By Harry Gatjens
In a quiet policy change. the Edmonds City Council changed the policy on maintaining the city’s financial reserves. The new policy eliminate the catastrophic and public safety reserves and combines all the previous funds into a “contingency reserve,” and a secondary, much smaller “risk management” reserve. This fund’s target is 2 percent of annual expenditures.
The new “contingency” reserve is 16 percent, or two months of budgeted expenditures. The is twice the size as what has been targeted before, but it is computed differently, using straight accrual accounting as opposed to the modified accrual accounting in the past.
What are you talking about, Harry? What are those terms and what’s the difference?
The modified accrual approach is the most conservative way to analyze a city’s financial position. It does not take into account the accounts receivable, which is money people owe the city, the determining financial position. The city is now using a more accurate but less conservative approach, standard accrual accounting, which includes accounts receivable. The difference is that even though the new policy requires two months’ rather than one month’s estimated expenses as a reserve, it is really only about 50 percent larger rather than twice as large.
Currently the city has enough money to fully fund both of the new reserve funds. The risk comes from the fact that the new policy makes it much easier to drive down these reserves. The policy states that the two funds should reach their targets by 2014. However, there already is enough money to reach these targets, so why the 2014 date?
According to the City’s 2011 Comprehensive Annual Financial Report, the city has reserves of $9,562,638. Pulling out the catastrophic and public safety reserve funds, the unrestricted reserve is still $6,335,638. Based upon the new formulas, the targeted reserves should be a total of $5,930,872 at the end of 2012. This includes $5,271,886 in the contingency reserve class and $658,986 in the risk management reserve. Under either computation, there are excess reserves.
What should be done with them? Should they be saved for projected deficits over the next several years? Should they be used to fix our streets? Under either the new or old reserve policy, there are excess reserves as of now. While we may want to use the excess for some purpose, it seems foolish to now be talking about reducing the reserves below the targeted levels.
More significant in the change, however, is the elimination of the catastrophic reserve. This reserve was set up years ago by the City Council in case of an earthquake, tsunami or other catastrophic event hitting the city. A total of $1,927,000 was set aside to provide immediate cash in case such a catastrophe hit. While technically still part of the general fund, this reserve was considered untouchable for other purposes.
Also being combined into the contingency reserve is $1,300,000 set aside when the city’s fire department was sold three years ago. There has been much debate about what this money should be used for: only long-term assets, only things related to police and fire, or just saved. As there never has been agreement on what to do with that fund, the balance has remained the same for the past three years.
The overall impact of these changes is that the council now has more ability to spend down the city’s reserves. Even with the new targets, they are able to use the reserves to meet budget balancing needs rather than save them for specific purposes. There is a specific schedule for replenishing the reserves if they are spent down over a number of years. However, if the city uses the reserves to balance the budget one year what chance is there to have excess funds in future years? This seems like a dangerous course for the city’s financial health.
Several councilmembers have been yearning to use excess reserves to balance the budget the past several years. This is like raiding your savings for your day-to-day living expenses. It is time to grasp that we cannot maintain a viable city financial health by putting off long-term asset preservation, such as maintaining our streets, and spending our reserves. However, it is far easier for a current council to use this strategy and delay the hard decisions until someone else has to face the music a few years down the road.
The other issue is that for all of this talk of “transparency of government,” this change was made with no public discussion of the issues and or the implications. While it may be the right choice to make these changes, it is certainly not transparent to not discuss the issues in a public forum. There actually was no mention of the elimination of the catastrophic reserve in any of the documentation. Rather there was just an explanation of the new reserve system. When I asked several councilmembers, they were unaware of the implications. While all councilmembers are not expected to be experts on financial issues it is unwise to ask them to make these changes without full discussion.
The City’s new finance director, Shawn Hunstock, has done a marvelous job of clarifying the city’s financial reporting. He also has an excellent working relationship with the council. They have the accurate information now; the question is, can they be fiscally responsible with our tax dollars?
Edmonds resident “Citizen Harry” Gatjens provides regular reports and commentary to My Edmonds News on the workings of the Edmonds city government. Gatjens, an accountant, also offers insight into the city budget.
