A Huge Local Government Expense Not Being Disclosed

Hold off on shooting me with the GASB Gun for a minute. Let’s go back to Accounting 101. There is a principle that says you should not record the Net of items that should be separately disclosed. For instance, if you buy a big piece of equipment for $250,000 and get $25,000 for the trade-in or sale of the old piece of equipment, you shouldn’t record the piece of equipment at $225,000. There were two transactions or events. You record the piece of equipment for $250,000 and the sales or trade-in of the old piece of equipment at $25,000.

Two different pieces of information.

Another example where the separation is distinguished is with property tax collections. You record your property tax revenues as a revenue and the cost of tax collections as an expense: sound accounting with a focus on the expense side of things. If you netted the expense into the revenue, you might never see the cost of the contract.

You get a grant for police overtime and record the revenue separately from the overtime expense.

This is pure accounting logic.

Then We Fly Off The Cliff

The State Comptroller collects the sales taxes for every local government in the state. There are 1,658 Cities, Counties, Transit Districts and Special Districts. The Comptroller charges a “fee” of 2% for this service. In the fiscal year ending September 30, 2018, the fees collected totaled $183,421,882.77. One year!

So, please show me where any of the 1,658 entities are showing $183,421,882.77 in their budgets or audited financial statements. They are out of the spotlight. And so the years roll by with the expense amounts rolling up. The last 10 years alone, this expense has been $1,471,718,694.39.

Or to take a page out of the Legislative Playbook, accentuated with the obligatory gasp and deer-in-the-headlights look, Local Governments have paid a “fee” that has increased 53.9% in just 10 years. Where is the outrage?

Is This Really a Fee?

A service fee is supposed to bear some resemblance to the the cost of the service. A tax does not. So how much is the cost of service for collecting and distributing sales taxes to local governments? Well, that’s not easy to tell. You can take a look here in an attempt to find out. In all fairness, the cost of service (the numerator) should include all of the direct costs of collecting sales taxes plus administrative overhead and facility costs. Heck, it could even include some kind of return, a few percentage points.

But the denominator should be the 8.25% with 6.25% being borne by the state and 2.00% being paid by the Local Governments. If this is a fee.

The next logical test is that if Local Governments are being charged $183,421,882.77, then are there $756,615,266.43 ($183,421,882.77 / 2% x 8.25%) in sales tax collection costs involved here? I don’t see it in the link above. Not by a long shot.

So, Isn’t It Really a Tax?

Sure looks like it to me. And a huge one! Wow! Talking about ironies. This tax has increased 53.9% in the past ten years. It’s staggering and flies in the face of all the ultra-conservative rants about egregious spending.

What Should We Do?

From everything I can tell, State Comptroller Glenn Hegar is the fairest and most professional state elected official in Texas. In fact, I understand he is assembling local government officials to provide him with feedback on the sales tax processes October 10th in Austin. There should be a plea for him to put the service fee on a true fee basis. Ask him to conduct a cost of service study to show the full costs of collecting and distributing sales tax checks, including the audits.

Then allocation to Local Governments a 2.00% / 8.25% share.

The difference should be refunded to Local Governments.

Or there could be an alternative. Local Governments are spending $millions to hire consultants to find missing or mis-allocated sales taxes. In today’s GIS technology, there is no reason the Comptroller couldn’t provide detailed maps that show that every payer within the boundaries of a local government is being credited to the correct Local Government. It is insane to be paying $183,421,882.77 to the Comptroller and not be able to reduce the extra outside consultant expense of paying for zero-sum overall work. A consultant finds my money being paid to adjacent city, and then finds my city getting money from an adjacent city. That’s nuts.

There is so much more that the Comptroller could do. If a Local Government wants to see their confidential data, and have not requested the data in the past, they can only get the current calendar year plus the previous calendar year. They can’t even pay for the older data, although they could have more than ten years’ worth if they had requested all along. There simply is no excuse for not having access to that data given Local Governments paid the Comptroller $1,471,818,694.39 for services over the past ten years.

