Monroe County 2015 Budget Hearings Recap

2014 Monroe County Council
2014 Monroe County Council

I’m embarrassed to see that I haven’t made a blog post since August 12 — unfortunately there just hasn’t been enough time in the day. However, that doesn’t mean that nothing has been happening in Monroe County Government; in fact, just the opposite! On Tuesday night, the Monroe County Council completed its annual budget hearings for 2015, which took up a good portion of the month of September. Budget hearings are a required annual process in which each county department presents its budget request for the upcoming year, and the county council votes to approve it or make changes.

During budget hearings, the County Council appropriated over $62M for county government functions across 47 funds.

All in all, this was, in my view, a particularly successful budget hearing. The most significant and substantive accomplishments were:

  1. The Council passed a balanced budget. For the first time in a number of years, the Council passed a budget in which planned expenditures for the primary operating expenses (in the General Fund and the County Option Income Tax Fund) are less than planned revenues. I’ll discuss more about the concept of a balanced budget in a future post.
  2. County employees (other than those whose salaries are mandated by state law) will receive a 2.8% cost of living increase. 2.8% represents two years of increase in the actual cost of living (as measured by changes in the Midwest Consumer Price Index from the previous December to December). This is the standard methodology that has been used by the Council in recent years. County employees did not receive any cost of living increase in 2014.
  3. The Human Resources department was increased from one full-time employee to two (moving a half-time position to full-time). Many councilors, including myself, indicated early in budget hearings that this increase was our number one priority if the resources were available. The county has over 525 full-time employees, and over 700 employees including part-time, and 1 full-time HR professional is well below the level needed to properly serve an organization of this size. With the increased resources, the HR department has plans to enhance employee training, increase desk audits, and introduce performance management techniques, along with other initiatives.
  4. Two employees in the Recorder’s Office were moved from the Recorder’s Perpetuation Fund to the General Fund. The Recorder’s Perpetuation Fund is funded by certain fees on recorded mortgages and deeds, along with copies made of these documents, and is statutorily earmarked specifically for the preservation of records and the improvement of record keeping systems and equipment in the Recorder’s Office (in fact, the council doesn’t even appropriate the fund; it is entirely under the control of the Recorder). However, whenever balances in the Recorder’s Perpetuation Fund grow large, county councils are always temped to try to use the Recorder’s Perpetuation Fund to support the general operations of the Recorder’s Office, despite the murky legality of such arrangements. Back in 2008, when the Monroe County Recorder’s Perpetuation Fund’s balance was over half a million $, the Recorder worked with the County Council to move the entire salary of 1 employee, half the salaries of 2 employees, and three quarters of the salaries of 2 employees out of the General Fund into the Recorder’s Perpetuation Fund. This was enormously helpful to the County Council in funding county government through some difficult times; however, by 2013, the balance of the Recorder’s Perpetuation Fund had almost entirely been spent down.In an attempt to stabilize the fund, for the 2014 budget, the Council rearranged the funding of the Recorder’s Office staff, paying for 3 employees out of the Recorder’s Perpetuation Fund and 3 employees out of the General Fund. Unfortunately, due to diminishing revenues from recorded documents, this restructuring wasn’t adequate, and the Recorder’s Perpetuation Fund is now in a position where it can mostly likely not even meet payroll for 2014.In addition, some new legislation in 2014 clarified the use of the Recorder’s Perpetuation Fund for general operations, stating that the fund could be used to fund salaries and other general operational expenses, but only if the Recorder attested each year that the records perpetuation efforts and technology of the department were fully funded. For these reasons, the Council moved two of the three positions funded out of the Perpetuation Fund into the General Fund, leaving only one position in the Perpetuation Fund — the Microfilm Deputy, whose work is clearly related to the purpose of the Perpetuation Fund. Although this may seem somewhat “inside baseball”, this move was a huge step in ensuring the sustainability of the Perpetuation Fund, and weaning the Council off of the use of the very limited Perpetuation Fund to subsidize basic county government operations.
  5. Two employees were moved from the Prosecutor’s Pretrial Diversion Program fund into the General Fund. This situation is very similar to that of the Recorder’s Perpetuation Fund, which which a fee-driven fund (Pretrial Diversion) was used to subsidize basic county government operations that should have been paid for out of County General. In the case of Pretrial Diversion, though, the situation was much more adversarial than with the Recorder’s Office. For a number of years, the Prosecutor’s Office would deposit excess revenues from Pretrial Diversion into the General Fund — in essence, the Pretrial Diversion Program was subsidizing the General Fund.The last year this occurred was 2006, in which $170K was transferred from Pretrial Diversion to the General Fund. During the last year of the Carl Salzmann administration, 2007, this practice was discontinued, and no funds were transferred to the General Fund. In apparent retaliation, in 2008 the County Council transferred $170K of salaries for Prosecutor’s Office employees (legal secretaries and paralegals) from the General Fund into the Pretrial Diversion Program fund.As with the Recorder’s Perpetuation Fund, over the years, the revenue and cost curves went in the opposite direction — pretrial diversion revenue declined overall (though not every year), while personnel costs (salary and benefits) naturally increased, leading to an unsustainable situation. Again, as with the Recorder situation, the Pretrial Diversion Program fund expended all of its reserves, to the point where it faced a negative balance by the end of 2014. Again, the Council started to address the situation in 2013, moving one of the salaries back into the General Fund for 2014. However, again this wasn’t enough, and the Council had to move the two remaining general prosecutorial positions (i.e., positions not there to support the Pretrial Diversion Program) into the General Fund several months ago in 2014.

