation that, according to Schulte, needs to be cured quickly.
The proposed cure seems relatively straight forward. Even though the County ended 2007 with deficit fund balances, it also ended the year with net money in the bank. Most of that money resided in the Road Capital Improvement (RCI) Fund. The proposed Interfund loan would loan – not transfer – sufficient money from RCI (approximately $3 million) to cure most of the deficit fund balances. The County would then repay itself (RCI), with interest, over a 20 year period.
Here’s the evident rub that arose. In the Interfund loan proposal, money from the General Fund would also be needed to cure a portion of the fund deficits. This would amount to a $479 thousand “direct hit” to the General Fund. On closer study, it appeared to Schulte and Finance Director Don Warn that it could be conceivable, under certain scenarios, that this hit could ultimately crunch the General Fund with a negative cash flow by November or December of this year.
According to Warn, any uncertainty in estimating revenues – and consequently making cash flow projections – is at least partly a product of the way revenue flows into the County coffers. The bulk of the revenue, from property taxes, arrives in the first half of the year. After June, estimating actual revenue, and the timing of that revenue, becomes less precise.
As Schulte further explained, “the two wild cards” that make the County revenue stream less predictable are sales tax and building permits.
To date, sales tax revenue appears to be tracking historical averages, but there are concerns that the sluggish national economy and rising gasoline prices could put a curb on travel this summer. Fewer visitors would mean less sales tax revenue.
More immediately problematic is that county building permits are lagging well behind 5 year averages. There are few signs that the construction pace will markedly increase over the next few months, and that could mean a shortfall in projected revenues from permits and fees.
All of which led Schulte and Warn to decide to delay making the Interfund loan proposal to the Commissioners until they had an opportunity to scrutinize different cash flow models.
In addressing the possibility of a cash flow crunch in the General Fund late this year Schulte noted, “This potentially could be a problem and we need to disclose it.” He added that it would not be fair to ask the Commissioners to approve the loan with that degree of uncertainty. He indicated that he and Warn met individually with the Commissioners this past week to share various detailed cash flow scenarios with them.
So, if there is some uncertainty that the Interfund loan might create some cash flow problems, why continue to consider the loan? As Schulte reminded those in attendance, the County is currently out of compliance with state statute by carrying deficit fund balances and needs to quickly correct that situation. The Interfund loan offers an expeditious cure.
Given his initial concern, Schulte was still not discouraged. Notwithstanding the two revenue “wild cards,” he noted that the County can exercise control over its expenditures. And to date it has. According to Schulte, County expenditures are running below projections in the current budget, and he commended department heads for doing a good job. The message, Schulte said, will continue to be “scrutinize your expenditures.”
Warn will also be scrutinizing revenues on a weekly basis to continually refine cash flow estimates. By way of example, Schulte noted that as of a week ago he and Warn foresaw the potential for a fairly significant cash flow crunch in the General Fund by November. With the addition of April’s actual accounting numbers later in the week, the estimated November shortfall disappeared and was replaced by a more nominal cash crunch in December.
Schulte did acknowledge that the County may not know if the proposed Interfund loan will create a shortfall in the General Fund until as late as October. “The numbers are squishy,” Schulte said,” because they’ll change every month as we go from projected to actual.”
Schulte’s comment evoked a barely detectable smile from Warn – from which I gathered that “squishy numbers” is not an acceptable finance term. Squishy or not, this seemed to jibe with Warn’s earlier characterization of cash flow projections as a “moving target,” due in part to the uncertainty of some revenue streams and the sometimes out-of-synch timing of revenues with expenditures.
County Attorney Teresa Williams was in attendance, and she engaged in a bit of scrutiny herself. Addressing Warn, she said, “Look me in the eye, Don. Do you feel comfortable, absolutely, positively comfortable with your [cash flow] projections?” To which Warn responded, “I’m as comfortable as I can be, with the data I have.” Williams’ retort, “That sounds like a legal answer” provoked some genuine laughter from those in attendance.
Following an aside about the language of attorneys and accountants, Warn added, “Based on my assumptions with how I came up with projecting the revenues and expenditures, yes, I’m comfortable with the numbers I’ve been able to generate. If I wasn’t, I wouldn’t have given them to Greg [Schulte].”
Schulte followed Warn’s comments by expressing confidence that based on their reexamination of the data and consideration of various revenue and expenditure models, the Interfund loan remains the best option to cure the deficit fund balances now. Schulte concluded, “We’ve got a good basis for confidence … we think it’s manageable.”
An audience member asked if it might not make more sense to consider a general obligation bond to cover the deficit, rather than loan money from the RCI fund. Warn explained that bonds require voter approval. The earliest that could happen would be the general election in November.
Asked what the downside would be to issuing bonds, Warn replied, “There is no downside. The problem is timing. We have to fix this problem [deficit fund balances] now because Lois [Baker] has told us that she is going to stop writing checks on these deficit accounts…as she should.”
The reality is that the County will have to assume debt to cure the fund deficits. That debt could take the form of an Interfund loan to itself now. It also seems possible that voter approval for a general obligation bond could be solicited in the fall to pay off the loan and reimburse the RCI fund. Either way, Schulte noted that the County has allocated sufficient funds to service that debt, estimated to be $198 thousand annually.
Schulte concluded the meeting by reaffirming his intention to take the Interfund loan proposal to the Commissioners at the May 20 BoCC meeting. In his estimation it is the best option for bringing the County back into compliance in a timely fashion. Given the limited options and need to act quickly, the Interfund loan may indeed be the best solution. Even so, it will be interesting to see if squishy numbers cause any squirming prior to May 20. |
|
|
|
|
|
| |
|