Friday, February 5, 2010

John Musolf (Who Knows What He Is Talking About ) Discusses " Raiding " Our Contingency Fund

Oro Valley Mom made some excellent observations, (comments on recent candidate response to Explorer posting) especially this one!

"Mary Snider:...How should... the council use reserves ($17 million) which are in excess of the required reserve ($7-8 million)?"

Great question. Because you're running for council, you should know the answer. Contingency reserve funds are to be used for one-time or unforseen emergency expenses. Because we face several more years of recession, we won't be putting as much money into the reserve funds, and they will quickly diminish to the required level and possibly below without any help from council members who would like to spend them on recurring expenses instead of cutting costs.
February 3, 2010 11:24 AM.

Oro Valley Mom, it looks like you observed that Mary Snider holds similar views to Mayor Loomis and the council, when they voted to use contingency funds to balance the budget.

David Andrews, our former town manager, discussed in the FY2009/2010 budget why using contingency funds to balance a budget was not a good idea. He advocated spending cuts. However, he was ignored.

REASONS WHY CASH RESERVES ARE NOT RECOMMENDED TO BALANCE BUDGET (Exhibit 9 from 2009/2010 OV Budget)
• Cash reserves have been built up over the years due to annual operating surpluses
created by new residential and commercial growth – one-time construction taxes and
building permit fees. That growth is no longer occurring or projected to return in the near
future, thereby eliminating the ability to replenish any draw downs on cash reserves to
fund recurring expenses.

• If recurring expenses are exceeding recurring revenues, as in our case, this will only
continue unless structural changes are made to the organization to reduce recurring
expenses over time to match recurring revenues. This is the main tenet and guiding
principle to maintaining a balanced budget. Plugging these deficits with one-time
revenue sources and cash reserves results in a one-time, not ongoing, fix and only
delays the need for deeper cuts to a later time.

• Use of cash reserves to balance the budget draws this savings balance down, thereby
leaving the Town vulnerable and in a weaker financial position to handle an unforeseen
emergency, natural disaster, or insurance loss.

• Bond rating agencies view jurisdictions with strong fund balance reserves more
favorably during ratings reviews and take a negative outlook when jurisdictions use their
cash reserves to fund ongoing, recurring expenditures. Negative outlooks often result in
bond rating downgrades, making it more expensive for the Town to borrow capital
funding.

• Cash reserves are recommended for funding one-time expenditures, such as pay-as-you-go capital improvement projects. This eliminates the need to issue debt or finance
these capital projects over time, thereby saving debt service and interest payments and
spending more for these projects over time.

• With the uncertainty of how long this current recession will last, using cash reserves only serves as a “band-aid” and ignores the long-term impacts of having recurring
expenditures that exceed recurring revenues.

• Using reserves only delays future cuts and leaves the Town with limited reserves if the
economy continues to falter.

• The current economic downturn is not considered an unexpected, sudden event, which
is typically justification for use of cash reserves. There is adequate time for action to be
taken to balance next year’s recurring expenditures with recurring revenues by adjusting
staffing, service levels, and programs offered.

• The Town’s adopted Strategic Plan calls for a focus on Financial Sustainability, and
financial sustainability cannot be achieved by using cash reserves to close projected
budget deficits.

John Musolf

13 comments:

Tetsua-san said...

This isn't rocket science. You can't continue to spend money that you're not bringing in. You can't dip into your savings to "support" your spending habits because you'll eventually run out of money.

You don't need a college degree to understand this.

This is common sense, isn't it?

Thanks for posting this article Art!

(previous post deleted accidently)

artmarth said...

"Tetsua-san" --- Thank you for your astute comment.

Anyone that doesn't understand what John Musolf is saying, does NOT belong on the OV Council.

John has enough educational degrees in finance to be listened to when he cautions us on "raiding" our contingency fund.

I hope the voters all know that Loomis & Carter voted to do just that. When David Andrews, our then Town Manager pointed out the folly in such a decision, what did Loomis & Carter do?

They terminated David Andrews.

Why would ANYONE VOTE for these two???

OV Objective Thinker said...

I am certainly that the 'self appointed god' has determined who should and should not live in Oro Valley

I would expect nothing less.

OV Objective Thinker said...

Allow me to jump before the 'god' does. I am glad the 'god' has decided who should be on the Town Council and who should not.

However I am probably correct in my first posting also.

arizonamoose said...