I also recommend that Local Governments record the money paid to the State Comptroller as an expense, along with a ten-year history in the Statistical Section of the CAFR. Okay, holster your GASB Gun, and just think through this sizable expense that nobody sees. It’s just not right. LFM

 

TOP 100 SERVICE FEE PAYERS
ENTITY FY 2018 LAST 10 FY
HOUSTON MTA $15,361,118.74 $128,778,118.43
HOUSTON $13,834,219.14 $119,675,201.80
DART $12,102,684.18 $96,457,914.20
SAN ANTONIO $7,123,770.08 $55,973,579.44
DALLAS $6,174,655.08 $50,817,283.63
AUSTIN MTA $4,912,997.85 $37,947,647.15
AUSTIN $4,501,162.52 $35,435,387.02
FORT WORTH $3,170,699.72 $25,015,008.73
SAN ANTONIO MTA $3,076,589.76 $24,641,435.31
ARLINGTON $2,219,554.11 $19,104,724.93
EL PASO $1,822,050.20 $15,694,629.71
PLANO $1,825,602.08 $14,654,342.83
CORPUS CHRISTI $1,601,425.38 $14,375,510.67
AMARILLO $1,556,903.62 $13,866,968.91
ROUND ROCK $1,652,458.97 $13,633,749.50
FRISCO $1,760,066.77 $12,449,367.34
FORT WORTH MTA $1,581,857.22 $12,234,380.67
LUBBOCK $1,423,145.53 $12,083,596.67
MCALLEN $1,256,629.69 $11,975,359.06
FORT WORTH CRIME CTRL DIST $1,498,063.00 $11,509,551.40
IRVING $1,368,553.42 $11,343,913.50
SAN ANTONIO ATD $1,393,679.69 $11,247,208.26
MIDLAND $1,343,112.17 $10,880,266.43
SUGAR LAND $1,064,268.06 $9,296,012.76
GRAND PRAIRIE $1,158,254.94 $9,060,253.59
EL PASO COUNTY $984,366.81 $8,419,147.39
MCKINNEY $1,090,433.95 $8,286,018.26
ABILENE $929,552.21 $8,076,564.57
ODESSA $1,333,220.96 $7,956,553.78
MESQUITE $895,256.60 $7,843,212.97
EL PASO CTD $897,755.60 $7,784,597.54
BEAUMONT $893,369.08 $7,708,526.39
TYLER $872,384.49 $7,702,418.21
GRAPEVINE $858,074.78 $7,617,770.02
LAREDO $847,208.61 $7,588,217.27
CONROE $983,471.07 $7,551,793.18
ECTOR CO HOSP DIST $1,055,593.34 $7,234,169.75
BROWNSVILLE $776,629.29 $6,992,229.32
MIDLAND COUNTY $1,135,900.69 $6,964,687.15
WACO $797,908.34 $6,638,438.31
ALLEN $807,651.79 $6,490,283.11
LONGVIEW $653,952.04 $6,189,432.57
CORPUS CHRISTI MTA $684,638.60 $6,058,247.70
LEWISVILLE $786,461.53 $6,025,063.44
WICHITA FALLS $639,148.79 $5,892,314.81
RICHARDSON $752,399.61 $5,885,538.19
PASADENA $693,306.84 $5,797,550.16
CARROLLTON $800,454.13 $5,711,078.50
COPPELL $781,511.52 $5,546,727.18
DENTON $748,902.86 $5,394,389.41
JEFFERSON COUNTY $614,518.93 $5,128,554.10
PEARLAND $671,736.32 $5,104,639.21
NEW BRAUNFELS $636,155.25 $4,972,018.84
SAN MARCOS $696,280.24 $4,884,031.36
SAN ANGELO $569,693.76 $4,861,878.87
VICTORIA $509,933.03 $4,846,560.21
GARLAND $581,891.15 $4,809,790.45
BRAZORIA COUNTY $683,020.36 $4,693,231.84
COLLEGE STATION $558,512.89 $4,591,624.75
THE WOODLANDS TOWNSHIP $566,894.72 $4,451,978.93
HARLINGEN $515,516.14 $4,319,363.18
DENTON CTA $568,921.08 $4,295,995.78
LOVING COUNTY $501,889.91 $4,167,991.23
KILLEEN $473,129.85 $4,142,585.33
SOUTHLAKE $585,815.19 $4,025,304.40
TEXAS CITY $461,344.06 $3,999,540.80
CEDAR PARK $583,660.03 $3,936,826.55
GEORGETOWN $523,324.40 $3,785,135.05
TEMPLE $443,364.36 $3,785,106.83
GALVESTON $427,354.93 $3,746,206.02
EDINBURG $450,221.71 $3,670,199.59
ROCKWALL $474,143.35 $3,637,845.13
MANSFIELD $467,429.37 $3,604,736.31
THE WOODLANDS TOWNSHIP EDZ $469,257.78 $3,601,842.03
SHERMAN $438,472.36 $3,546,488.54
SMITH COUNTY $373,708.72 $3,296,506.95
BELL COUNTY $391,111.34 $3,289,384.68
LEAGUE CITY $474,237.27 $3,283,983.43
BRYAN $406,889.80 $3,251,463.72
BAYTOWN $441,180.82 $3,196,052.66
WEBB COUNTY $345,070.07 $3,152,808.70
STAFFORD $339,895.96 $3,145,208.76
WEBSTER $359,497.34 $3,074,961.16
HURST $326,454.61 $3,063,773.43
GREGG COUNTY $316,354.01 $3,037,652.00
BURLESON $367,294.36 $3,032,756.95
MCLENNAN COUNTY $367,618.37 $2,981,097.38
TEXARKANA $332,270.03 $2,980,873.77
EULESS $367,093.16 $2,957,350.90
ROSENBERG $405,017.66 $2,935,111.20
THE COLONY $573,739.85 $2,917,157.71
MISSION $308,031.87 $2,916,947.54
PORT ARTHUR $314,769.35 $2,915,125.13
PHARR $372,817.34 $2,871,553.92
BRAZOS COUNTY $364,087.63 $2,834,916.46
HAYS COUNTY $417,860.60 $2,817,597.20
FLOWER MOUND $373,709.84 $2,768,979.25
NORTH RICHLAND HILLS $309,456.92 $2,739,693.78
FARMERS BRANCH $291,967.84 $2,709,455.24
CEDAR HILL $303,371.39 $2,668,111.18