Thanks for the detailed reporting, Harry. This little action was completely under the radar, as you noted, though not necessarily with any nefarious intent. It looks to me to be a simpler and more straightforward means of accounting for the reserve fund, are there potential pitfalls to this new approach that we haven’t figured out yet, other than the mysterious reference to 2014?
As for the $1.3 million from the fire district deal, what do you think we should do with it? I would vote for paying off more of our debt, which reduces our future deficits directly. While cash in hand is good, reduced debt is even better.
Is this a “done deal”? It is buried in the August budget amendment portion of the Finance Committee meeting agenda and appears, at least to me, to be headed for the consent agenda. Perhaps one of our Council Members will pull it for discussion at the next Council meeting so that it can be publically and fully discussed. I think, it also requires a majority plus one vote by the Council to pass.
The policy was passed at the July 17 meeting. The vote was unanimous. In the presentation they were told that the reserves were insufficeient as of the time being.; However, I took my numbers directly from the City’s CAFR and 2012 budget,
Todd: My concern isn’t so much about the actual dispostion of the money, or even the new reserve policy, but rather the lack of discussion and disclosure. I am not sure what to do with the excess reserves, other than saying I don’t think it should be used to make up short term operating deficits.
During the elections and at council meeting there is much talk about tranparency but this is just one more example of political talk. Transparency is just something that is used at there convience as demonstrated by this policy being passed without any open discussion except at the committee level. I would hope a council person would some how bring this up for public discussion.How about it council members.
Harry:
Thank you for your comprehensive write-up of this important topic. I’ve only now had time to digest it; I have a question about your following statement:
“The difference is that even though the new policy requires two months’ rather than one month’s estimated expenses as a reserve, it is really only about 50 percent larger rather than twice as large.”
I would appreciate seeing your calculation of the 50%, because I can only come up with a 16% increase. With this new policy, 16% reserve equals $5.282 million – according to last night’s budget amendment. Therefore, an 8% reserve would equal $2.641 million. In addition to that the old policy had $1.928 million in the emergency reserve. So we had a total of $4.569 million in those reserves. $5.282 million is only 16% above that amount. Where am I going wrong?
My biggest concern with the new policy is the following clause:
“A planned draw down of the fund’s reserves should: a) not exceed 50% of the balance in
the Contingency Reserve Fund.” If that currently happened we’d be down from 16% to the original 8%. But when our policy was to have 8% we also had $1.928 million in the emergency reserve.
Ron: A couple of differecnes. 1. you are forgeting about the $1.3 million that was from the sale of the Fire Department, the so called public Safety reserve. #2 is in the calculation of the fund balance and the inclusion of Accounts Receivable in the new calculation which wasn’t included in the old.
Your concern matches mine, but my bigger concern was the lack of being clear to the other council members and to the public of the potential impact of the new policy. So much for “transparency.”
Thanks, Harry. I didn’t forget about the $1.3 million; I didn’t include it because I viewed it as an anomally in the past reserve policy – a reserve that wasn’t going to be long lasting.
Don and Ron are right on point about this. The Economic Development Board was created in 2009. That Board has put forth several recommendations to increase business/marketing in Edmonds. I haven’t seen the Council do anything with regard to economic development, except maybe allow food trucks. On the contrary, it tried to increase some water fees (?) a while back for developers.
It seems that the only thing that citizens of this town get incensed about it the old Safeway property. Let’s start by allowing some give so that it can be developed. It doesn’t mean we need skyscrapers, but it does mean some reasonable planning instead of just the word “NO”. It feels to me like all the Council cares about is dealing with building heights so that they can win their next election. Or, in the alternative, feel good legislation like banning phone books. In the meantime, Council continues to spend money on consultants to tell us the same things we knew since I’ve lived in Edmonds.
What happens if, we do have an emergency? How do we handle that? Why was this passed without public testimony with prominent notification to the citizens of the issuet? We have public testimony on whether cats should be leased for weeks on end but, Council, you sneak this under the table? Shame on you!
I will not vote in favor of any levy until I see some real work coming out of Council.
