Commissioners voice frustration with a process that discounts years of trends shown by its own budget models and conservative spending practices
Delving more in-depth into an issue he raised in February, Deputy Sarasota County Administrator and Chief Financial Management Officer Steve Botelho this week stressed what Commissioner Charles Hines characterized as the potential for the county’s “being penalized for having a more conservative [fiscal] model than other communities do.”
The focus of the discussion was the prospect that, because of a recently implemented government auditing procedure, the county’s bond rating could be lowered if the county’s 2018 fiscal year financial situation shows the county dipping into its 75-day emergency operating reserve to balance the budget. That would upset the national bond rating agencies, Botelho said.
The agencies could end up lowering the county’s rating, which would make it more expensive for the county to borrow money, County Administrator Tom Harmer pointed out. The issue arose as the board was preparing to consider a number of measures to raise money to pay for its highest-priority projects, including the North Extension of The Legacy Trail. The potential for borrowing more money is one measure the board has been considering. (See the related story in this issue.)
During the commission’s Feb. 17 budget workshop, Botelho explained that Statement No. 54 of the Governmental Accounting Standards Board (GASB) will necessitate that the staff of the Sarasota County Clerk of Court and County Comptroller’s Office prepare a comprehensive financial audit report (CAFR) for the county’s 2016 fiscal year showing that whatever was budgeted was spent. Typically, Botelho said during the board’s March 29 budget workshop, the county has been budgeting millions more from its Economic Uncertainty Fund — its “rainy day reserve” — to fill potential budget gaps than it actually has ended up needing. For example, staff budgeted $41.8 million out of the reserve fund for the 2015 fiscal year, but it ended up using about $100,000.
For the current fiscal year, the amount from the Economic Uncertainty Fund incorporated into the budget was $36,262,716, so the CAFR the Clerk’s Office will complete later this year will have to assume all of that was spent, based on the GASB 54 requirement. Therefore, Botelho continued, that would leave the county with a $5,566,796 deficit in its 2018 fiscal year budget, cutting into its 75-day emergency operating fund. If the budgets presented by the county’s constitutional officers — such as the sheriff and the clerk of court — come in at even higher levels this June than staff has projected, Botelho pointed out, the 2018 budget could end up showing the county falling below the 60-day emergency operating fund level that is considered the best practice by the Government Finance Officers Association.
The constitutional officers’ budgets make up about 55% of the county’s General Fund expenditures, Harmer noted. (The General Fund is derived primarily from property tax revenue.)
The GASB 54 model also has to assume the county has spent the $8.1 million it has set aside since it changed its emergency operating reserve policy from 90 days to 75 in 2013, Botelho said. (The board members agreed at their December 2015 retreat to refrain from budgeting that $8.1 million for any purpose until after the World Rowing Championships this year, in the event the money would be needed to cover expenses that could not be met otherwise.)
“That’s the predicament we [could] be in,” Botelho summed up the situation for the board on March 29. “That would have some [bond] rating agency potential implications.”
Details of the potential dilemma
Annually, county staff uses 10-year historical averages of its expenditures in projecting the budgets for the next five years, Botelho pointed out. Therefore, while staff would feel comfortable with the 2018 fiscal year budget situation shown by its software model, he indicated, the figures the rating agencies would see as a result of the GASB 54 model would be troubling to them.
Using the county’s model, Botelho explained that staff projects no shortfall in revenue for the 2018 fiscal year, with $32,473,270 plugged in from the Economic Uncertainty Fund. Given current figures, a shortfall of $3,542,392 would be anticipated in the 2019 fiscal year.
However, as Harmer has pointed out, staff typically can find ways to reduce gaps in the $3-million to $5-million range in outlying years.
“These requirements for us to abide by this [GASB 54 rule] actually paint a picture that historically we don’t really deserve,” Commissioner Alan Maio said.
“I would agree,” Botelho replied.
Over the years, Botelho continued, representatives of the major national bond rating agencies such as Fitch’s and Moody’s have had concerns about the county using its “rainy day” reserve to balance the budget. However, they have been assuaged by staff’s explanations about fiscal transparency— including evidence of the public budget workshops — he said. Staff even has shown them the videos of those sessions, he added.
Questions intensified, nonetheless, he indicated, after the board changed its emergency operating reserve policy from 90 to 75 days.
Typically, Botelho explained, a rating agency provides a list of questions ahead of time and then holds conference calls with staff members of the county’s Office of Financial Management. Those generally take two to three hours, Botelho noted. “We get into the details.”
The agencies rate hundreds of municipalities each year, he added. “Once they get into the details with us, they usually feel a lot better. … They’re always happy we are above and beyond [the 60-day standard].”
“Our [bond] rating improved last year,” Chair Paul Caragiulo pointed out.
“Yes,” Botelho replied. That was because the county has maintained a reserve level that is 15 days beyond the best practice of 60 days, he added.
“We have a top tier credit rating,” Harmer pointed out.
When Caragiulo asked whether Botelho and his staff generally deal with the same person each year from an agency, Botelho replied, “There are a lot of changes. We might be calling the same building and the same floor in New York City, but it’s not necessarily the same people we are talking to … We do have to start at the ground level annually during these calls.”
“That would drive me insane,” Caragiulo told him.
Commissioner Nancy Detert asked whether the board should reduce its emergency operating reserve policy to 60 days, but “we really put away 75 days’ worth …”
“That is one option,” Botelho responded.
“The model that we use allows us to say, ‘What if? What if?’” Commissioner Charles Hines said. Nonetheless, he acknowledged, “It does look strange that each year we have this huge gap … and then we don’t spend [the full amount budgeted from the Economic Uncertainty Fund].”
Yet another concern Detert raised is that discussions have arisen in the Florida Legislature this year about requiring local governments to reduce their reserves to a 30-day level. “[That] is a little bizarre,” she said. “So [if] we thought we weren’t safe enough, they would like us to be less safe, I guess.”
“The last thing you want to do is not be able to make paychecks for the [Sheriff’s Office] and the Fire Department during an emergency,” Hines concurred.
“If that goes through at 30,” Botelho said, “that will spark a lot of phone conversations with all the municipalities in the state of Florida.”
On June 1, Botelho reminded the commissioners, the county Property Appraiser’s Office will release its preliminary property values for the year. That could change the budget forecast. In the meantime, Botelho indicated, he and his staff will continue working on funding models, with plans to discuss the situation further during the board’s May 26 budget workshop.
In upcoming appearances at community meetings, Commissioner Maio said, “I’m simply going to say … that GASB 54 is a uniform way of reporting that hundreds of jurisdictions have to abide by, [but the county’s budget model] has been deadly accurate year after year after year, and it’s not as ominous …”
“That is accurate,” Botelho replied.