 

Job Needed: Information Ombudsperson

Recently, I was telling a group of City Managers about a job description I wrote several years ago. An attendee asked to receive a copy, which I could not find, so here is my recollection. I hope to someday get all of my articles and essays moved to this blog site. Perhaps I can enlist a granddaughter to help in the future.

The job title, updated to reflect the times, came from me wanting to play off the Input/Output (I/O) computing term. However, the position is much more than IT even though I’d give a full 50% of the necessary skill set to computing sector.

Where do I suggest this position be placed? The Budget Office would be my first choice. This is where data should be directly married to management intellect. I believe the I/O could also be within the City Manager’s Office (CMO), probably reporting to an Assistant City Manager (ACM). Many ACMs reach the CMO via the Budget Office these days. And most City Managers, if honest, would say the ACM position is the best job in the House.

The I/O must be able to speak the language of management and to think like a manager. They must be politically savvy yet not be political. They should also be able to think like a crook.

The I/O must be able to transform operating data into management data. I’ve witnessed software systems being purchased over the last four decades on the basis, hope and promise of management data, analyses and reports. In fact, many if not most software systems produce operating data that in turn generate slightly higher level operating data. But not managerial data.

Operating data include registers, ledgers and details ad infinitum. Management data includes summaries, exceptions, graphical representations and the ability to slice and dice that information in multiple ways. Implied in the transformation of operating data into management data is the need to gobble tons of data in a way that makes sense such that the data can form the basis to support a decision.

Free to Stay in the Research & Development mode

If there is tragedy in data analysis, it is due to a lack of freedom to get into and stay in the R&D mode. If you try to use process people with a full plate to advance into data analytics, then forget it. Process people are budget analysts or accountants or just about anybody dedicated (or trapped) by operating cycles that allow no breathing room to think, explore and develop a skill-set. Even Project people with a full annual schedule of duties are unlikely to be able to take on and advance/excel in data analysis. And there is nothing worse than stop-start situations where one cannot remember where they left off once they pick up an old analysis effort.

The Tools

Obviously the first tool to reach full potential as a data analyst is Excel. To go way beyond basics, the I/O must master some of the more powerful features of Excel that can lead to super models and analyses. The first thing that might come to mind are the use of Excel micros. However, there are many more tools that need to precede macros, and I could make an argument that you can make quantum leaps in number crunching without macros.

The single most powerful tool in Excel is the ability to build pivot tables. This blog is not capable of focusing on the details of Excel features, but the easiest and most powerful tool is the ability to build a pivot table so that a large amount of data can be analyzed with built-in drill-down features to go from high summaries to the lowest detail with ease.

Excel can also import data from a number of sources, such as SQL Server. SQL is how most databases are constructed and stored for everything from your accounting and utility billing systems to building permitting.

However, it isn’t long before the capacity of Excel is challenged even though you can have 1 million rows and 15,000 columns of data in Excel. SQL Server has virtually no capacity limits. Along with database management, there are power SQL query and analytical tools. Yes, now you are stepping into computer program language territory, but one should not fear in light of the results one can get from SQL. However, you cannot dabble in that the skill-set comes with practice, practice, practice. I understand that some business schools and accounting programs now require multiple courses in SQL. There is a reason that is so. One leaps into a broad and powerful world of data analysis with SQL.

