Response to the FY 20/21 budget inquiry last week
July 14, 2020
Dear Council Members,
Below is my reply to Mr. Conway’s response to my initial email. I understand the Mr. Conway provided you a copy of this reply.
It is important that the Council understand that there is a disconnect between the information provided in the budget transmittal letter regarding the magnitude of one time funding amounts outlined in the transmittal letter and what was authorized in the enabling budget resolution passed by the Council. The difference between the two documents is approximately $1m. I have pointed this out to Staff, and they should clarify which number is correct.
I am bringing this to your attention because it is another example where an independent Finance Commission would have been very helpful to the Council at the time you were reviewing the operating budget.
Thank you for your reply. I appreciate you taking the time to research my questions.
I know that you hoped that the answers would be straight forward, but, unfortunately, they weren’t. In fact, the answers have raised additional critical questions that I would respectively request you answer.
- In the Adopted Budget, schedule C-15 shows all Town revenues and transfers in by Fund. The General Fund (fund 111) is listed and shows total revenues and transfers in of $45,751,230. In your email you mention that there is another fund (fund 731) which was “established for budget tracking/transparency that is merged with fund 111”. Where in the adopted budget is fund 731 disclosed? How would the reader even know this fund exists? I have been unable to find it in the budget detail. If the goal was to improve transparency, it strikes me that this has not happened.
- Question: Are you saying that the revenue numbers shown for Fund 111 include revenue for Fund 731? If so, why was this done?
- The $45,751,230 that is shown in the “Total Town Revenue and Expenditures by Fund” schedule which adopts the Town budget, is labeled as General Fund revenue. There are other funds listed in the resolution, but Fund 731 is not disclosed. The $45,751,230 is also the same number that is listed in your reconciliation as General Fund revenue. It is also the same number on schedule C-23. From C-23, you can see that the $962,158 is included in the $45,751,230 as general fund revenue. This number is the sum of $572,158 which is the residual amount left in the pension/OPEB general fund reserve after making the $3,660,342 ADP payment to CALPERS plus $390,000 which is the ADP payment to the 115 CEPPT Trust. On schedule C-8, which is the General Fund Revenues and Expenditures, the $962,158 is included in the “other sources of revenue” line item. This is where we part ways.
- Question: What is the accounting theory that supports the $962,158 be recognized as revenue? Why isn’t the $572,158 a transfer out from the general fund Pension/OPEB reserve (fund 111) to Fund 731 reserve balance? The schedule on C-32 shows this exact fund transfer out treatment. I do not believe that the $572,158 transfer of this reserve balance from the General Fund in anyway should be “washed” through General Fund revenue. Similarly, I do not see how the $390,000 which is the additional ADP payment to Fund 731 (115 Pension Trust CEPPT) should be “washed” through General Fund Revenue. The way you have treated this is to overstate the General Fund revenue by $962,158. You hint in your email explanation there is a problem here when you state that “this particular revenue source (i.e. $962,158) is not a true operating revenue…….since its source is a general fund expense”. I would go further in stating that it is not an element of revenue at all and should not be reflected as such.
- Question: By including the $962,158 in general fund revenue, the resolution that adopted the operating budget shows a total of only $7,441,129 of “designated one-time use of general fund reserves”. This amount differs from the $8.4m of “one-time sources” shown in the transmittal letter. The transmittal letter on page A-11 specifically mentions the following one time uses – $3,660,342 from the Pension/OPEB reserve, $572,159 from the Pension/OPEB reserve, $769,308 from the Capital Project Reserve and $3,401,479 from the Capital Project reserve. Which is the correct view of the “designated one-time uses of general fund reserves” – the $8.4m in the transmittal letter or the $7.4m in the resolution adopting the operating budget? This is a material difference.
- You are correct that the general fund expenditures include non-department program expenditures which are shown as Program 1201. On page D-72 of the Administrative section, the budget detail shows $4,622,500 as “payment toward unfunded pension liability”. This number is the sum of $3,660,342 which is the ADP payment to CALPERS, $572,158 which is the remaining balance of the pension/OPEB general fund reserve which was transferred to Fund 731 and $390,000 which is the current year ADP payment which will be deposited into the CEPPT trust. This $4,622,500 is shown on schedule C-8 as an element of “operating expenditures” which totals $13,690,647. So here again, both the $572,158 and the $390,000 have been treated as an operating expense and revenue of the general fund.
