Embassy at heart of city budget hole, state finds

North Carolina’s Local Government Commission has spoken in response to Henderson’s fiscal crisis, and it has found problems with Embassy Square, tax collections and the fund balance.

In a letter dated Feb. 21, a copy of which was faxed Tuesday to the city government, the LGC informs Mayor Clem Seifert that the dramatic drop in the city’s available general fund balance from June 30, 2003, to June 30, 2004, is a problem that should be addressed “as quickly as possible.”

The city’s audit for the fiscal year that ended June 30, 2004, found a fund balance for the general fund of $788,417, or 5.36 percent of total general fund expenditures. Excluding Powell Bill money, which the state supplies and limits to street repair and maintenance, Henderson had only $464,163 available for emergencies or other unforeseen expenditures as of June 30. That figure represents 3.16 percent of general fund spending.

“We also noted that fund balance available decreased from 14.72% at June 20, 2003, to its current level,” reads the LGC letter, prepared by T. Vance Holloman, the director of the state agency’s Fiscal Management Section.

The letter also notes that the available fund balance should not be allowed to drop below 8 percent of general fund expenditures and that the average for North Carolina cities comparable in size to Henderson is 35.09 percent.

The LGC urges Henderson to get the fund balance back above 8 percent as quickly as possible. The state agency says the city should seek savings in the current budget and create a contingency fund in the annual budget. The city could tap that fund in emergencies and could bank the money in good years.

Such a contingency fund would also help Henderson overcome its poor tax collection rate. The LGC letter notes that the city collected 92.31 percent of the property taxes it levied in 2003-04, compared with a statewide average of about 97 percent. The Vance County Tax Office collects the city’s property taxes, so that collection problem is largely out of the hands of Henderson officials.

The general fund balance is like a family’s savings account. If the family manages to earn more money than it spends during a year, the extra cash goes into the savings account. The account grows from year to year as long as the family spends less than it earns. The money is available in case the family has emergencies (a broken water heater, say, or a leaking roof) or sees opportunities for special spending (a vacation to Walt Disney World or a new refrigerator with a fancy icemaker).

Henderson has largely depleted its savings, and, the LGC warns, the city could hit a cash-flow crunch.

That outcome isn’t a surprise. The City Council has fretted for years about the reliance on the fund balance to create a balanced budget, but that spending has continued. According to figures from the LGC, the city last added to the fund balance in the fiscal year that ended June 30, 1999, when the accumulated savings in the general fund equaled 43.72 percent of spending.

Henderson drained almost $4 million from its accumulated savings over the next five years.

Fiscal 2004 was the worst. The city spent $1,488,297 more than from the general fund than it brought in.

The Embassy Square library project was responsible for a big part of that shortfall, the LGC letter says. City officials acknowledged that they transferred hundreds of thousands of dollars from the general fund to the fund for capital projects to cover library expenses. Those transfers lacked the approval of the City Council in the form of the budget ordinance or budget amendments.

“It is our understanding that the City anticipates being reimbursed for these costs at a future date that may be a few years away,” Holloman’s letter says.

Sam Watkins, who heads the Embassy Square Foundation, has said several times that the foundation will repay city expenses only if fund raising exceeds the cost of building a library, gallery space and a performing arts center downtown. Watkins’ argument has been that the library will be an $8 million facility, so it’s a good deal even if the city winds up paying $1 million or $2 million of the cost.

Council member Elissa Yount, who has been increasingly vocal with questions about Embassy Square and city finances in general since the fall, has requested an extensive update on the Embassy project and the city’s financial liability. Seven Embassy-related issues are part of a list of concerns she plans to raise at Monday night’s council meeting, according to a memo to she forwarded to her council colleagues and city staffers via City Clerk Dianne White.

City Manager Eric Williams, who distributed copies of the LGC letter Tuesday, wrote in an accompanying memo that he will discuss the LGC findings during the budget forum the council will hold for the public Monday at 5:30 p.m. at the Municipal Building on Beckford Drive.

That public forum could be a crucial opportunity for city residents and council members to learn what has happened to city money and how Williams proposes to climb out of the hole. The council’s finance committee scheduled the forum to dissect the city audit from accounting firm William L. Stark & Co.

“I believe you will find the letter generally self-explanatory and what we were anticipating,” Williams wrote Tuesday.

HomeinHenderson.com obtained copies of the documents too late Tuesday to contact Williams, council members or Seifert. But Holloman envisions a role for all of those officials.

“Please write to us about your plans to resolve these matters,” Holloman’s letter reads. “We request that the response be signed by all members of the governing board. With your response, pleas send us a copy of your most recent interim financial statements, including a budget-to-actual comparison and the current assets and liabilities of your major funds.”