The Data Warehouse

Watch the face of your IT Manager when they learn you want to tap into “their” SQL databases. They have a right to be concerned, but they should not be if they are proactive. A tell-tale sign of assistance and cooperation is when you want a data analyst to have access to accounting and other data systems and get a roadblock as opposed to a suggestion to use a data warehouse. In essence, you want to be able to play with the data yet not touch the live systems. For instance, if you wanted to take a deep dive into your A/P system or your Utility Billing system, a data warehouse would include a download of the live system to a separate location as of the night before. Or it could be refreshed upon demand throughout the day. What’s the problem if I am not touching the live data?

Examples

I want to look at the details of our p-card spending by person by vendor for the past five years. I want an aging of our water meters, including the number of meters with over 1 million gallons of water in our system. How many batteries have been replaced in our fleet by vehicle over the past three years? How much overtime is being used in the past 10 years as employees approach retirement and might be spiking their pay? How much salary lag have we accumulated in the system so far this year? Are our water loss and unaccounted for numbers getting better or worse?

I can think of hundreds more, and you could, too.

The Danger Ahead

Several things have been happening over the past decade or so. More elected officials work for organizations where management data is derived from operating data and being made available to them in their operating and executive capacities. They often are appalled at the questions they want answers to that are met with, “we don’t know” or “we don’t have access to that information.” WHAT??? We have $millions invested in information systems and can’t get these logical questions answered?

If you haven’t noticed, the news media have been adding in-house talent or have been contracting with third-parties to analyze massive amounts of public data. So, they ask for a download of your utility bills or your check registers (already online) and then produce an exception report that is placed back into your hands as a story you should already know.

And the local complainers and watchdogs, many retired with analytical skills, can have a field day doing as I have explained.

Conclusion

In this day of forensic audits, you cannot be caught with someone outside your organization telling you something about your business you should already know. But this is not simply a plea for a defensive posture I am talking about here. It’s a plea for professional management.

I often open up a presentation with a statement like “while you are listening to me for the next few minutes, somebody is stealing from you this very minute.”

What I do know is that when something blows up, nobody gets thanked for the lean and mean staffing that also may equate to a lack of oversight where it should be.

But here’s the good news. Take one good analyst and give him or her three things. The right tool set; the authorization to explore any and all systems other than the confidential police data; and the time to be left alone to explore and build queries that can be run to look for exceptions.

I predict the payoff will be big. It will be in the form of trends you otherwise didn’t see happening or heads up to explore yellow flags. It wouldn’t be long before the organization fully realized that everything from operating statistics to revenue performance to spending is under healthy scrutiny. LFM

 

What Does This Troll Have to do with Managerial Problem Solving?

 

Troll

This Troll is located under a bridge in Seattle, Washington several miles from Bill & Melinda Gates’ $68 million home. I saw it on a bus tour on Saturday. It is visited night and day by kids, families and sightseers. How could you resist the invitation to go look for the troll hiding under a bridge? You can see the pedestrian bridges coming down both sides. That’s a full-size VW in his left hand. The hubcap resides in his left eye. There is a road in front of the troll to see it by driving under the bridge.

But this is end the of a story. Let’s work our way back to the beginning. The troll is the product of a neighborhood contest. A group was formed to come up with an artsy idea, and this was the result. A grant was provided to construct this attraction. Great idea, right?

Yet the motivation wasn’t to support the arts. The purpose of this troll was to solve a problem. A very ugly problem. This was the site for nightly drug use at the height of heroin addictions in Seattle. Police detectives were being called to this location almost nightly to deal with overdose problems. If detectives were called, then you know this was a death-related call – the kind that sends a team of people seeking the cause of death and another team seeking the drug dealer or murderer, either the direct or indirect cause of death.

Let’s Enumerate the Team

At the risk of stating the obvious, let’s count off the people who might be involved in just one case like this. I’m sure I’m leaving some group out, but this is from memory.

  1. Police call takers and dispatchers.
  2. Police patrol squad.
  3. Police Detective Investigators.
  4. EMS.
  5. Public Hospital Staff.
  6. City Morgue.
  7. Pauper Burials.
  8. Crime Scene and Crime Lab Personnel.
  9. Jail Facilities and Personnel.
  10. County Criminal Court Facilities & Staffing.
  11. District Criminal Court Judge and Administrative Clerks.
  12. Two Criminal Bailiffs for Court.
  13. Two Criminal Bailiffs for Criminal Transport.
  14. A Court Reporter.
  15. Two Criminal District Attorneys & Investigative Staffs.
  16. Two Court Appointed Defense Attorneys.
  17. The Jury Fees & Lost Time for Jurors.
  18. Expert Testimonies.
  19. Prison Facilities & Personnel for Decades, perhaps.
  20. Probation Officers & Support Staff.

