Fort Smith Directors frustrated with utility department financials, call it a ‘flaw in our system’

Editor’s note: Story updated to provide estimate of debt service ratio as of April 12.
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The Fort Smith Board of Directors received updates at Tuesday’s (April 12) study session on the utility department’s financial policy review as well as updates on the $1.6 million River Valley Sports Complex and movements on potential rezoning in the vicinity of North 9th and North H Streets.

The latter became a discussion topic in 2015 as a result of Fort Smith Brewing Company’s unsuccessful attempt to move into the area.

Leading off the meeting, City Directors expressed frustration with the utility department that it wasn’t further along in identifying “prescriptive policy” changes it was directed to undertake at a meeting on Sept. 8. At the top of that frustration list was the lack of movement on efforts to improve the city’s debt service coverage (DSC) ratio, which aids the city in being able to get the best interest rates on municipal bonds, thus saving taxpayers money. A faulty debt service coverage ratio can negatively impact the terms of future and existing bonds. Poor DSC ratios could also result in further rate increases, which Fort Smith residents have already had to endure in relation to sewer rates as a result of the $480 million consent decree for the city’s violations of the federal Clean Water Act.

The debt to payment numbers need to hit 110%, meaning the revenue needs to be 10% higher expenses. While the percentage is not known and cannot be known until 2015’s numbers are incorporated into the city’s annual financial report (CAFR) in May, Fort Smith Finance Director Jennifer Walker admitted the percentage is currently “not good.”

“If I were to do the calculations based on the numbers that were published in December, that debt service coverage ratio would be between 25 and 30 percent, which clearly isn’t 110 percent,” she said. (Calculations later showed operating income for the year to be $3.5 million, with the debt payment at $13.5 million, which put the debt to payment at 25.9%.)

This was a source of frustration for Director Keith Lau, who said he was concerned mostly about the ratio in comments to Utilities Deputy Director Kevin Sandy.

“Just as a simple analysis, we’ve had two extremely wet years here in Fort Smith. Our reservoirs should be full, and our revenue – our sales – have been slow to non-increasing over that period of time. Where is the provision to be more responsive to actual expenses?” Lau said, noting that expenses for the department continue to increase at a rate that outpaces revenue. “We have to do what is bet for our credit rating and what provides us with the most capital.”

Lau and fellow Director Tracy Pennartz also commented on how difficult it was to be “responsive” and make cost-saving decisions when the city budgets based on two-year-old numbers.

As a point of clarification, the mid-year CAFR is based on actuals for the previous year, which means that every November and December when the city undergoes the budgeting process for the year ahead, they are essentially using actuals from two years before. As Lau explained to Talk Business & Politics after the meeting, the annual CAFR cannot be finalized until actuals come in, so in May 2015 the city will get 2014’s. This forces them to base 2016 budget projections on the 2014 total. Likewise, the 2017 budget will use actuals from 2015; 2018 from 2016; and so on.

Lau said in order for the department to do a better job of controlling costs and improving its DSC ratio, reporting needs to be more “real-time.” Pennartz concurred, calling the process “a huge flaw in our system that I think needs to be fixed.”

ZONING REQUEST
Also Tuesday, the Board heard from City Planning Director Wally Bailey over a request to change the “9th Street Corridor” areas of North 9th and North H Streets from commercial (C-5, its designation since the 1960s) to a Planned Zoning Development (PZD) with restrictions against certain types of developments that are not considered amicable to an area that now consists mostly of neighborhoods and churches.

The move to rezone began with a controversial issue that arose when Fort Smith Brewing Co. (FSBC) tried to purchase Fraternal Order of Police property for use as a microbrewery last year. Two churches spoke out against the request, and since there were no prior definitions in C-5 (at the time) to allow for microbreweries, it forced FSBC co-founder Quentin Willard to seek property elsewhere. The brewery eventually settled in the Chaffee Crossing District.

Since then, there has been a push to get the Corridor zoned properly, but Bailey’s request that the initiative come from the Board was met with reproach at the study session, with most Directors in attendance, save for Andre Good, not feeling comfortable setting the precedent even though they were good with a zoning change.

Pennartz said that if the Board decided to initiate the request in order to help area residents avoid a $350 application fee, it would open the door to other similar requests.

RIVER VALLEY SPORTS COMPLEX DELAY
Finally, representatives for the River Valley Sports Complex (RVSC) reported the development was running slightly behind schedule. The project was originally authorized in March 2014, and the city committed a maximum of $1.6 million.

In May 2015, project developers Lee Webb and Sen. Jake Files, R-Fort Smith, proposed a time extension for the project, which was approved by the board with a new date of March 31, 2016.

To date, the city has paid $620,000 of the $1.6 million commitment. While the complex was further delayed due to weather issues, thus missing its March deadline, it is approximately 90 days away from completion. Files and Webb do not foresee cost overages.