Fund balance planning takes precedence


Henderson’s substandard savings account is playing a prominent role as the city examines spending for the balance of this fiscal year and prepares the budget for the next year.

The City Council’s Finance and Intergovernmental Relations Committee repeatedly discussed the depleted general fund balance during a meeting Friday afternoon that covered a range of current and future spending issues.

The state’s Local Government Commission sent Mayor Clem Seifert a critical letter last month in response to the fiscal 2004 audit, which showed that the city’s unrestricted general fund balance was equal to slightly more than 3 percent of anticipated expenses this fiscal year. The fund balance, essentially the city’s long-term savings account, was roughly $800,000 less on June 30 than the City Council had been told to expect when it prepared the budget for this fiscal year.

The LGC’s suggested minimum fund balance is 8 percent of expected spending, and the state agency expressed concern last year when the city’s fund balance was well above 10 percent. Other North Carolina cities with 10,000 to 49,999 residents average a fund balance of about 35 percent.

Now the LGC is demanding a written plan, signed by all council members, on how Henderson will rebuild a healthy fund balance.

“We’ve got a number of ideas that relate to rebuilding fund balance that we’ve been talking through and thinking about. … Our thoughts are not fully complete,” City Manager Eric Williams told the three council members at Friday‘s FAIR Committee meeting, FAIR Chairman Bernard Alston, Elissa Yount and Mary Emma Evans.

Williams said he’ll be ready to present those ideas “very soon,” and he encouraged the council members to submit their own ideas to save money or raise revenue.

The city manager offered some good news on the fund-balance front: The current budget calls for spending $46,000 from the fund balance in the fiscal year that ends June 30, but “some things that have occurred already” will just about eliminate that use of savings.

Looking ahead to the 2005-06 budget, Alston said the “guiding principle” should be to appropriate enough money to savings to lift the fund balance past the 8 percent threshold.

Yount agreed with Alston’s priorities.

Getting to the 8 percent level would get Henderson off LGC “probation,” Alston said, then the city could try to build up the fund balance by 1 percent or 2 percent per year.

He’d like to see the city maintain a 12 percent fund balance because “fund balance for its own sake does you no good.”

Seifert has said the city got similar advice in the late 1990s when its fund balance swelled well beyond 40 percent.

Yount, however, said she would like to see the city approach the state average by building a fund balance of 30 percent.

The amount needed to reach 8 percent depends on how you want to count the fund balance.

The LGC allows cities to include state-supplied Powell Bill money, which is restricted to road projects. With the Powell Bill money, Henderson’s fund balance is above 5 percent, and the city needs $388,000 more to reach 8 percent.

But the preference of the LGC and the city is to work with the unrestricted fund balance, which excludes the Powell Bill funds. For the unrestricted general fund balance to reach 8 percent, the city will need to add more than $600,000, Finance Director Traig Neal said.

Seifert said at the last full City Council meeting that Henderson was only a few tweaks from restoring the fund balance during the current fiscal year.

“I think those tweaks can happen,” the mayor said in an interview Wednesday. He said the city will be OK if department heads operate under a mandate to hold off any unnecessary expenses until at least July 1, when the next fiscal year starts, and if frozen positions in the city government stay that way until the new fiscal year.

A “quick-and-dirty” assessment of the city’s financial position through February, Seifert said, revealed that if the city holds the line on spending and can increase revenue by 2 percent, the fund balance will be 10 percent at the end of this fiscal year.

But the final figures for this year won’t be available until at least September, and the City Council must pass a 2005-06 budget before July 1. The council made plans Friday to meet with department heads in the first week of April to discuss their 2005-06 budget requests.

A year after the City Council was burned by rosy projections about the fund balance — Seifert said the council never would have approved the current budget had it known the true state of the fund balance — it’s unlikely to operate under the assumption that the fund balance problem will work itself out.

Adding another twist to the budget talks is uncertainty about exactly what the LGC wants. The LGC letter said Henderson needs to boost the fund balance to 8 percent as soon as possible and needs to include a contingency fund in its budget to cover any unexpected expenses that arise during the year.

“If we get ourselves to the 8 percent, do we still have to have a contingency?” Alston asked.