Back when I was the Dallas County Budget Officer in my early career, I priced out the cost of just one trial. It was staggering back then, so I can only image the sticker shock today.

May I remind you that I mentioned the calls for overdoses and murders were routine. And it was just for this one location.

So, what if this wasn’t such an easy place to do drugs? Oh, and did I mention this problem in turn was creating a blighted area well beyond the spot in question as do all neglected areas where crime is left to move in?

That’s what the City in general and this neighborhood in particular wanted to address.

There is always the conventional alternative, and that is to keep adding costs triggered by one murder multiplying into 20 different areas of specialty – all at premium costs. Can you imagine the General Fund budgets for the City and County governments bloating up? Much worse, the money would grow as the problem grew, but not a thing would necessarily be done to solve the problem.

How do you stop that one murder from happening?

Lights, people and traffic motivated to come see an attraction was their answer. An investment instead of an expense. Hey, the protective shelter for Mr. Troll was already there! And imagine this – an art project investment turns into an economic development stimulator as the immediate area was reclaimed without corporate welfare!

Comments & Conclusion

If your first response is that all this did is to move the drug users and dealers to another location, then you have just revealed something about yourself. You are worthless as a problem solver.

Here is what I do know. The tax caps and cuts that are coming are real and will likely be severe, especially as they become cumulative over a period of a few years and then compounded by an economic downturn where real losses cannot be restored politically.

It’s. Going. To. Happen!

Here is a companion comment and a few questions. How many people working for you right now would be hired/re-hired today knowing what you know about them and their productivity right now? For each one of them, what are you doing to train/re-train, mentor, motivate, discipline or terminate? How many of them have 1 year’s of experience 20 times vs 20 years of continued growth in responsibility and contribution?

How many are good people, but they have just become way too expensive as the numerator has climbed with raises and generous benefits while the denominator has diminished with extra holidays, vacation days and sick leave days?

More than once in my career I have had city managers and department heads yelp like they had their legs chopped out from under them from a cutback – only to tell me privately that it was one of the best things that could have happened to make them step up to earn that part of their paycheck that includes making hard decisions they had been hesitating to make.

On The Other Hand

If your first response from the Troll story is that the demand side of your workload has got to be addressed, especially for services that require 24x7x365 coverage, then I apologize for scolding and only wish to provide encouragement.

I don’t like the way things are going with citizens and elected officials caring less about who gets hurt, that there is only one priority – cut taxes. I am working hard to provide analyses to show the fiscal impact for every city, county and school district in Texas. You should have already seen my report.

But you know what? They don’t care about facts. And I hear that nothing sets them off like being threatened with the consequences to public safety. I’ve even heard that one State Senator responds to that threat with “sometimes a few people may have to die.”

Here’s the deal. There are only a dozen or so ways to balance a budget. Improving Productivity is the first and Raising Property Taxes is last. LFM

Budget Balance Options

(I’m writing a more complete blog on these alternatives as soon as I can)

  1. Improve Productivity. $Impact: High.
  2. Defer Needed Spending (kick the can down the road, compounding costs) $Impact: High.
  3. Trim Expenditures. $Impact: Low.
  4. Reduce Program Service Levels. $Impact: Medium.
  5. Eliminate Programs Altogether. $Impact: Usually High.
  6. Don’t Start New Programs Requested by Citizens. $Impact: High.
  7. Refuse Unfunded Mandates. $Impact: Medium to High.
  8. Use One-Time Solutions (i.e. Reduce Reserves). $Impact: Medium.
  9. Shift the Burden (ie. To employees or another government). $Impact: Medium.
  10. Charge New Fees for Service. $Impact: Low to Medium.
  11. Increase Existing Fees for Services. $Impact: Low to Medium.
  12. Raise Property Taxes. $Impact: Medium to High.

 

 

 

 

 

 

 

Why Do We Wait for Animal Control to Reach a Crisis Before We Act?

Actually, I could have replaced “Animal Control” with a blank since this question applies to hundreds of situations in government.

But today I want to focus on just animal shelters in particular. As most of you know, I read from a few hundred (246 to be exact) Texas newspapers and their suburban editions each day. I look for stories that are of interest to city officials, city managers and mayors in particular.

I have known for decades that few topics consistently make the Top 5 as often as animal control issues. I live in McKinney, a city of 180,000 people, meaning just about that many people have an interest or downright big investment in pets.

In recent years, there is one common topic that pervades the Texas headlines. It is the overcrowding of animal shelters. On most days I can point you to at least 10 stories about animal shelters waiving fees and going to extra lengths to incentivize residents to make a permanent home for a pet in order to keep them from being euthanized, the ugly alternative.