- Question: Under GASB accounting principles is this presentation correct? Will this be the same presentation in the CAFR?
- Answer: I believe the proper presentation should have been to reflect both the $3,660,342 ADP payment to CALPERS and the $572,158 as “transfers of fund balance” since the source is the Pension/OPEB General Fund Reserve and not record them as elements of operating expenses. In fact, schedule C-32 shows this exact treatment. This is also how the $3,401,479 transfer to the GFAR is recorded in the General Fund. The GFAR transfer is not “washed” through “operating expenses”. The $390,000 ADP payment to the CEPPT should be captured as “operating expenditure” since it is being made from the current period operating revenues of the General Fund. The problem created by “washing” the full $4,622,500 through operating expenses, is that it distorts all prior period budget and actual comparisons. By doing this transparency is reduced and it makes it impossible for a reader to understand the “true” level of general fund operating expenditures. On schedule c-24 you attempted to show this when you reflected the $4,765,797 pension payment for FY 20 as a separate line item and did not include it in “non-departmental” expenses. Bottomline, the lack of a consistent treatment has made the budget extremely difficult to understand the on-going operating expenses and non-departmental expenses of the general fund.
- There is a fundamental disconnect between the transmittal letter and the adopted budget in the definition of operating revenue. You highlight this in the reconciliation schedule in your email. You are correct in showing that the true operating revenues for the General Fund are $42,263,744 and are reported as such on schedule C-23. In contrast, the transmittal letter shows operating revenues plus transfers are $44,789,072. If we subtract the transfers in of $616,834 from this amount, we get $44,172,238 as operating revenue per the transmittal letter. This amount is greater than the $42,263,744 because the transmittal letter includes the $1,908,494 COP debt reimbursement as part of operating revenue. The lack of consistency between the transmittal letter’s 5 year plan presentation of operating revenues and the adopted budget makes it impossible for the average resident to understand either document. I would encourage you to adopt one format and use that consistently.
- Question: Why hasn’t the Town adopted consistent definitions for operating revenues and operating expenditures across all reports?
I apologize for the length of this reply, but it is important to get the budget and the enabling resolution correct. They aren’t. This is why I strongly believe that it would be in the best interest of everyone (Town Council, Staff and residents) to have a resident, independent Finance Commission reviewing the budget and collaboratively discussing these issues with the Staff during the budget preparation process. The Town would certainly benefit from their input.
Following your lead, I will send this email under separate cover to the Town Council. It is important they understand what they have approved in the enabling resolution. Frankly, I am not sure that they do.
Intermedia – The Business Cloud
From: Stephen Conway <email@example.com>
Sent: Monday, July 13, 2020 4:35 PM
To: Phil Koen <firstname.lastname@example.org>; Rick Van Hoesen <email@example.com>; firstname.lastname@example.org
Cc: Laurel Prevetti <LPrevetti@losgatosca.gov>; Arn Andrews <email@example.com>; Gitta Ungvari <GUngvari@losgatosca.gov>
Subject: [EXTERNAL] Response to your FY 20/21 budget inquiry last week
Hello Mr. Koen
Thanks again for your question. We referred back to our FY 20/21 budget model and the answer to your question posed last week we hope is fairly straight forward. To recap your question, you were wondering why the forecast amount shown in the FY 20/21 on the financial forecast model is $962,158 lower than the amount shown as total GF adopted revenues. This is because the Town established a separate fund for PARS/CEPPT(Fund 731) for budget tracking/transparency that is merged with the GF (Fund 111) at year-end for CAFR purposes. There is $962,158 of “other revenue” in the PARS/CEPPT Fund 731 fund that represents FY 20/21 contributions to this fund from the General Fund expenditures Non-Departmental Program 1201. Since the $962,158 of CEPPT contributions revenue is derived from General Fund expenditures, this particular revenue source is not a true operating revenue that could be used to support General Funds operations since its source of revenue is a General Fund expense. For this reason, the General Fund Five Year Forecast of $2.3M is appropriately lower by $962,158 from the adopted budget of $3.2M since this revenue does not support operating expenditures.
You have asked for a reconciliation of page C-23 to C-25 which in combination to the above should help you better understand the adopted budget for FY 20/21.
Since you copied the Town Council we will be forwarding your response to them under separate cover to avoid Brown Act violations.
Director of Finance
Town of Los Gatos