Harry,
The Finance Committee Agenda for December 13, 2011 included an earlier Draft Reserve Policy. This Draft Policy included a Risk Management/Capital Facilities Reserve Policy as opposed to a Risk Management Reserve Policy. Do you know why the Capital Facilities reference was removed?
The December 13, 2011 Draft Reserve Policy also included a Revenue Stabilization Fund Policy as well as an Enterprise Fund Reserve Policy. Do you know why these two items were not included in the Reserve Policy voted on and passed on July 17, 2012?
I reviewed the related July 17, 2012 City Council Meeting Minutes and did not note any related discussion.
Ken,
Can the ordinance be pulled from the consent agenda for discussion or is it a done deal?
Perhaps one of our Council members ( who all voted to approve the reserve changes on July 17) will post here and explain the reasoning behind the changes and why they voted to approve it. ( Showing their work, as it were).
Hi Diane,
To the best of my knowledge, the Council votes to approve the consent agenda near the start of each Council Meeting. I’ve seen them remove items as well as move items from consent to the regular agenda.
I do not think they can move an item from the consent agenda to the same evening’s regular agenda and also add a Public Hearing. I believe Public Hearings require public notice. Public Discussion of teh agenda item (which I believe is different than a Public Hearing) might be allowed – but I’m not certain.
Also confusing this matter somewhat is that it doesn’t look like it was done via Resolution or Ordinance. Maybe it does not have to be.
As far as being a Done Deal, I think citizens have the option of requesting Council Reconsideration.
Sorry this response is so scattered. Let me know if you’d like me to research in more detail.
Thanks Harry for keeping us informed and offering your prospective.
Much of this discussion is about process, great but here are some items that MAY be part of the puzzle. Some repeat but so it is all in one place. We are talking about reserve funds.
There are OTHER reserve accounts that and accounts that have $ that are planned to be use over a several reserves. Simple research will show several cities make easy to find out WHAT, WHERE, and WHY they have dollars set aside. . Check out this link for Mukilteo and see what they have done. https://www.ci.mukilteo.wa.us/files/doc-fund-balance-reserve-policy%20finance.pdf
Funds:
Public Safety Reserve Fund=$1.3m
Emergency Reserve Fund=$1.9m
Combined=$3.2
Pending potential Expense Items not budgeted for2012 or 13:
Human Resource Legal Action=$??
X Mayor Assistant Legal Action=$??
Haines Wharf Park Overrun payment=$??
Projected Budget Shortfall for 2013= $800k-$1.3m
Savings for 2013 for Early Retirement Process=$?? This would be an offset for 2013?
Council is PROBABLY aware of some of these unknown items (executive sessions) and has a feel for what the numbers are or could be plus or minus. So maybe Council is just preparing for what will be some day public knowledge. Given the 7/0 vote it is likely they know something we do not yet know. Other than feel good proclamations and things like that, few Council votes are 7/0.
Given the above, some of the $3.2 m may be needed to deal with the potential expense items not budgeted for 2012 and set the stage for Council using some of the left over as an off set for 2013 budget issues. Past Councils have added items to the budget that were not part of the Mayors budget; Sometimes small, sometimes measured in the $100k plus range.
The administration has done an excellent job of helping us all understand more about the finances of the city through the new articles, presentation and discussions around town. While still trying to run the day to day city business the Mayor and the Department Heads (mostly new) are trying to give us greater insights of how the City is being run and what are the financial issues for the future. We have had 3 Finance Directors all tell us the same thing: We have a budget problem. We had a Mayor say in his first words to the public as mayor something like…It is time we have a “blunt conversation” about the general fund budget. He and the Directors have and are doing a good job to help us all understand the issue. Sometimes we just don’t like to hear it and often do not like the alternatives: Raise Taxes or Make Cuts.
So we can continue to talk about processes and open government and all that, but hopefully we can begin to talk about some of the real problems facing the city and some of the alternative solutions. We are seeing the results of the Strategic Planning Process that hopefully will provide the frame work for moving our city forward. Council and Staff and the Public need to spend time sorting out what the people have said in the SP and discuss what we what to do, what we want to not do, and how do we find ways to pay for the things we say we want either by reallocating funds or raising taxes or both.