He and Neal said their understanding of the letter is that once the fund balance is healthy, a contingency fund will be unnecessary. Yount’s interpretation is that the LGC wants the contingency fund to become a permanent part of Henderson’s budget and thus reduce the chance of another fund balance crisis.

Alston, Yount and the financial staff agreed, however, that the No. 1 priority has to be the rebuilding of the fund balance.

“That overrides everything,” Alston said.

The fund balance overshadowed many things Friday.

The council members at the FAIR meeting decided to hold half-hour budget sessions with each of the city’s 12 department heads over three consecutive nights, April 4, 5 and 6, to start crafting what is expected to be a difficult spending plan.

Alston said he didn’t want to hold those meetings under any mandates or preconditions because the fund balance will take precedence over everything else.

The department heads had to submit their budget requests by this past Monday, and the City Council members will get copies of those requests Monday so they have two weeks to review them before the April budget sessions.

Those department heads will spend the interim involved in the process of receiving merit raises, based on Friday’s consensus.

The city paid its first merit raises in 30 months at the start of January, at a cost of about $85,000, Williams said Friday. The department heads weren’t covered by that phase, and Williams wants to take care of them now at a likely total cost of $25,000. The raises will be retroactive to the end of December, when the other employees’ raises were effective.

The city budgeted for merit raises averaging 3 percent for all employees this year. For each individual, a merit raise can be nothing, 2 percent, 3 percent or 4 percent.

Yount was aggravated that the city administration went ahead with the merit raises after learning of the precarious position of the fund balance. The merit pay was in the budget, but so was a fund balance triple the size of what it turned out to be.

“I certainly believe that our city workers are underpaid, and I am all for giving them more,” Yount said, calling for conservation elsewhere in the budget to allow higher wages.

But she said it would have been preferable this year to save the $110,000 cost of merit pay, given the drop in the fund balance. Yount said she wants to avoid city layoffs in the next fiscal year, and that goal should have taken priority over raises.

Now that most city employees have received merit pay, she said, it’s only fair to go ahead and give the department heads their merit raises.

Williams doesn’t have the department heads’ performance appraisals prepared but said he should have the merit-pay process completed within two weeks.

There was less discussion about a request the Appearance Commission sent via Recreation Director Alan Gill regarding an unspent $10,000 appropriation. The Appearance Commission received the money as a match for a Department of Transportation grant to restore the underpass of the railroad bridge at Charles Street, but Henderson didn’t get the grant because the railroad bridge is active.

The Appearance Commission has at least $2,500 worth of landscaping it wants to do in the area where it planted trees along North Garnett Street, but Alston said now is not the time for the city to seek out extra projects on which to spend money. No one at the meeting disagreed that the money, like any unspent appropriation, should be allowed to go into the fund balance.

Williams said the city must guard against such late-fiscal-year spending requests. “Once you open that box, it’s tough to turn down anybody else.”

He noted the council’s refusal to give $400 to the Human Resources Commission for its annual banquet.

Williams and others were sympathetic toward the Appearance Commission’s funding frustrations. Alston suggested that contributions of time and service could address the commission’s landscaping needs. Yount raised the possibility of giving the commission some review role in the approval of building plans and charging a fee for its services.

Evans asked why the Vance County Board of Elections is getting an additional $5,170 from the city, and Alston explained that Henderson has a contract requiring it to pay 22 percent of the Board of Elections’ operational costs.

That appropriation will be one of four budget amendments before the City Council on Monday night.

One will close out the Dorsey Avenue widening project at a below-budget cost of $271,755; $21,445 will go back into the city’s pot of Powell Bill money, where it could bulk up the fund balance, expand the end-of-fiscal-year street resurfacing program or pay for traffic-calming measures such as speed humps on Granite Street.

The second amendment will add $1,850 to the depleted Code Compliance Department budget for contracted services. The money represents a reimbursement for the cost of the voluntary demolition of a house at 422 Pearl St.

The third amendment distributes the insurance proceeds from the death of the generator at the Kerr Lake Regional Water System plant in the fall. As the FAIR Committee previously agreed, the city first will use the money to cover the unbudgeted expenses the water plant had in connection with the generator, such as rental of a temporary unit, and the remaining $95,407 will pay down the principal on the loan for the replacement generator.

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