Mystery, suspense and Fort Smith finances

I spent this past Sunday afternoon reading a mystery. It wasn’t Agatha Christie. It was the City of Fort Smith, Arkansas Comprehensive Annual Financial Report for the Year Ended Dec. 31, 2014 and the unaudited second quarter financial report for the six months ended June 30, 2015.

My interest in reading these suspenseful documents was to see if I could get a handle on the facts surrounding the board’s discussions about the police and fire departments retirement plan funding shortfall and to find some detail on how the city planned to comply with the federal Environmental Protection Agency’s $255 million consent decree – estimated to cost up to $480 million – resulting from all the untreated waste Fort Smith released into the Arkansas River in past years.

A financial statement doesn’t answer the specifics of those questions, but I am a CPA and the financial statement is where I wanted to start to give me some context and insight into the city’s ability to meet these “problem” obligations. After perusing the city’s financial statements I began to look for details by searching and scanning the minutes of our city Board of Directors meetings and the supplemental attachments for more detail. After a few hours reading and searching I found myself with more questions than answers. The biggest question I was left with was if the City directors only see the information they post on the city’s website, do they have a grasp of our city’s finances.

I spent an hour listening to the Aug. 4, 2015 board of directors meeting where Raymond James and Stephens Inc. pitched their cases for being chosen as the lead securities firm to issue an upcoming bond placement for the city where winning firm received the privilege of collecting the associated management fees.

Neither of the presenters provided information that revealed any benefits that would accrue to the city of Fort Smith if one firm was chosen over the other. Raymond James came the closest by stating that they could generate more market demand for the bonds which would result in a lower interest cost to Fort Smith, but due to time limits on their presentations, this informative statement ended abruptly without really making the point.

When the firm representatives finished their presentations, the directors asked a few questions, but none that gave the public insight into which of the competing firms would be able to provide the city the lowest cost of borrowing. Director Tracy Pennartz came the closest to asking a couple of important questions, but in the end the directors’ choice of the lead firm was based on what made them feel warm and fuzzy. The directors voting in favor or Stephens Inc. based the decision on how they felt about the city’s past relationship with their firm.

Rounding up, Fort Smith’s budget is $150 million a year. That’s a lot of money to most of us. I’ve been known to defend our directors because they basically volunteer their time. But their knowledge and ability affects the lives of Fort Smith’s residents. We need directors that are interested in the city’s business as well has some practical knowledge and the ability to commit the time necessary to understand the problems at hand.

Another issue that concerned me while I scanned the city directors’ meeting minutes was based on a memo included with the documents posted for the special meeting and study session on Aug. 11, 2015.  A memo dated Aug. 7, 2015 to Jeff Dingman, Acting City Administrator, from Jennifer Walker, Deputy Finance Director with the subject title 2015 General Fund Budget Reduction seemed to show a mismatch between the City Directors’ request and the City Staff’s response.

The memo opened stating “Throughout June and July 2015, the Board of Directors had considerable discussion about several budget factors and funding needs. At the July 14 study session, City staff presented some possible General Fund budget reductions. Staff received direction to analyze the 2015 General Fund budget with a fresh look and a collaborative effort across departments. The staff has analyzed and discussed the General Fund budgets from a variety of perspectives, focusing on cutting cost without limiting services.” Walker then proceeds to discuss “several changes to the budget approach.”

As I read this memo, the first question I asked myself was, “How can you cut costs without limiting services if the city departments are operating efficiently?” But then Walker seems to answer a different question. The question was about costs. Her answer was about changing budgetary authority. These are two different issues.

Walker’s memo provided points like “Personnel reduction in the attached proposal do not include reductions to employee counts, wages, or benefits. They are only budgeted funds that we believe will not be utilized in 2015.” I translate that to mean “we can’t cut costs but we had enough room in our original budget to amend the budget to reduce amounts that we don’t really need.”

The next point states: “Most or all operating conditions have been removed. The associated risk is that there may be an unexpected occurrence that requires some departments to ask for additional appropriations later in the year.” Translation: “If all goes well we may spend less than budgeted. However, if not, you are going to have to give us more money.”

Walker is trying hard to give our directors the answer they want, a way to cut expenditures in the current year, but in order to give them some relief she has to play a budgetary shell game. In essence she is saying we can change the budget on paper but we can’t really cut costs without limiting services. Walker, just tell them the truth. The answer to their question is “you can’t reduce operating expenditures without limiting City services.”

The question our directors need to ask the city staff is can the staff find ways to increase their efficiency and productivity, but that is a much tougher question to answer. But the odds are increases in productivity are the only way to reduce costs without limiting services.

It isn’t fair to ask our City Directors to be experts in government finance. But it would be nice if they felt the need to be financially literate in our city’s finances. The starting place would be to ask questions, lots of detailed questions. If I was a city director the first question I would ask is where is the city’s internal auditor and why doesn’t the internal auditor report directly to the city board of directors bypassing the city administrator.

When a family or business is in a financial pinch, they have three options to relieve the pressure: increase income, cut expenses, or borrow money. The city of Fort Smith has the same options.

The City board has discussed cost cutting for several months. I think they may have even cut a few expenses. They just haven’t solved the police and fire retirement fund deficit yet. They do feel good about the choice of Stephens to lead in the city’s next round of borrowing by issuing bonds. It’s a mystery  whether Stephen’s will deliver a lower interest rate than Raymond James or whether Stephen’s will deliver lower servicing costs, but we can all feel good that Stephens is an Arkansas company.

The cost of complying with the EPA’s consent decree and the current deficit in funding the police and fire retirement plan are good examples of past decisions made by decision makers who aren’t around to deal the results their decisions. Hindsight is 20/20. Maybe they didn’t have all the facts to make a good decision. However, the skeptic in me believes past leaders weren’t faced with a crisis situation and therefore chose not to deal with the issue. They kicked the can down the road.

In reading through our current board minutes and viewing their discussions I haven’t come across much talk or consideration of how their decisions will affect future decision makers and Fort Smith residents.

Déjà vu. More to come.