Fort Smith Directors reject budget reallocation plan

The Fort Smith Board of Directors on Tuesday (March 18) rejected a plan to change the 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 board voted four to two against two proposals for reallocating – one proposed for 2025 and one for 2024. Directors Neal Martin and Kevin Settle voted for both proposed ordinances.

The city’s budgeting policy 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.

The proposals would not have increased or decreased overall city revenue derived from fees, taxes, permits, service charges or other basic sources. The proposals only sought to change how city revenue and expenses are budgeted for accounting purposes.

The idea was that if the funds were reallocated, the city’s water and sewer departments would meet the necessary 110% debt service requirement on bonds tied to utility system work as well as give money back to other departments for their needs.

Martin and Settle have questioned the allocation process in the past and did so again Tuesday, 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, might allow the city more options in funding consent decree work.

Fort Smith Finance Director Andy Richards told the board that while the change in allocations could bring a potential revenue-retention benefit, it would come with a negative outcome. 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.

That would bring the general fund reserve balance below the 20% of the budget that city policy requires. When the reserve balance drops below 20%, city policy requires capital expenses to stop. When it drops below 15%, it means personnel has to be cut, Richards told the board.

Allocations and methodologies need to be consistent, Richards said, noting that if the city were to only do the change in allocations for a couple of years, it would seem as though they were simply manipulating revenues.

“It needs to be forever (if it’s done). The general fund is not in the position to take on $2 million to $2.5 million a year. The flip side is that it does provide relief to the other funds. Water and sewer is the one we are most concerned about, and I know you are concerned,” Richards said. “It’s enticing to say we can meet the debt service coverage, and no one wants to meet that more than I do. But I’m more concerned with the deficit in the general fund.”

However, just by making the changes the city made in 2024, the city is now looking at ending 2024 at 107% debt coverage. Richards also suggested the city go back and take the amount the city paid for credit card fees from citizens paying bills online from the general fund instead of the water and sewer fund. If the city did that, he believes the city would be very close to making 110% debt coverage in 2024.

Even if the city only hits 107% debt coverage in 2024, Richards said the city would be OK.

“Anything under 110, we’re going to have them (those who hold the bonds) call and ask questions. But we have answers. We have passed a water rate increase. We have passed a sewer rate increase. We are doing things to lower expenditures in the budget. Then we have positively answered the questions,” said Acting City Administrator Jeff Dingman.

With the water rate increase passed in 2024 that went into effect in January and the increase in sewer rate approved earlier this year, the city will make its debt covenant in 2025, Richards said.

Vice Mayor and Director Jarred Rego has a spending cut proposal the directors are scheduled to review in the coming weeks and Director George Catsavis suggested the city ask experts, such as former Director Lavon Morton, to review the city’s spending to see if there is any government waste.

“We need to find ways to eliminate waste in city government,” Catsavis said. “There is no doubt there is some waste.”

Directors Lee Kemp and Cristina Catsavis also suggested the city needs to look at spending and find a way to cut city expenses.