Tetsua-san

Thank you for your comments on raiding the OV Contingency Fund.
Bill Adler said it best when he commented that Mayor Loomis and some council members changed the formula for a balanced budget from Revenue = Expenditures to Revenue + Contingency Fund = Expenditures.
Perhaps they have never had to balance a business or family budget. Of course when you are playing wither other people's money (taxpayers) who cares about common sense.

OV Objective Thinker

Instead of slamming Art for his comments, I would have appreciated some of your insights into the use of cash contingency funds to balance the OV Budget. As we all know, the VOTERS will decide who will serve on the OV Council.

John Musolf

John Martin said...

Yes, Oro Valley finds itself in a real budget mess. I can’t help but think that no matter who wins this upcoming election, the victors will have the worst set of spoils. With no support for a property tax (not that it should be the first or preferred alternative), the new council must make deeper cuts. Furthermore, the town faces long-term fiscal problems. At 90-plus-percent build-out, Oro Valley no longer has room to grow. (In Arizona it’s grow or die.) Without revenue from new construction, the town will become increasingly more dependent on sales taxes and other fees (already happening).

The next council must begin a serious discussion on Oro Valley’s future: What services should the town provide and how to pay for them? Should the town mount a full-court press to annex surrounding communities, especially Arroyo Grande?

I do not envy the victors of this election, for they must manage a town in decline. I would advise our prospective leaders to develop a vision for the town’s future. We may be down, but don’t leave us on the outs.

Past decisions by this current council (Andrews’ removal, contingency fund spending, etc.) no doubt have angered the many contributors to this blog. In some instances, the anger is justifiable. But once the new council makes the required cuts to put the town’s fiscal house in order, what’s next? Where do we go from here? That’s what I want to hear. What’s your vision for Oro Valley’s future? What kind of community do envision for me and my neighbors? In your answer to that question lies the key to our collective future.

Thanks for your comments.

Nombe Watanabe said...

John Martin has provided an accurate and sober assessment of the situation OV now faces.

Although I enjoy the neon breathing slap stick between Objective Thinker and his critics, it is time to concentrate on the issues Mr. Martin so clearly notes.

I suspect the police unions will go over the edge if we are forced to cut manpower. It will not be a good year.

artmarth said...

I too believe Mr. Martin has raised some serious concerns, and the question is---- who do we want leading us during the difficult near term future?

Loomis has proved time and time again that he will tax the people of Oro Valley BEFORE he'll cut his overzealous expenditures.

The fact that Loomis put his personal agenda in the forefront by terminating David Andrews was enough reason to send him (Loomis) packing.

Satish is a nice man, but his approach to running a government leaves a lot to be desired.

Mike Zinkin has the know how and wherewithal to "take the bull by the horns," and get thingsd done.

Will it be unpopular to let some employees go, if necessary? Sure it will. Will it be a hardship, especially on those affected? Certainly. But Mike will do what is best for the majority of us, and that, in itself, will be refreshing.

One last thing---- if the police unions "go over the edge," so be it. Let's not forget, the cops are almost 50% of the whole Oro Valley budget.

OV Objective Thinker said...

Hi John...

I am happy to comment on the budget. It’s one of my favorite topics.

I find the dipping into the contingency fund to be a reasoned use of revenue during tough economic times such as these. The contingency fund IS the people's money just the same as other dollars and therefore should be available.

Let’s examine the contingency fund for a moment. The only reason it even exists is because of previous overestimates of expenses and underestimates of income that resulted in a fiscal surplus for the Town. That practice is a long term favorite of Oro Valley and was practiced to an art form by David Andrews. To the best of my knowledge there is no statutory requirement for a contingency fund. A previous council established guidelines for an amount and it’s use. IT IS A COUNCIL POLICY DECISION how and when it should be used. So if a council votes to utilize it for budget balancing that’s perfectly within their purview. However like all other government expenditures, IT SHOULD BE SPENT WISELY.

The fact that we have a contingency fund is a positive influence on our bond rating and allows financial institutions to look upon our fiscal position more favorably.

Now we can discuss the pros and cons of various expenditures until we are blue in the face. What I consider to be wasteful spending, at this time, is money spent to do management efficiency surveys where there is NO clear indication of mis-management. I have yet to see one factual statement that indicates otherwise. I also believe that sending four people to Washington, DC, for the League of Cities meeting is wasteful spending but that didn’t seem to bother any of the four people who went. I believe that taking council and staff time to present animals for adoption is also an improper use of our resources; nice but certainly not necessary. I am sure there are people that will disagree with me, but that simply confirms my “pros and cons” statement.

So the comments about “spending money that we are not bringing in”, is nothing more than 'Monday morning quarterbacking' by folks who don't have a clear understanding of the budget process and what is and isn’t available to spend.