While there are usually two primary ways to deal with challenges like animal control, programming and larger facilities, it is always programming that should be given resources even though that means physical space, too. Spay and neuter efforts are foremost, of course. That goes without saying. And adoption endeavors need a robust and unrelenting dedication from staff and volunteers.

But the facilities need to be sufficient, and that is where I want to place an emphasis with my comments today. My main point is to not be surprised at this need. I rarely go to our animal shelter or any shelter. The reason is simple. Although my wife and I have four pets, I am positive a visit for any reason would result in us adding to our fur family. But the last time I visited the Collin County Animal Shelter, it was organized chaos. I’m sure the pet inventory was over-crowded, but I had to work my way through the people (some bringing pets, some taking one home) and volunteers to talk to the person I went to see.

Here is what I was left wondering, and I think about this every time I read yet another “Code Red” adoption story across the state in my daily readings. Why would we not realize that the companion story to the daily rah-rah about Texas’ hyper-growth in population has the same direct correlation to animal population management?

To know that any city’s population that has grown 5-20% in the last five years, and is likely to be on that same path for many more years – and to not have an animal shelter program and facility expansion in lockstep – is to have one’s head stuck in the sand.

There was a new story in the Amarillo news media this morning. A dog in labor was euthanized. I’m having difficulty even imagining how that could happen. But I do know  there are some basic management principles at play. There is an intake rate and an outflow rate. When the former grows at levels that some would have no problem describing as “massive,” then the inventory (facility) can only expand so far until the outflows have to increase: Pets have to be adopted, shipped to another facility (shifting the burden) or else the animal has to be euthanized put to death.

But those inventory and processing steps – called animal shelter programming and facility capacity – need to be sized commensurate with the population growth. Otherwise, city and county leaders can expect mistakes and regretful decisions from staff and volunteers. To turn one’s back to this problem is irresponsible.

C’mon folks, these animal shelters need some help – and kind-hearted adopters who already have too many pets cannot be the only solution. LFM

 

Is It Time to Reconsider the GFOA Awards & Transparency Awards?

INTRODUCTION

It was in the mid-1980s when I was called into the City Manager’s office at a medium-sized city in Missouri. I was there as part of a consulting team looking at the IT department and, in my case, the accounting software needs. I wasn’t sure why the City Manager asked to meet with me behind closed doors.

I quickly learned the purpose of the meeting was for the City Manager to vent about the Finance Director. I already knew they did not get along. Well, that’s an understatement. They despised each other. The City Manager came up through the public works channels. The Finance Director, I soon learned from those inside the City and even those in the wider government finance industry, was one of the most obnoxious individuals to ever walk Planet Earth.

The City Manager’s complaints about the FD were laced with fiery profanity. It didn’t take him long to direct the discussion to the GFOA Awards that the CM painted with his hand across an imaginary wall that was ostensibly the finance and accounting hallway. The CM ranted about how much time and money the FD spent on obtaining the awards that, to him, took time away from being productive. Specially, the CM complained about how he was getting no timely and meaningful reports out of the FD. I don’t actually recall my response to him, and I’m not sure he asked for my input. Like I said, he was just venting. Let this story simmer on the back burner for now.

TODAY

Fast forward about 3+ decades to just a few weeks ago. I was with a group of people that included CMO officials as well as some finance officials. Suddenly, the discussion landed on the GFOA Awards. In a slightly more gentle and professional way, representatives from both disciplines repeated almost verbatim the opinions of the Missouri CM. Without the profanity. One finance professional said he estimates that he dedicates about 2 FTEs to doing nothing but preparing the CAFR and Budget to submit for the GFOA Awards.

Worse, as the discussion unfolded, the time and money were spent to produce two documents that virtually nobody read. Not the Council, the City Manager or anybody else in the City. And even fewer citizens! Profanity almost entered the discussion when the participants started talking about the uselessness of most Performance Measures included in the Budget. One finance official had a PDF of his Budget on the laptop. He counted the pages of PM data and surprised every one in the room that it was about 30+% of the Budget document. And worthless – only done out of duty to satisfy the requirements to earn the GFOA Budget Award.

More than one person in the room said they could produce a much more valuable set of Finance Statements and a better Budget document without the worry of GFOA Awards. The extra time they gained could be used to work on true management reports. One city showed how they actually prepare yet another version of the Budget that is understandable with most of the pertinent information readers need to assess the City’s financial resources.

However, there was one problem revealed. A serious one. The City had so many consecutive years of awards on the walls that it was certain they would be fired if the loss of an award happened on their watch. That was a sobering thought and took a few minutes to soak in. Is that the real reason more people don’t speak up?

