Fiscal Emergency

In 2003, City Council requested the State Auditor perform a fiscal analysis on the finances of the City.  This request was made after Council became aware of the fiscal position of the City outlined in the 2002 Audit.  The results of that analysis and the yearly audits are available from the City. 

Reviewing the financial information shows the City with negative fund balances in several funds.  The fiscal analysis performed by the State shows the City’s ability to recover from negative fund balances as well as pay ongoing expenses.  The State analyzed the finances at December 31, 2003 and four months later at April 30, 2004.  The result of this analysis shows the City with fiscal emergency conditions.

Background

In 2003, City Council sought a fiscal watch analysis from the State Auditors office due to concerns over the results of the audits performed by the City’s independent auditors.  This came after the resignations of the City Manager and Finance Director earlier that year.  At the end of 2002, Council was provided with financial information that greatly differed from what had been presented in earlier years.  This information showed that fund balances had gone negative and spending levels exceeded original appropriations.

Once Council recognized the depth of the financial problems, City staff developed a plan to cut spending and balance the budget in 2003.  Balancing the 2003 budget was accomplished by eliminating capital improvement projects, laying off staff, leaving important vacant positions unfilled, refinancing debt and cutting spending in all areas.  The City balanced the budget while attempting to maintain the service levels previously provided.  In some cases, such as in Public Works and Administration, service levels have been negatively affected by the cuts made.

While 2003 was a budget year in which we strived to balance the budget, 2004 has been a year to study how the budget has affected the services the City provides.  As we look to 2005, the City has recognized that most service areas need to improve.  These include administration, public works and safety services.  A growing population and the deterioration of public infrastructure is spurring this need for improvement. 

While the quality of service can be managed internally, the growth in services provided cannot be accomplished with the current budget.  The fiscal analysis performed by the State Auditors Office clearly shows that the need to eliminate the negative fund balances takes precedence over all other needs of this growing city.  The City will not be able to dedicate funds toward improving services and correct the fund balance issues that exist with the current budget restrictions. 

NEGATIVE FUND BALANCE

Negative fund balances were created over a three-year period from 2000 to 2002.   During this period Council was provided with inaccurate and inadequate financial information.   The information that Council received showed the City in good financial position.  Council was forced to make decisions on spending based on the information they had.

The negative fund balances were created over the years by budgeting transfers into funds that need support from the general fund but never actually performing the transfers during the year.  While those transfers were not being made the general fund was overstated and so the money dedicated for transfer was used for other expenditures.  The transfers were made on paper in the end of the year budget reporting but never recorded in the City’s accounting system.  As a result, cash was spent down and we became delinquent on many accounts payable to vendors of the City. 

Example A (not actual figures):

Fund                                        General                        Fire                  Police

Beginning Balance                     $25,000                       $20,000           $15,000

Budget

Revenue                       $50,000                       $5,000             $5,000                        

Expense                       $10,000                       $15,000           $10,000

Transfers

            In                                                                     $10,000           $5,000

            Out                              $15,000

Ending Balance             $50,000                       $20,000           $15,000

Example ‘A’ shows a balanced budget with good fund balances to offset any contingency needs.  These are the types of numbers that were shown to Council.

Example B (not actual figures):

Fund                                        General                        Fire                  Police

Beginning Balance                     $25,000                       $20,000           $15,000

Budget

Revenue                       $50,000                       $5,000             $5,000                        

Expense                       $55,000                       $20,000           $15,000

Transfers

            In                                                                     $0                    $0

            Out                              $0

Ending Balance             $20,000                       $5,000             $5,000

Example ‘B’ shows an unbalanced budget with decreasing fund balances.  This is what was actually happening from 2000 to 2002.  

After three years operating as in Example ‘B’ the fund balances will be as follows:

Fund                                        General                        Fire                  Police

Beginning Balance                     $10,000                       -$25,000          -$15,000

When cuts were made to balanced the budget in 2003, the goal was to stabilize the fund balances.  Thus, no correction of the negative fund balances was made.  We did manage to become current with all our delinquent accounts and build cash reserves.  The 2004 budget is a balanced budget that, by years end, will show modest improvement in the negative funds that exist.  We continue to build cash reserves and the negative funds reflect only what is owed to other City funds. 

2005 Budget

Council has begun planning for the 2005 budget.  The City Manager has received budget requests from the departments and has developed the Tax Budget.  The Tax Budget is a planning document that is intended to show the revenue needs of the City in the following year.  Because of this, the Tax Budget expenditures will not balance to expected revenues.

Council is now beginning the process of setting the goals for the 2005 budget.  This process includes collecting information from the community and staff on the needs of the City.  A strategic planning session will be held with Council so that they may prioritize those needs and develop goals for the upcoming years.  Once this is accomplished, staff will develop a budget around those prioritized needs and goals.  This will be presented to Council in draft form and will be adjusted according to their direction.  The end result of the budget process will be a budget that meets the priorities and goals of the community.

Now that the State has declared Fiscal Emergency for the City of Monroe, Council and the State Auditors office will be working to form a Finance Review Committee.  This committee will have the responsibility of developing a fiscal recovery plan and performing fiscal analysis.  They will also have oversight of the finance procedures of the City, including the budget.

Anyone with comments or questions about the goals and priorities being set in the 2005 Budget process is encouraged to contact any member of Council.