    The 2015 budget included all of the basic prosecutorial positions in the General Fund that had been moved into the Pretrial Diversion Fund by the Council in 2008 — thereby finally ending the unsustainable subsidy of the Prosecutor’s Office by the Pretrial Diversion Program fund. Incidentally, this is not only an important accomplishment because it ensures the sustainability of the Pretrial Diversion Program; more importantly, it ends a practice that could be perceived as a conflict of interest — i.e., the Prosecutor formerly could be perceived as having an incentive to ramp up the Pretrial Diversion Program in order to fund basic operations.

I’m very proud of all of my colleagues on the County Council and in other county departments this year for what they accomplished — a balanced budget, a cost of living raise of county employees, increased organizational capacity, and weaning the county off of unsustainable fee funds.

Of course, there is still some unfinished business. This year we raised the Juvenile County Option Income (Juvenile COIT) Tax from 0.05% to 0.095%. The 2015 budget moved some youth-related expenses from the General Fund into the Juvenile COIT fund; however, the Youth Services Bureau had a proposal to add two new positions and reclassify several others in order to provide more outreach and build organizational capacity. This proposal was removed from the 2015 budget proposal, however, and will be considered in the future by the County Council on its own. The Treasurer’s Office also requested 1-2 additional staff in order to address claimed chronic understaffing in the office. The Council ultimately declined to add additional positions during budget hearings, but agreed that they needed to address the staffing levels in the future. Finally, the planned revenue for 2015 also included around $250K in an appeal for a one-time excess levy in order to correct several past errors. The Council still needs to complete this appeal — and there is no guarantee we will receive all of what we are requesting.

The next step in the budget process is for the Council to formally adopt the proposed budget, as well as set the tax rates and levies that will be used to fund the property tax portion of these budgets. Budget adoption hearings will be held on Tuesday, 2014-10-14 and Wednesday, 2014-10-15, at 5:30PM each evening.

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Preview of Today’s Monroe County Council Work Session (2014-05-27)

 

Monroe County Courthouse at Night
Monroe County Courthouse at Night

The agenda and packet for tonight’s work session of the Monroe County Council is available here:

The council does not have any regular business to conduct tonight, so tonight will be for discussion only. The main topic will be preparation for the fall budget hearings. In particular, the council will discuss:

  • Dates for 2015 budget hearings (held in the fall of 2014)
  • State of County finances (the Auditor will present)
  • County employee compensation, including options for for increase (I will give a primer on the structure of the county employee compensation system, which I will post afterwards)

In addition, I will name the 3 Council members to serve on the Sophia Travis Community Service Grants committee. This year, $100,000 has been appropriated for community service grant awards.

As always, the meeting is open to the public, and will be held tonight at 5:30 in the Nat U Hill room of the Monroe County Courthouse. Unfortunately due to CATS staffing issues, the meeting will not be broadcast on CATS. Hope to see you at the meeting!

State Pushes New Accounting Mandate on Counties for Income Tax Revenues

Monroe County Courthouse in the Fall

New Mandate from the State

This week, the Monroe County Auditor’s Office (along with every other auditor’s office in the state) received the following memorandum from the Indiana State Board of Accounts and the Department of Local Government Finance: DLGF Memo 24 July 2012 RE COIT Fund.

The relevant part of this memorandum states:

Implementation of the uniform county chart of accounts has brought to light that counties have been commingling income tax certified shares and distributive shares with property tax dollars. This practice fails to provide accountability for each of these revenue streams and any remaining balances. In order to avoid creating shortfalls in these commingled funds State Board of Accounts (SBOA) did not ask for change in 2012 but we are looking to improve the uniform accounting system in 2013 and beyond.