Darrol,
Excellent presentation. Process is vital. Three of the unknown items listed have nothing to do with strategic planning but rather were entirely avoidable costs had process been properly and fairly observed. (Haines Wharf, Human resources and Mayor’ Assistant litigations). Adding items to a budget which are not funded is simply not prudent.
Reconfiguring the reserves may, indeed, make sense or it may be similar to spending down a nest egg. The citizens have resoundingly said no to raising taxes. I believe that the reason is that they correctly see a pattern of spending which ignores the basics and favors roundabouts, new parks ( we already have many) and pet projects. I believe that if the Council gets serious about bringing the budget into line with the basics and works to fund maintainence projects that the citizens will see that, be reassured that the monies are being well and prudently spent and will approve honestly presented and unbloated new taxes. It should be a very open process.
Diane:
Very good comments.One clarification, no expense item is ever placed in the budget for which a source for funding it has not been identified – sometimes it’s simply the ending fund balance.
Ron B., I will try to respond to all folks below but I take exception to your last comment. Yes I speak English, you would see that for yourself if you would ever meet with me as I have offered. I type English as well. I hope you are not making some slur of my ethnicity or race or origin or language skills, but that is for you to know. I will assume you did not intend to make a slur unless you confirm your intention.
Clarification below is for all not just Ron: I do not what him to think I am talking down or at or whatever to him. I am simply trying to have a logical, frank, thoughtful discussion of issues. Ron is a better wordsmith than I, so engaging in a debate would be a losing mater.
My discussion above pointed out that we have choices: Taxes or Cuts. I went on to say that the SP gives us some insight in to what the public is thinking. In that process people took the time to give their thoughts on a number of issues. I put a lot of stock in what these people are saying and much less on what is sometimes posted on this site.
Two of the highest votes in the Strategic Plan were for item 63, Fiscal Sustainability and item 72 Assess Performance Results. The public gave them very high votes of 4’s and 5’s to the tune of 66% and 58%. When one looks at what the public said in these items it is clear they want to find ways to balance Revs and Exps. Council has been talking about these issues since Feb of 2011. The end result of doing Items 63 and 72 would be a full and complete sorting out of what the public considers to be basic services and how to pay for them. It may also lead to things the public wants to do beyond basic services and how to pay for those as well.
MY OPINION: The sooner we move on with 63 and 72 the sooner we will figure what we want govt to do and how do we want to pay for it.
It was also interesting that 57% of the folks want to support item 53 Street Maintenance. They want to “create a financing mechanism to generate approximately $1.4m /yr which is needed annually to maintain city streets.” Before someone says this is a backdoor tax plan consider this: There are 3 funding sources for streets that I can think of: 1. Put it back in the GF and make the needed cuts to do that. 2. Seek out grant money, but then we would be getting one of those hated grants. 3.Tax ourselves in some way, regressive, progressive or whatever. But 58% of the public wants it fixed.
If we just get going on items 63 and 72, things will fall into place.
For anyone who want to learn more about the SP go to the City Web site and you can see all the work papers, all the reports and all the details including the report that I have cited above.
Have a nice day everyone, you too Ron.
Paragraph 1 Yes to your remarks, that is the best I can do.
Paragraph 2. We do have representation. Most elected by the people got 6000+ votes, those appointed got 4+. So we do have representation, even if you may not like who was elected. One outcome of running out of money could be like other cities have done and that is to go bankrupt and reorganzie. Other option is desolve the city and go back to being a part of the county, another option is consolidate with other south county cities and look for efficiencies. Raising untility taxes is an option I guess. Just looked at my untility bill and we would have to be taxed at 100% plus to raise just $1m. You asked for options and there are a few.
Paragraph 3. Cutting spending should come after the citizens do what they said they want to do in the SP process. That process would lead to a rebalance of govt tasks and revenues to match. You may see some cuts in the budget this year. The Mayor is obligated to present a balanced budget and my guess is he will and it will include cuts. The street comment was what the people said not your opinion. If you want to see the ranking of the streets that shows street conditions done by professional standards of ranking streets just go to the web site or call the city they are happy to show you. Your street is not in the needs repair list.