CONCLUSION

It dawned on me that the discussion I am describing, 100% true, is likely to be descriptive of what some City Officials may have been thinking for a long time. I’m even aware I might be ostracized for bringing it up. I must confess it has occurred to me many times in the past three decades – even as I was once a GFOA Reviewer for the Budget Award. So was at least one other person involved in this described discussion.

Separately, I was talking to one of my respected colleagues several months back about how I have grown to really appreciate and use some of the infrastructure and depreciation data included in the otherwise confusing CAFR. I was then shocked when told that he didn’t place much stock in the accuracy of that data and that it was only included to satisfy GASB requirements. I’m still dumbfounded.

I wonder sometimes if we haven’t continued to fall into the “Awards Trap.” Even the Transparency Awards, now the goal of many cities, appears to be adding some flashy stuff that can be more sizzle than steak. After playing around with a few sites, I think the jury is still out. Are you able to make decisions from information or is it simply interesting at best? The hope is that the answer is “both objectives are satisfied.” But I wonder.

A basic dilemma governments face is whether to just add on tasks to staff, especially overhead functions, or to Reallocate Resources. Adding is a computer function. Reallocating Resources is Management in its purest form, often not practiced at all. The companion question regarding information has always been this: “just exactly who would notice if we stopped doing this task or preparing this report?”

Wait, don’t shoot me with the “Rating Agencies Gospel Gun.” I know they are the only readers of the CAFR (along with a few of the larger Bond Holders), and the CAFR Award carries more weight than the Budget Award. But in your heart of hearts, is it time to reconsider the effort and costs of the “Award Trap” and time to Reallocate Resources to something people need, read and use? LFM

Should McKinney Refund $29,770,931 to Taxpayers from Excessive Taxation? You Make the Call!

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Municipal budgets are a compilation of tons of numbers. The focus is usually on Revenues & Expenditures. However, not to be overlooked are the resulting Fund Balances, both the incremental addition or drawdown for any particular year as well as  the cumulative Balances.

Fund Balances should be clearly highlighted in a budget. They should also be viewed in light of the overall expenditures in each fund. There are several “funds” such as the General Fund, The McKinney Economic Development Fund, The McKinney Community Development Fund and the Water & Sewer Fund. The largest is the General Fund where most of the property taxes, sales taxes, franchise taxes and building permit revenues can be found. Also, the Police, Fire, Parks & Recreation Departments and most all typical city tax-supported services can be found in the General Fund.

The McKinney General Fund budget indicates a financial policy desired minimum Fund Balance of 90-days of Expenditures or about 25%. That’s pretty healthy. I also wouldn’t consider a 120-day balance or about 33% to be excessive but rather very healthy.

While the Budget documents are of value, I consider them secondary to the Comprehensive Annual Financial Report (CAFR), which are the audited financial statements for a government entity. You will note from my table above that I have recapped some key number from the last 10 years of CAFRs for McKinney. These CAFRs are available at this link. The pages from the CAFRs I am using to compile my table can be found here.

To summarize my table and the CAFR schedules behind it, the City of McKinney has continually under-budgeted Revenues and over-budgeted Expenditures. Sure, there will be a variation out of a 10-year view, but the story is unmistakable.

The supporting schedules also show the changes between the Original Budget, the Revised Budget and the Actual Results. The Revised Budget figures are often shown late in the year about the time the Budget is presented to the City Council. That would be right about now as the City Council Budget Workshop is scheduled for tomorrow August 4th, when there are less then 60 days remaining in the Fiscal Year (October through September).

I would like to think that such a sophisticated staff as McKinney has, with all kinds of software and computing power to slice and dice the financial data, tailor queries and such, could stand flat-footed in August and get a very close estimate of the year-end actual numbers a few weeks away.

As you can see, the Actual results show the General Fund Balances to be well in excess of 120 days or 33% year after year for a decade. As of the end of September 30, 2016, the Fund Balance in the audited financial statements totals $65,606,029. When compared to Expenditures of $108,998,422, the metrics are 220 days or 60.19%.

If you compared to 120-days, the excess would be $29,770,931!

So, what could be done or should be done with that excessive amount? First, you would have to convince the City Manager that it is excessive, because he argues just the opposite. Actually, all you have to do is convince the City Council, the policy makers who adopted at the staff’s recommendation for a General Fund Balance level of 25% at a minimum.

Ah, nobody said anything about a maximum!

Would the City be in dire straits if the Property Tax Revenues had been $29 million less in recent years? Hardly. But you make the call. I want to see somebody stand up and tell me that $25-35 million at 120-days is too skinny.