Beginning in 2013, the SBOA is instructing all county units to use funds, 1110, CAGIT County Certified Shares or 1121, COlT County Distributive Shares, as applicable, to receipt, disburse and account for balances of county income tax dollars not otherwise designated for special legislation or property tax relief. Planning and budgeting for this change is necessary during the 2013 budget process. Please enter these funds as new “home rule” funds in Gateway.

These new funds are separate income tax revenues for the purpose of fixing the county budget and may be used for any allowable governmental purpose. Salaries, fringe benefits, capital expenses are all appropriate uses of these funds. Income tax, however, is the only revenue source for the fund.

Two General Funds?

To understand why this is an issue, consider the way that most counties (including Monroe County) budget for their basic operations. There is a general fund that funds most basic functions of local government — law enforcement, record-keeping, tax collections, justice, etc. Highway funding is already separate, by statute. Revenues flow into this general fund from multiple sources — property taxes, excise taxes, income taxes, fees for service (such as building, planning, and recording fees), etc., and are then expended out of the general fund for the operations of county government, as appropriated by the County Council. This provides maximum flexibility for the County Council to express the priorities of the community in the county general fund budget.

This memo, however, is instructing counties to start segregating out the income tax revenues from all of the other revenue sources that flow into County General into a completely separate fund, and then budgeting for county expenses out of this fund as well. This essentially requires the creation of a second general fund — but without any clear policy distinction between the two (since at this point, property tax, income tax, and other miscellaneous revenues can be expended for any legal expense of county government).

In principle this new mandate from the state should make absolutely no difference. It neither increases nor decreases the amount of revenue available for county government, nor does it in any way restrict the way in which revenues are expended. What it does, however, is create, at the last minute (with respect to budget hearings) a significant budgeting challenge without any public policy benefit. Counties now have to decide arbitrarily which expenses to pay out of the regular old general fund (property tax plus other miscellaneous revenues) vs. which expenses to pay out of the new income tax general fund. Additional monitoring will be required throughout the year to ensure that one of the two general funds doesn’t accumulate a surplus while the other runs a deficit.

How to Slice Apart the General Fund

Since this mandate was just released, no approaches have yet been proven out.  However, different, counties are discussing different approaches. Some counties are considering segregating the income tax fund by function — in particular, by putting so-called “public safety” expenses in the new income tax fund, leaving the rest of county government expenses in the old general fund. I strongly oppose this approach, first, because it sets “public safety” (however that is defined) apart from and above other functions of county government, and second because it creates the temptation for a public safety entitlement if the income tax general fund winds up in surplus.

Another possible approach is to segregate expenses by category — for example, to put all supplies, services, and capital items in the income tax fund while paying personnel out of the old general fund. Paying personnel out of any fund creates particular cash flow problems — payroll may be required before the income tax is received, for example, and so the county would need to “seed” the new fund with money that would be available January 1, 2013, if payroll were to be made out of the fund (we probably want to seed the fund anyway, so that expenditures can be made January 1, but it becomes less urgent if the budgeted expenses are non-personnel).  I prefer this approach, although the fund will probably wind up in surplus, since the total of the county’s supply, services, and capital item expenditures in the general fund. This kind of approach, though, avoids setting up an entitlement mentality for certain essential county government functions over others.

Process Over Substance

In summary, while counties can certainly figure out ways to work with this mandate, it puts additional burden and complexity on the budget process with absolutely no additional public benefit. There is no more control over expenditures. No more transparency. No more accountability. This is simply process over substance. And the problem can be fixed by the General Assembly next session; the General Assembly can simply specify that income tax revenues should be distributed into the general fund.

Budgetary Reserves for County vs. City

The City of Bloomington has just begun their budget hearings for 2013. The City’s proposed 2013 budget can be found here: 2013 Proposed Budget.

Monroe County will begin ours in mid-September. Both the City and the County will likely be running some sort of deficit, at least on paper (there are many reasons why what looks like a projected deficit does not, by the end of the year, wind up actually being a real deficit). Any time deficit spending is contemplated, the level of reserves rises to paramount importance: once the reserves are expended, obviously, deficit spending becomes impossible.

There are many ways to represent budgetary reserves, but since the City of Bloomington chose to represent their reserves in a particular way (the projected cash balance in the General Fund at the end of 2013 plus the Rainy Day Fund), I thought it would be illustrative to calculate the County’s is the same manner, by way of comparison.