Pararagraph 4. I appreciate that you think I have some power to cut spending for the city along with the mayor and the council. I have not been asked by either for my opinions nor have I been granted that power with any of the volunteer work that I do as my part of helping our city. The public has spoken in the SP. I suggest we look at what they have said, urge council to adopt the ideas and by doing so we WILL have a plan to balance the budget with cuts or taxes or both. That will be up to about 7000 people, not you or me.
I share my views in an effort to share what I have learned in my work with the city. Hopefully these ideas and information are useful to others because it is clear to me you do not give them any value and that is your right. For the good of our city I would hope you get involved with some volunteer work around town. Just be careful when you drive without your seatbelt.
Ron B. I am sorry you took my remarks about the seat belt as condecending. I meant no disrespect. Sorry if you took it that way. I was just commenting on your lengthly post on MEN the other day about the seat belt issue and wanted you to be safe. You also commented there about medicare and a long of other things that kind of left the topic at hand. I am happy to learn of you good driving record, that is commendable.
In your post the other day you said. “So meanwhile the city got this senior citizen for $124 and refused to return it, even though the letter in now in their possession. They only gave one of my checks back.” Were those fines or tickets and how many times did you have to pay? It’s a shame your record was tarnished with these incidents.
By the way you get your wish. Your are still around and have been for my first 19 years of AARP membership and now in my in my 5th year on Medicare.
My appoligies about the seat belt remark, I would not have even known about it if you didn’t tell the world in your earlier post. I said then and will say again. I believe seat belts save injuries. I was spared injury when I was stopped and was reended by a car that the Edmonds Police said was likely traveling 60+ mph. That was more than 30 years ago.
I also want to tell you how sorry I am that none of my ideas make no sense. But what a wonderful place we have that allow us to express our views even if they do not make sense to others.
Dave, I am done wasting people’s time on issue that do not inpact the citizens of Edmonds. We have much to do and so little time to do it. Lets get going and figure out where we go from here.
Harry, does this change impact bond ratings, insurance and interest rates, etc. Are there secondary impacts related to these changes? Thanks
Darrol, Thank you for your rational input and positive ideas.
I so agree with you that there is so much real work at hand. This is not the time for anti government rhetoric and blaming the worker bees for the economy.
I’m not sure what stokes some folks to be so negative in every post.
I drove on 5th today, by city hall and 3rd, and Dayton. Those roads are in terrible shape. I think those were some that are now too far gone and need a complete tear out at 3 times the cost of just over laying. I hope we don’t let this add up and cost us even more, with the cost of fuel/asphalt going up every day!!! I would gladly pay $60 year to save from paying triple or more. Just common sense and the way I run “my” business….which is my house and family. I keep it in good shape so repairs don’t cost more.
Thank you too Harry. I really appreciate the information and time you give.
Does anyone know if MT Lake Terrace has a city manager?
I think they do. I looked at the recent staff wages. The consultant that was hired compared them to MLT and Edmonds was lower.
I’m not union one way or the other, but a fair living wage I’m all for.
I think we have much bigger issues than the water meter reader $17/hr py.
I am told we have water and sewer pipe from 1923 that are leaking every day. Roads falling apart, leaking roofs on the sr center and other buildings, dang, let’s get going.
Mountlake Terrace has had a city manager form of government for many years; currently the very capable John Caulfield holds that position.
I forgot to add that MLT was not included in the suvey done by the compensation consultant.
Ron B.
I have never called you anti government. When and where did that take place?
I don’t read your posts as they are all the same rant that is just your opinion.
I looked the $100K + salaries and those salary levels belong to directors that manage a lot of people and are who people with college educations and years of experience.
The average worker at the city does not even come close to $100K.
I also looked at a few business managers in my field, hard to compare to because city’s are not profit machines. I just don’t see the disparity.
There is a group of people out there that just want to create havoc, will never be happy no matter what, have a loose screw and don’t want to abide by our rules. Sovereign nation kind of thing. Like seat belt laws don’t apply to them as an example.