Could the $29 million have been spent to buy 2-3 downtown garages out of cash and the City still be in sound financial condition? Yes. Or the same spent on a new city hall or on any kind of infrastructure needs? Yes.

Could or should the $29 million be returned to the Taxpayer since the rates could have much much lower in recent years and the City still be fiscal responsible? I think so, but you make the call. The $29 million excess got there because of unneeded taxation, pure and simple.

Has a refund like this ever been done before in the region? Yes, Farmers Branch did so many years back. They called it a dividend to the taxpayers.

Does the City have excessive reserves in other Funds? Yes, download the most recent CAFR and take a look. You will be blown away.

Did the City Council sitting in early 2017 when the FY 2016 CAFR was presented to them and accepted by the Council understand the General Fund had a $65 million balance? Dunno. Ask the three still on board or call up the four still active in the community. What about the current Council members? Dunno either. Ask them.

What is the staff projecting for the contribution to the General Fund Balance (or drawdown) going to be as of the end of the fiscal year in 60 days? I’m told a decrease of $381,105. And for FY 2018? I’m told it will be zero, that Revenues and Expenditures will be exactly the same.

We shall see.

Will Fund Balances even be discussed at tomorrow’s Budget Workshop?

Tune in.

LFM

 

 

Collin County Tax Base is Robust … And Will Put Pressure on Officials to Lower Tax Rates

We are blessed in Collin County. The momentum (momo) is enormous, and there are no signs of slowing down. In fact, it is just the opposite. Our momo is gaining momo!

The market value of my property went up 16.90%. Wow! My investment is paying off. My assessed value is lower due to my Homestead and Over 65 Exemption. Still, that’s quite a rise.

The pressure will be on for local government officials to lower the tax rate in most cases. But just how much? It depends. Each government will have to compute an apples-to-apples comparison in accordance with the State’s Truth-In-Tax laws before tax rates are considered beyond July 25, when the Certified Tax Roll is finalized. A key metric is the Effective Rate. The calculation can get complicated, but it basically boils down to this: what is the tax rate that equals last year’s Operations & Maintenance Tax Revenues + this year’s Debt Service obligations?

Oh, by the way, last year’s O&M Tax Rate can be adjusted to compensate for services needed to cover new growth in our community plus anything we annexed. That’s fair. You don’t add $billions in new subdivisions without needing more staff to patrol and serve same.

That basically leaves us with the Revaluations to scrutinized. I made an attempt to separate that critical number from an official document released yesterday by the Collin County Appraisal District that can be found at http://www.collincad.org/downloads/viewcategory/55-estimated-taxable-values.

Can the O&M Tax Rate be dropped by that Revaluation Percentage, which is 5.93% for McKinney and 5.11% for the County as a whole? Not exactly. There are two things not covered in the T-n-T calculation. One is inflation. Personnel costs and just about everything costs more due to inflation. So, there is a reasonable expectation that a portion of the increased tax valuations should cover property service cost increases due to inflation. Inflation means I am buying the same things for a higher price.

So, what should that inflation factor be? The official number is about 2.00%. My expectation is that local government inflation is more due to a fairly large amount of commodity costs, such as fuel, electricity, road materials and more. Let’s use 2.50%, just for illustration purposes.

That would leave about 3.43% in the O&M Component of the Tax Rate for McKinney. Should we expect that level of tax reduction?

Well, maybe, but there is one more thing, and it is not tiny. There are new things needed and approved all the time. Cameras and better police vests are examples. Not cheap. The list is long, and many if not most are new services and service level increases requested by the citizens and taxpayers themselves.

So we should just suck it up and expect all of the 3.43% to be absorbed by local governments? Not at all. In fact, we are isolating just this one component of budget balancing to better understand it. Below the CCAD table, you can find my diagram of all of the other ways local governments have to balance a budget BEFORE they get to raising the taxes or utility rates.

I started calling this approach Skinny Budgeting way before President Trump started using the term. And virtually every avenue for budget balancing has been part of my sermonettes since the early 1970s. The elements of this approach are exhaustive as you drill down within each selection. When I prioritize these approaches, the very last one is to defer necessary expenditures like infrastructure maintenance. The next to the last one is to raise taxes. The very first one is performance improvement, which should be an everyday exercise and not one saved to balance a budget in case of a crunch.

More on Skinny Budget in a later blog. My point for bringing it up as part of this blog is to keep from getting slammed from John & Jill Obvious that tax revenues aren’t the only balancing solution that should be examined.

Also, and this is very important, these CCAD values are preliminary, before they go through the appeal process – a primary obligation of the property owners. LFM

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