I am writing in response to Jim Haff’s repeated requests to have several questions answered. Jim would like simple answers to what he refers to as simple questions. Despite his belief these questions are simple, the truth is that the answers are not, and to give them out of context would be highly misleading. In that light, please forgive this lengthy response.
Why the Town Report doesn’t show a deficit with flood funding and FEMA in the Town Report like the auditor’s report does?
(1) The simplest answer, though not very complete: The Town Audit is not complete until after the Town Report is published. It is not possible to have the audit numbers in that year’s town report. Only the 2013 audit numbers were available and those were out of date.
(2) The Audit and the Town Report have different purposes, are based on different methods and thus contain different information. In 2010 the town transitioned from modified cash accounting to accrual accounting to keep its financial records (in order to meet Generally Accepted Accounting Principles or GAAP). The Town Report, specifically the budget on which we vote, is presented on cash (accounting) method. This means it is based on the actual money expected to come in to the General Fund, as well as the bills to be paid out of the General Fund in that particular year i.e. it tracks actual cash flow. The Audit and the towns overall accounting, on the other hand, is based on accrual accounting, (as required by the federal government in accordance with GAAP principles). In accrual accounting income is counted when the sale occurs or money is due, not when it actually received, and expenses are counted when you receive goods or services, not when it is actually paid. Hence it provides a different picture of the town’s finances, one that looks at financial health from a larger picture, not just what is exactly in the bank at that time. The Accrual accounting will also track events in which expenses and reimbursements occur over several years, such as Irene. There are not two sets of “books” just two different reports. I’m sure a former board member Mr. Haff understands this.
(3) So, that brings us to why the $815k Irene debt is not listed the page 7 debt summary of the town report (besides that the exact number from the audit was not available: please see above). Page 7 of the town report clearly refers to debt to outside entities that have not been paid. The $815k Irene debt has been paid to all outside vendors, it is no longer a cash accounting debt, therefore, it does not appear on page 7. It is only still an accrual accounting debt because we have not yet reconciled any of that debt against any specific fund listed on the Audit’s Statement C, as of yet. We intend to do this after we know the final amount FEMA will reimburse us, which should be by the beginning of December.
(4) The effect of the Irene costs ($815k), which were not paid by FEMA are, as Mr. Haff suggests, important. This is why they were brought up by the Select Board at both the March 2014 and March 2015 Town Meetings as they were essential to understanding our cash flow issues. The numbers were not exact as the audit; however, this March I made it very clear that the Town’s portion of Irene expenses were between $800K and $950K. I offered to anyone a worksheet showing my calculations. In addition, we asked our auditor to attend that meeting (which he did) to further clarify the issue for anyone who had questions. I do not recall the statements Mr. Haff quoted from the accountant, and since I don’t know the original question the accountant was referring to, I can’t really comment on what exactly he said.
The second set of questions, regarding the Unassigned Fund Balance (UFB) and at what level it should be, and how to get it to the proper level also requires a bit of background information to answer properly and in context. And all of this ties back into the information given above.
(1) The Unassigned Fund Balance or UFB (also previously referred to as the Undesignated Fund Balance) is produced in the audit as an accrued amount balance of monies not assigned to any specific purpose. But, an accrued UFB of $585K does not mean there is a bank account with $585k sitting in it. That is because it is offset, at least in part, by funds to which the town is owed, but has not necessarily received. One example (and a major driver) of that would be delinquent taxes. On an average year the delinquent tax balance owed to the town falls between $600k and $750k (please see the Town Report- Statement of Delinquent Taxes). It is important to note that prior to adopting the accrual accounting method in 2010 there was no UFB, mainly due to the fact funds owed, but not received, would not be designated to any purpose because we didn’t actually have those funds.
At this point we are looking into how to best assign these funds so that it doesn’t negatively affect our cash available. Applying them to the Irene/FEMA debt would be the best idea right now as those debts are paid and would not add to any negative cash flow. I never claimed the spending of the UFB was the cause of our cash flow issue, rather it likely contributed to it. Just as many other things have.
As Mr. Haff pointed out: The state of Vermont doesn’t consider a town having an Undesignated Fund balance and the VLCT recommends we don’t carry one. The majority of this UFB balance, if not all, will be used when we reconcile the Irene/FEMA debt against it (once the final payments have been secured).
(2) In all honesty the Board has been discussing the pros and cons of setting a fund aside with two months worth of expenses (between $600 and $750K) as is recommended by the VLCT since 2012. A “rainy day fund,” so to speak. We did not move forward with this yet because with Irene, finances continue to be tight. Setting aside even $600K would seem extravagant and not very popular with the taxpayers. Apparently, the auditor feels that the unassigned funds could be used for this purpose.
With the UFB being depleted by the Irene/FEMA reconciliation, that leaves the question: How do we maintain reserves to cover two months’ worth of expenses of municipal operations as recommended by the VLCT? Well, that is a very good question and there are several possibilities. Unfortunately most appear to include setting aside these funds in a restricted account, thus require raising taxes. Even VLCT points out the down sides, such as people considering this a “slush fund.” So at this point we do not have a definitive answer. I would prefer to continue working on improving our cash flow issues as well as our infrastructure needs before venturing into setting aside a rainy day fund.
The Board is not overlooking essential priorities as Mr. Haff claims. We continually look to improving our finances, improving our infrastructure and investing in our economy for today and the future, all as laid out in our town’s Strategic Plan. The job of the town Selectboard and Town Manager include addressing multiple issues at the same time so that we can solve problems and still move to the future.
Again, the town financials are all available to anyone who wants to see them at killingtontown.com. And if Mr. Haff or other residents have other questions, please come to a Select Board meeting or email me at [email protected].
(This letter is based on my impressions and is not approved of, nor has been reviewed by the full Board.) Thank you for your time and consideration,
Patty McGrath, Killington Selectboard Chair