Lastly, I want to state that the Town Council actions surrounding the budget process last year were disgraceful. And that statement is to encompass all members of the sitting Council. They have no business micro-managing the budget. It should not be their job to examine line item expenditures. If the number is too big or two small they simply need to so state and allow the Department Director/Manager to make additions or cuts where necessary according to the policies that have been set by the Town Council. If the responsible parties can’t meet that challenge then it is time to find people who can.

J Martin....

Outstanding post!!!

Nombe.....Hope the above interests you.

Nombe Watanabe said...

O. THINKER:

GREAT POST!

NO NEON BREATHING.

arizonamoose said...

John Martin

You made some very good observations about the “State of the Town of Oro Valley”.

First, let’s talk about a few past examples of Town Council Performance:

Utility Tax

The real reason for the utility tax was insufficient recurring general funds to support 18.5 new desired positions. The 18.5 new positions had been voted down twice in previous budgets. The utility tax was an end run by the mayor and council to secure that revenue. To secure passage the utility tax was lowered from 4% to 2% and there was a sunset clause in the utility tax to void it in 2 years. The sunset clause was subsequently repealed and the utility tax has now become a permanent revenue fixture.

Naranja Town Site (NTS) Park

Starting in the year of 1996, the TOV purchased land for future parks for $7,650,000 using municipal bonds.

Originally, the TOV wanted to spend up to $150 million dollars the Naranja Town Site (NTS).

The Town of Oro Valley (TOV) Council decided on a scaled down first phase plan for a bond issue for $48.6 million dollars.

Tax dollars that were spent by TOV for Naranja Town Site Park before any vote by taxpayers on a new bond issue:
 May 2001 – Paid Stantec Consulting $120,000
 December 2003 – Paid Webb Management $18,000
 June 2006 – Paid Burns,Wald-Hopkins $291,070
 July 2006 – Paid travel expenses $2,799 for TOV council members/staff to go to Denver to observe similar park structure
 September 2006 – Paid Burns, Wald-Hopkins $6,000  November 2006 – Paid Stantec Consulting $15,000  December 2006 – Paid Ballard $17,400
 December 2006 – Paid DMA Engineering $12,320  March 2008 – Paid Gordley Design Group $50,000
 2008 – Paid lawyers $70,000 for ballot preparation work on NTS bond question 400.

Total cost of NTS bond issue $85,868,75 (25 Years).

Although the concept for the NTS park may have been a good one, shouldn’t the Town Council have spent less up front and worked harder to solicit voter support before it was voted down?

Stormwater Utility

This new utility is responsible for meeting all quality and quantity issues including the Town's Stormwater Management Plan, Floodplain and Erosion Hazard Management, and supporting all other Town programs that are impacted by storm events. A new stormwater tax was passed. The Town government responded to problems that directly affected homeowners repeatedly with flooding and erosion damage to their homes and affected public facilities. Also, there were some mandated compliance regulations from Federal, State and local government agencies related to the Town's Stormwater program that were necessary.

John, you asked for comments about the future vision for Oro Valley.

You and some council candidates partially answered your request by calling for annexation (especially in the foothills area) to raise revenue.

I am retired. When the economy took a nosedive, I had to cut back on some of my desires (not necessities). My quality of life has not suffered significant damage. What is different about the Town? How many entitlements are enough?

However, no one person can come up the “perfect” vision for Oro Valley. Getting involved is the only way to help develop a vision.

I have lived in Oro Valley for 7 years. I have attended virtually every Town Council meeting and spoke on issues. I can count on my two hands the usual attendance at those important meetings. Thank God we live in a democracy where I can also write over 20 Letters to the Editor concerning Town decisions (some with positive recommendations). I can comment on the LOVE blog. I have volunteered and worked on the TOV budget process. Any citizen can attend the “Council On Your Corner” sessions that are held periodically by council members for input. Finally, I can vote for council people who will be responsive to me and the voters.

John Musolf

arizonamoose said...

OV Ojective Thinker

Pros

You are correct that there is no statutory requirement for a contingency fund.

You are correct that a contingency fund does improve any government bond rating.

You are correct that Resolution 07-78 establishes a Town Council Policy for a contingency fund. It establishes a minimum of 25% of the general fund annual expenditure (although it can be more) be set aside for emergency. Contingency Funds in excess of the minimum, may, at the discretion of the Town Council be used to fund “one-time” non-recurring expenditures.

