Op-Ed: Why Changes to Covington's Fiscal Stability Ordinance are Needed
On Tuesday evening the Covington Board of Commissioners will vote to amend the city’s Fiscal Stability Ordinance. Some have expressed concern that amending the ordinance will introduce laxness in the administration of the city’s financial affairs.
The Covington Board of Commissioners adopted the Fiscal Stability Ordinance to increase financial reserves for the city. It is accomplishing this goal as evidenced by the increasing reserve amount in the General Fund and reserves for potential liability and claims.
While the overall intent of the Fiscal Stability Ordinance is good, the needs of the City continue to change and grow. As a result, city ordinances need to be amended to adapt to the circumstances of the time.
The last commission recognized this reality. It originally adopted the Fiscal Stability Ordinance on December 15, 2015 and amended it in June of 2016 when the city’s budget was adopted.
Experience administering the Ordinance has revealed some problems that are easily fixed, without undermining the intent of the Ordinance.
One of the major issues with the current Ordinance is that most of the Fiscal Stability calculations are based on the final Comprehensive Annual Financial Report (CAFR) numbers. The CAFR is not completed until several months into the next fiscal year. The budgeted reserve projections are calculated months before the numbers which are the basis for the calculations are confirmed. As a result, it is difficult to determine the accuracy of these projections, demanding of staff time, and somewhat artificial.
More importantly, why does the policy require the city to fund certain infrastructure, fleet, and equipment improvements after the fiscal year is closed depending on a fund balance that may or may not be available? Wouldn’t it be preferable to plan funding of these critical areas as a budget development policy before each annual budget is developed?
Another major problem is that the calculations for several of these funds are not very clear and they do not provide a definitive way to calculate the required year-end transfers.
Some of the funding formulas are unnecessarily complex and are difficult to effectively communicate to the citizens of the city and others.
The number of different funds for various specific purposes is prohibitive and limits flexibility to respond to changing needs, especially in the area of capital improvements.
The city’s true overall financial picture is made more difficult to evaluate given the transfers out of the General Fund to other funds created by the Ordinance.
In holding true to the Ordinance, some of the intent can be accomplished by the Mayor and Commission through annual policy direction to the City Manager for budget development.
It may be advisable, for example, to fund the minimum reserve amount in full, sooner rather than later. This would reduce some of the other Fiscal Stability Funds in the short run, but once done the reserve can be put away and locked up and increase only by the annual percentage increase of expenses. The other Funds can catch up over time because the minimum reserve would get only small increases.
The Fiscal Stability Ordinance was well-intended. Its goal is good; however, there are a number of changes that should be made to accomplish the goals with far more clarity and far fewer challenges to Finance Department staff.
The Commission proposes two changes to the Fiscal Stability Ordinance at this time:
Merger of the “Capital Reserve Fund” with the “Infrastructure Fund.” The Capital Reserve Fund can be used only for pre-development costs for capital projects that require the use of new debt to finance them. There are no immediate plans to issue new debt. The merger of the funds allows the money to be used to support a variety of currently planned infrastructure projects.
The elimination of the “Personnel and Benefits Fund”. This fund identified a specific amount each year to be used for “staffing and compensation needs of the City.” The immediate concern was the city had been involved in contract negotiations with the Police, Fire and AFSCME unions for years. The conclusion of the negotiations meant large back pay obligations to many city employees. Having a reserve for this large, unusual obligation was wise. Those negotiations are all now completed and the obligations paid. We do not expect the next round of negotiations to linger for two and three years, so the need to set the money aside for large back payments is obviated.
Employee staffing and compensation levels are part of the normal budgeting process. The City Manager makes the recommendations to the Commission based on his or her perception of the city’s needs each year. A dedicated fund should not be used to artificially inflate or deflate the resources for staff and employee pay raises.
Once the new City Manager and the new Finance Director are in place there will be a continuous review of the city’s financial policies and practices. There will be more changes in the months and years ahead. It’s prudent.