Here are the results:

City County
2013 EOY Projected Cash Balance  $    2,522,943.00  $  11,283,937.92
Rainy Day  $    4,637,930.00  $    5,570,550.00
Total Reserves  $    7,160,873.00  $  16,854,487.92
Projected General Fund Budget  $  34,786,808.00  $  29,202,961.00
Reserves as % of Gen Fund 21% 58%
Projected 2013 Deficit  $       781,157.00  $            713,546
2013 Deficit as % of Reserves 10.9% 4.2%

Of course, there are a lot of what-ifs in this analysis. My projected general fund budget includes a 2% employee COLA increase that I am proposing, while basically remaining flat in other areas — and also makes some assumptions about revenues (which I will post in a different entry). But the upshot is that even under a projected deficit scenario, Monroe County Government, through years of prudent fiscal management clearly has reserves that are very healthy, compared to the proposed level of deficit spending during these difficult economic times. This is exactly why we build up reserves during good times — so we don’t have to slash basic public services when times are tighter.

Appropriations vs. Cash: A Crucial Distinction

The distinction between having cash in a particular fund and having an appropriation in a fund is a crucial distinction that is often confused. Both are needed before money can be spent from a fund. Neither is enough by itself.  Let’s consider the distinction:

Having cash in a fund is just like having money in a bank account. Cash can come into a fund from various sources — taxes, sales of government services, fees, etc. Once it is deposited into a fund, it sits there in a fund until it is spent, just like money in a bank account.

Example: A county could create a Dog License Fund and designate all fees from mandatory dog licenses to to into the Dog License Fund. As dog license fees are received by the county, they would be deposited into the Dog License Fund, and its balance would grow over time, until the money was spent.

Appropriation, on the other hand, is simply official permission to spend money out of a fund. In Indiana, each unit of government has a designated fiscal body which is required to provide that permission to spend; for cities, it is the city council, for counties the county council, for townships the township board, etc.  Appropriations are most typically performed during the annual budget process; however, from time to time fiscal bodies will find it necessary to appropriate additional funds after a budget year has begun (e.g., for unexpected expenses). These appropriations are called additional appropriations. In most cases, appropriations only last until the end of the budget year (the calendar year), after which they expire.

Example: The County Council could appropriate $1000 from the Dog License Fund to the Sheriff, to provide training to animal control officers. This appropriation would provide the Sheriff permission to spend $1000 out of the Dog License Fund, if the cash is available in the fund, to provide training to animal control officers.

It is probably clear by now that two things are required before a government official can spend money out of a fund: the cash must actually be there in the fund AND the official must have an appropriation from the fund. Neither is useful by itself. If cash is in a fund, it just sits there until it is appropriated and spent. But without the cash, an appropriation is worthless — although there is permission to spend, there may be no money in the fund to spend! Note that it is perfectly acceptable to appropriate more money than there actually is in a given fund — until the money is there, though, the appropriation is worthless; despite the appropriation (permission to spend) there is nothing there to spend!

Example: The County Council creates a new Dog License Fund, and designates all fees from dog licenses to go into the Dog License Fund. It also appropriates $1000 out of the fund to the Sheriff for training for animal control officers. At the beginning, before any dog license fees are deposited into the fund, the appropriation is essentially worthless. Although the Sheriff has permission to spend up to $1000 for training, until the fees are actually deposited into the fund, there is nothing to spend. After the fees start to build up in the fund, the Sheriff may start spending the money on training. Note that there may not be enough cash in the fund to support the entire appropriation. For example, let’s say dog license fees only generate $700. Even though the Sheriff has $1000 of appropriations in the fund, if there is only $700 available in the fund, she or he would only be able to spend $700 on training. Conversely, say the dog license fees generated $2000 in revenue that was deposited into the Dog License Fund. The Sheriff still only has $1000 in appropriations, and can therefore only spend up to $1000 on training.

A couple of other notes about appropriations and cash:

  • There are times in which the fiscal body may appropriate more than is available in a fund. This occurs particularly in funds that are supported by revenue sources that are uncertain — for example, fees, fines, building permits, planning fees, etc. The fiscal body may want to appropriate funds only once a year during the annual budget-setting process — but the official who has the appropriation can still only spend the appropriation when the cash is actually available in the fund. To reiterate — there is nothing wrong with this. This is NOT overspending or overdrafting, or anything like that; even with an appropriation an official can’t actually spend money that isn’t there to be spent.
  • An appropriation is permission to spend, it isn’t a requirement to spend. Just because a fiscal body appropriates money for a particular function does not mean that the official with the appropriation has to spend the appropriation (absent some other statutory requirement to spend the appropriation). For a particularly silly hypothetical example, let’s say that the County Council decides to appropriate $10,000 in a fund to the Sheriff for clown therapy in the jail. The Sheriff might decide that clown therapy is a waste of money and decline to spend the appropriation. An appropriation is not required to be spent.

Hopefully this helps clarify an important distinction that is often confused in media reporting and popular discussion about government finance.