Fort Smith Board to consider changing decades-old budgeting practice

The Fort Smith Board of Directors on Tuesday (March 18) will consider changing a longstanding policy of allocating certain revenue to the city’s general fund which pays for administrative functions and supports critical services like fire and police.

The city’s budgeting policy now allows an approved amount of revenue from key city departments – including water and sewer, streets, and solid waste – to be directed to the general fund for support of city administration functions that include police, fire, and economic development support.

Directors will on Tuesday consider two proposals – one that would reallocate the accounting of revenue and spending in the 2024 budget, and reallocate revenue and spending in the already approved 2025 budget. The proposals do not increase or decrease overall city revenue derived from fees, taxes, permits, service charges or other basic sources. The proposals only seek to change how city revenue and expenses are budgeted for accounting purposes.

“Except for the recently established Citizen and City Services program, these programs were included as justified allocable costs in the cost allocation methodology study performed by Landmark CPAs and have been historically allocated across the City funds for decades,” Andy Richards, the city’s chief financial officer, noted in a March 13 memo to Acting City Administrator Jeff Dingman.

Some members of the Fort Smith Board of Directors have questioned the allocation process, especially as it relates to potential financial flexibility in addressing the city’s federal consent decree.

After decades of failing to maintain water and sewer infrastructure to federal standards, the city entered into a consent decree with the U.S. Environmental Protection Agency and Department of Justice in late 2014. The consent decree, which began in January 2015, required the city to make an estimated $480 million worth of sewer upgrades in 12 years. That amount is now estimated to be as high as $800 million.

According to some directors, retaining some or all revenue in the water and sewer fund, for example, may allow the city more options in funding consent decree work. The retained revenue may also help the city meet and maintain financial terms – covenants – tied to bonds previously issued to fund utility improvements.

Richards, in his memo, noted the potential revenue-retention benefit, but noted a negative outcome of the budgeting change.

“The outcomes of these reallocations provide some relief to the budgets/fund balances of Street Maintenance, Streets Sales Tax Construction, Water and Sewer, and Solid Waste while at a cost of further burdening the budgets/fund balance of the General Fund,” he wrote in the memo.

One impact of reallocating the 2025 budget would be an almost $25 million general fund deficit at year end, which would push the general fund reserve balance from almost $42 million to around $9.3 million. Richards said that allocation plan would violate an existing city policy.

“As the City’s Chief Financial Officer, I do not recommend these reallocations, except for Citizen and City Services. My main concern is the additional financial stress the reallocation places on the General Fund. The 2025 budget adopted on December 3, 2024, shows an annual budget deficit of $5,744,098 or 10% of General Fund revenues. The projected fund balance for the General Fund at the end of 2025 as a result of the reallocation is $9.4 million. The contingency reserve percentage would be 11%, well below the 20% required by City policy,” Richards noted.

Richards also wrote that he is not sure the proposed reallocation would be enough to help the city achieve stable compliance with the 110% debt service requirement on bonds tied to utility system work. He suggested the board consider other actions instead of changing the generally accepted practice now used by the city to support administrative functions.

“I recommend the City revisit the 2025 operating budgets and consider potential operational cost savings across all operating funds via budget cuts or administrative spending holds and then consider additional revenues to the extent necessary to fund operations and debt service requirements,” Richards wrote.

Fort Smith Director Jarred Rego recently proposed budget “reprogramming and reductions” that would provide more than $7 million in 2025 for consent decree work. The board is expected to discuss the plan in an April study session.