Cons:

You made a statement: “Let’s examine the contingency fund for a moment. The only reason it even exists is because of previous overestimates of expenses and underestimates of income that resulted in a fiscal surplus for the Town. That practice is a long-term favorite of Oro Valley and was practiced to an art form by David Andrews”. Why is it necessary for you to denigrate a person, David Andrews, to try to make a point? What has happened to civility?

What is a contingency fund?
It is pre-planned savings (or a rainy day savings plan if you prefer) and is not a manipulation as you imply. Contingency planning is a scientific part of risk management. Please provide detailed factual information where the TOV Contingency Fund was mis-aligned?

You made another statement: “What I consider to be wasteful spending, at this time, is money spent to do management efficiency surveys where there is NO clear indication of mis-management”.

Could you please identify where in the Request for Proposals (RFP) from Brian Garrity it states that the purpose is to study mis-management in those departments?

I was a management consultant for 25 years and performed over 50 management surveys for business, hospitals, and government agencies. The basis for 90 % of the management surveys was to define results for each company or non-profit program, plan for measurement, and provide management information on the outcomes of policies and programs.
 Performance informed budgeting
 Forces departments to examine and justify expenditures for correct operational inefficiencies. The emphasis on continuous improvement provides a strong check against the potential for duplicative, low value or unaligned spending.
 Enhanced accessibility and usability of reporting
 Every government activity requiring direct spending is accounted for and linked to an outcome, demonstrating a strong commitment to transparency.

You made another statement: “So the comments about “spending money that we are not bringing in”, is nothing more than 'Monday morning quarterbacking' by folks who don't have a clear understanding of the budget process and what is and isn’t available to spend.”

I am not clear who the “folks” are which don’t have a clear understanding of the budget process. Please identify factual information to back up that statement. In my professional career, I personally created budgets for over 40 years and volunteered significant time last year working with Chief Danny Sharp (at his request), Finance, Town Manager, and Council members on the Oro Valley budget. I don’t recall seeing OV Objective Thinker at any budget meetings?

You made another statement: “They have no business micro-managing the budget. It should not be their job to examine line item expenditures”.

Government bodies (Mayor and Council) have a fiduciary responsibility to justify the expenditures of taxpayer revenues. Oro Valley department managers have never had to justify their line item budgets. The justification gives the government reviewing body an opportunity to see an explanation of budgetary request. A clear and focused explanation helps the reviewer (sponsor) understand the need and benefit.

John Musolf

OV Objective Thinker said...

John.... to quote you,

"Why is it necessary for you to denigrate a person, David Andrews, to try to make a point? What has happened to civility?"

That is a knee-jerk, completely inaccurate reaction to my comments. And I submit it indicates a predisposition to any comment I might make and therefore calls into question your ability to be objective.

David Andrews was a very good friend of mine. I knew him well and dined with him frequently. My comment was not a denegration of David but a simple, well known statement of fact. We discussed it often and he agreed that it was a common practice and was done purposefully to insure there were never any "end-of-year surprises". Those are his words not mine.

1.YOUR definition of a contingency fund is "pre-planned savings". This fund is not and never has been "pre-planned". The Town is NOT a for-profit organization. Therefore when revenues exceed expenses the residual funds are placed in the contingency fund. And as stated these dollars are there for use at the disgresion of any Town Council that wishes to utilize them. The contingency fund was a operational policy created by the stroke of a pen and can be used or eliminated in a like manner. I am not advocating that but by the same token I do not share the "HANDS OFF" position shared by you and some others.

2. There are individuals on the Town Council who believe (and have so stated through innuendo at the least) that the Police Department is mis-managed. They are the same ones pushing the management survey. I would hate to think they want to spend $50,000 plus and this time to confirm their belief that everything is OK. Allow me to use YOUR words to define one of the expected outcomes:

"Forces departments to examine and justify expenditures for correct operational inefficiencies."

I believe to meant to say "and to" correct operational inefficiencies".

I believe that falls into a definition of mis-management. Let's not play word games.

3. I too created and had to manage to budgets over my 30 plus years working for an international service management company as a manager at many levels. I am not a budget rookie. Last year I did attend several budget meetings and was present for a portion of the annual department head presentations. I also have asked for, received and studied a copy of the last three OV annual budgets. I have submitted budget comments to Council members for several years.

4.The primary responsibility of the Oro Valley Town Council is to establish policy. It is the resposibility of the Manager to insure that that policy is implemented. The budget is one tool necessary to implement the policy. The Manager and town staff need to examine each line item as necessary to as you state "justify the expenditures of taxpayer revenues.

I stand by my previously stated opinion that the Town Council needs to stay far above line-item management.