August 29, 2006 > Who keeps track of city money?
Who keeps track of city money?
Ever wonder who does all the accounting of the money that flows through a city? TCV asked Fremont's Finance Director, Harriet Commons, CPA, about that and other accounting matters cities face every day.
TCV: Can you give us a brief outline of what the Finance Department does?
Commons: The finance department covers many different activities. We keep accounting records as well as manage the development of the annual operating and capital improvement budgets. It is our responsibility to make sure the city's bills are paid. Our department invests city money and issues bonds. It is also our responsibility to collect business taxes and all other money due to the city.
TCV: How much money flows through the city each year?
Commons: Our annual Operating Budget is about $130 million. The Capital Budget is probably another $100 million and the Redevelopment Budget is approximately $30 million.
TCV: Where does the money come from?
Commons: About three quarters of our money comes from property taxes, sales tax and vehicle license fees. These funds come from either the state or our county at certain times during the month or year. For the most part these monies go into the General Fund. Some revenues, such as gas taxes, go into a segregated fund that can only go toward street projects. The portion of property taxes designated for the Redevelopment Agency can only go to that agency.
TCV: Is money deposited into the General Fund separated by use or destination?
Commons: The General Fund is the primary checking account for city operations. Within the General Fund there are budget spending authorities, appropriations for different departments - police, fire, etc. The source of the funds is identified and we keep track of it by line item and it is spent as authorized by the council in the annual Operating Budget. There is money that has been set aside, like a savings account, as a "Budget Uncertainty Reserve" as well as two core reserves that cannot be spent without council approval. We pool our money for investment purposes but for accounting purposes, it is segregated on paper into different funds.
TCV: How does the city invest its money?
Commons: We are limited by state law. Our investment policy will be going to the council for approval on September 5; it must be approved every year. Our investments are 'plain vanilla.' Our objectives are: safety first; then liquidity; and finally yield - earning a reasonable return. We invest in money markets; certificates of deposit; the state investment pool; U.S. Treasury bills, notes and bonds. We do not buy stocks. Cities tend to be conservative and generally hold to maturity, not actively trading while making sure there is enough cash on hand to pay bills.
TCV: Why do some cities run into financial trouble if investing and spending are done using a conservative model?
Commons: On the investing side, we avoid the things that have been problems for other governmental institutions. Orange County is probably the most notorious. That led to a number of pieces of legislation that were designed to avoid fiscal problems. One of these is a requirement that investment policy is reviewed at least annually. We were doing that anyway. The city of Fremont has always been conservative. Other types of investments might have a higher yield but they also have a higher risk.
TCV: Does your department act as an economic forecaster for the city?
Commons: We monitor economic forecasts from a variety of sources to get a sense of general economic conditions; the Federal Open Market Committee being one of them. A cash flow forecast is part of our job to understand future cash needs in relationship to maturity dates of our investments; making sure investments mature when cash is needed.
We keep an eye on the interest rate environment so we don't invest too far out when interest rates are low and miss an upturn.
TCV: How is cash flow adjusted to meet varying needs within the city?
Commons: We stay in close contact with all departments in order to adjust to changing conditions. Through the purchasing function as contracts are bid and let, there are indications of cash flow needs as well.
TCV: As projects are completed, how are surplus funds, if any, handled?
Commons: It depends on the source of funding and whether there are state law or bond covenant restrictions. We go through a project fund closeout annually to clean up these accounts. There is a biannual capital improvement program review where those monies are also addressed and assigned to other projects.
TCV: Is Fremont audited?
Commons: Yes, every year. An outside CPA firm does a complete audit of our books. Every five years, we review qualifications and fees of auditing firms. That process was just completed and the firm we have been using was reappointed although the audit team will change, so there will be a 'fresh look.' As long as I have been here - since 1988 - and before that time, we have always had a clean audit opinion. We take that very seriously. Every time we go to the debt market, we are reviewed by the bond rating industry and always have high ratings from them. Fremont issues Certificates of Participation and General Obligation Bonds from Measure R.
TCV: Budget Manager Jim Becklenberg left to work with the city of Pacific Grove. Will his position be filled soon?
Commons: Yes, we will be filling that position shortly.
TCV: How has the Finance Department been affected by cutbacks?
Commons: We had to identify those things that are critical to our operation and focusing resources in those areas. We lost the capacity to be more proactive about things like analyzing methods and procedures. Resources have to be used to keep accurate books, pay bills, sustain prudent investing.
We are pretty well 'lean and mean' in our department; you will probably hear that throughout all city departments. Our core responsibilities are covered, but I am not sure how much more cutting could be done and retain our efficiency. The Finance Department is composed of very capable and dedicated people who are doing an outstanding job.
TCV: What is the trend in business sales tax at this time?
Commons: We certainly took a hit in the business-to-business tax, but we are seeing a restructuring. Our sales tax is gradually starting to recover with the impact of places like Pacific Commons coming on line. Retail and consumer goods are increasing. The Auto Mall is a very stable part of our sales tax revenue base.
TCV: How are pension costs affecting the budget?
Commons: There is more predictability then there was previously because Calpers (the state retirement system) has changed the way in which rates are calculated, increasing our insulation from big swings in investment earnings, the largest factor. Following exceptional investment earnings in the early 90s with resulting very low rates, an unprecedented three year earnings loss caused significant and dramatic rate increases. Now, the investment portfolio has returned to profitability and stabilized the rates.
TCV: How has the state affected Fremont's cash flow?
Commons: The state needed a revenue stream to pledge for bond payments, so they executed what we call a "triple flip." First, they decided to hold some of the sales tax monies supposed to go to cities. Normally, we get that cash advanced monthly with a reconciliation at the end of each quarter. Second, they made it up to us with property tax revenue that is paid twice a year and 12 months in arrears. Third, the state did essentially the same thing with property tax money earmarked for schools as Educational Revenue Augmentation Funds (ERAF). In this complex shift of timing and funding, cities have been put in a difficult cash flow position.
TCV: How does the Finance Department see the economic future?
Commons: This is a challenge. The signals continue to be mixed. We are no longer in the free fall of previous years. Sales taxes are fluctuating although our property taxes have held up so far. The impact of current conditions on the housing market will certainly affect us but that has yet to be seen. Assessed valuations have grown so new construction and sales of existing homes raise the property taxes collected, but a slowdown will affect our collections. Since assessed valuations are set January 1 of each year, we will not see the effects until the '07 - '08 budget.