Katherine:
Your information about which city employees are paid $100K, or more, is no more credible than your statement in #31: “The consultant that was hired compared them to MLT and Edmonds was lower.” MLT was not included in the consultant’s report.
There are several Edmonds employees, who are not directors, who are paid above $100K – and that does not include any overtime pay.
When you deliberately post statements that are not factual, why should anyone believe anything that you post here.
Because I have read reports by consultants and historical data!
Unlike the generalized opinions I have read here that salarys should just be lower. Not citing any amount or reason why, just should be lower.
My opinion, the city has bigger things to work on than cutting pay because they don’t like unions, or police, or the lawn mowers. I can’t figure it out…is it just anti government?
We need to listen to folks like Darrol Haug or Paul Miller that really understand the problems. Somebody mentioned the other day becoming part of lynnwood.
Maybe that’s the answer.
Harry, thanks for a great article about reserve funds. I have served with Harry on a couple of volunteer committees and alway found his hard work to be helpful in getting information to people so they can make their own assessments and judgements. He is careful to point out when he is offer his opinion. HIs discussions help us all understand issue a little better than if we were to dig out the detail on our own. He does a great service to our community. I have had debates with him on occasion and at these discussions have always been constructive. But our discussions have always been civil and I come away with more information and I give. Sadly discussions on MEN can go down hill faster than a ski racer. The keyboard gives us all the opportunity to be a little less kind to each other than we would typically be in a group setting.
Back to the ideas at hand, reserves, what are they, how do we create them and how do we change them and all the stuff about open govt. Harry and I served on the levy committee and that was an interesting experience. The citizens on the committee all wanted to learn and understand the issues and try to sort out the financial issue. We talked about labor costs, executive pay, and a host of issues. I recall lively discussions about reserve funds and in the end we recommended a public discussion of all our reserve funds and policies to come to grips with this part of the budget and try chart a new course of creating a more comprehensive plan for reserves. That public conversation is still needed and has not happend. Given a full and complete discussion we would likely create a policy that is understood and accepted by all as the best we can do and we could move on. Thanks Harry for your continued work, we should all be grateful for your help in trying to get us all on the same page.
Katherine, you have every right to express you views without being attacked. Sadly the personal attacks do little to add to our small town charm. At the heart of some of what Harry has presented before in MEN and on television is a discussion of the compensation of public employees. There are opinions on all sides of this issue but unless and until we sort out the pay and benefit issue we have little chance to balance budgets.
So Katherine, keep expressing your views, ask for new facts, and as you have already done, keep adding value to the conversation. When the attack start coming at you again let me know I have an extra flack jacket.
Don’t need to do a Strategic Plan, it is already done by the citizens of Edmonds. Here is a link to some of the summary information of the key priorities suggested by the Citizens.
https://agenda.ci.edmonds.wa.us/docs/2012/CCOUNCIL/20120731_703/4993_Strategic%20Plan%20-%20Matrix%20with%20Priorities.pdf
Darrol:
In your #42 you neglected to give Katherine one piece of critical advice, “don’t make statements that are blatantly false”.
I try to avoid giving advice. Why are you singling out her and not others who make false statements?
I singled out her because she is the one you gave the advice to.
Thank you Darrol. I will. Thank you.
I’m still not sure of the false statement. It was something I read somewhere. I’m not the sort to make things up but also human, so mistakes can happen! I didn’t know that I would be so attacked. MLT does have a city manager and the same workforce/pay as Edmonds, so I’m not sure what the fuss is really.
I will input here as I see fit. The group I had coffee with this morning clued me in on some of the fellows here so I will ignore and move on. Sad really that some are more intent on being right than helping.
Ron B. Good research. Good idea. Yes SP has some problem areas. My bet is your list is the same as mine. Some items are much more doable than others so the idea is pick the ones that we can get going with, assign someone, some group or what ever to move it forward by digging a little deeper on the details, resolve conflicts and move the issues forward. I do not want to get into a debate about the details here but would be willing and anxious to work WITH you on some of these issues.