City plans lean budget as city bond rating takes hit
Fairfield city administrator Kevin Flanagan has resolved to create a lean budget for 2013 after Moody’s Investors Service downgraded Fairfield’s general obligation rating mid-December from an A2 to a Baa1 rating with a negative outlook.
Flanagan emphasized the city’s overall good financial standing in spite of the unwelcome news at an annual city council work session Saturday morning at city hall. However, he said the downgrade demonstrates the need to build the city’s general fund balance and pay off the city’s deficit balances, which have fluctuated around $3 million during the past decade. He said it also is an opportunity to standardize the city’ accounting system and budget management policies going forward.
“If we can do this, we’ll have a more powerful, more capable Fairfield than has ever existed,” he said.
The rating system weighs a municipality’s ability to repay debt, the strength of the city’s management of its budget, the flexibility of its general fund and whether or not the city holds a deficit balance. While the report said Fairfield has a healthy economy and is quick to repay its debts, it found weaknesses with management, limited financial flexibility and a deficit cash balance in fiscal year 2011.
Flanagan arranged a presentation from Travis Squires of investment firm Piper Jaffray & Co. to explain the rating process.
While Squires explained the importance of good standing in “securing low-interest cost financing of capital projects,” he also said news of the downgrade is not cause for panic.
“The sky is not falling,” said Squires, “Fairfield is still a vibrant community.”
He said the downgrade should be viewed as “a blip on the radar,” as well as an opportunity to improve Fairfield’s financial order.
The downgrade will likely increase the interest rate for the $3 million general obligation bond approved by citizens in the last election to help pay for a new outdoor pool and gymnasium. Flanagan said the penalty will be marginal, at a fraction of a percent, and said the city will still move forward with that project.
Squires said it was important to keep the national economic climate in mind when reviewing the downgrade. He said ratings agencies “lost all credibility” when they deemed mortgage-backed securities safe and have toughened their ratings as a result.
Mayor Ed Malloy pointed out that even with stricter agencies, Fairfield’s rating is still higher than in the past. Before the city’s bond rating was upgraded to A2 in 2009, Fairfield had been borrowing since 1999 with a general obligation bond rating of Baa2.
Malloy and Flanagan agreed a major factor in the downgrade was a change in accounting by former city manager Jeff Clawson during fiscal year 2011.
Squires shared a chart of the city’s general fund balance during the past 10 years, all of which carried positive balances until 2011. In 2010, the city had $703,102 in its fund, but dropped to negative $187,224 in 2011. Malloy said if switched to the former accounting system, the balance would be similar to the 2010 total.
“In 2011, we had an accounting change in how we reported city obligations,” said Malloy. “It all got comingled with the general fund. We have always balanced our general fund and in fact have had the highest reserves over the past three years with over $700,000 in reserve.”
Flanagan and city clerk Joy Messer are currently going through the city’s accounts to separate the items once again.
“We are trying to track back where all these funds originated and decide how they may be individually abated in an appropriate manner, on a reasonable timeframe, and without an undue burden on our ongoing operations or the taxpayer,” he said.
Squires said Moody’s concern about Fairfield’s management was not a comment on the quality of Fairfield’s city managers.
“It’s not that the city has had bad management, it has been inconsistent management,” he said. “There has been a lot of change at the top.”
Flanagan has been in office little more than six months and said from reviewing past budgets, both former managers Clawson and John Brown had different ways of handling the city’s internal deficits.
Implementing debt management policies could help ensure a uniform approach to budgeting going forward, said Squires.
“This needs to become a more transparent process,” he said.
He also recommended using a long-range budgeting tool that could be used to create a five-year budget.
“Restoring a higher bond rating will motivate the city to focus on eliminating deficits that we have carried for too long and create new policies for dealing with deficits in the future,” Malloy said.
First and foremost, however, he said the city needed to restore the general fund to at least $700,000.
While working on the 2013 budget, he said the city should follow the national “push to be lean.”
In suggesting an action plan to restore the city’s rating, Squires said it should focus on long-term goals.
“The deficit balances did not happen overnight, and the council should not expect them to be fixed overnight,” he said.
Flanagan supported Squires’ suggestions. He shared ideas of how to pay down the $3 million deficit and to add flexibility to the use of Local Option Sales Tax revenue.
Fortunately, said Flanagan, the city has $1.5 million in CDs, part of which could be used to help pay down the deficit.
“We are not in a great situation, but we are very, very lucky in the sense that the city has accrued substantial cash investments in reserve as well as taking good care of assets such as Logan Apartments,” he said.
He also proposed the city sell the Logan Apartments building, recently assessed at $1.7 million.
“I think it’s in our best interest to sell it,” he said. “We have a small window to completely reverse the situation, and we need to be thinking about different revenue streams we can bring to bear to eliminate these deficits.”
In order to improve flexibility of funds, Flanagan proposed a referendum for the next election to free use of Local Option Sales Tax revenue. The city would still honor commitments such as payment for the Fairfield Arts & Convention Center, but would better direct unassigned revenue as well. Flanagan said the measure would not raise property taxes.
“The goal is to skate through without raising taxes,” he said.
That would require an emphasis on discipline in department spending, he said, including the budget for public works, which he’d intended to increase for street projects.
“Many of our departments haven’t seen significant increases in years already,” he said. “This is going to be tough.
“It’s a transitional budget. We will be austere during this time and hesitate to jump on new projects that are not in the budget.”
However, he said the city also might spend more in areas likely to increase the city’s revenue, such as economic development.
“The point is to begin moving in a direction more attune to building reserves as well as rebuilding our aged infrastructure – in streets, in sewer, in storm sewer, in water,” he said. “We have our work cut out for us, but we can do it, and we have the excellent staff and elected officials that can work together to get it done.”
Lastly, Flanagan said the city needed to focus on creating debt management policy to ensure proper action for the future.
Malloy applauded Flanagan’s drive to tackle the city’s deficits, but also reiterated the role the change in accounting played in the downgrade.
“A lot of these measures are centered around the Moody’s downgrade, which was mostly due to changes in accounting,” he said. “ ... It will feel good to deal with our structural deficits.”