Auditor June Pitchord Responds To Boone County "Slush Fund" Story

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February 10, 2014 Mike: This is in follow-up f ollow-up to our recent e-mail exchange regarding one of your articles, “YOUR “YOUR MONEY, NOT AT WORK: W ORK: Boone County “slush Fund” hits $47 million” million”,, which contains several errors and mischaracterizations. mischaracterizations. I was hoping for an opportunity to discuss discuss these with you in person as this would allow for back-and–forth questions questions and discussion. Since it appears that is not possible, I am providing the following written comments which I hope will be helpful. After you’ve read this, perhaps we we could visit by phone or m meet eet briefly. You have my e-mail and my phone number. Let’s begin with the headline which references a county “slush fund”, a reference that is (intentionally?) erroneous and misleading. What, exactly, exactly, is a “slush fund”? fund”? How would the the term “slush fund” be understood by the average reader? Is it a truthful statement to say that the County has such a fund and that it has $47 million in it? Webster’s dictionary defines “slush fund” as “an amount of money that is kept secretly for illegal or dishonest purposes; a fund for bribing public officials or carrying on corruptive propaganda; an unregulated unregulated fund often used for illicit purposes”. The Oxford dictionary provides a similar definition: “a reserve of money used for illicit p purposes, urposes, especially political bribery”. Investopedia.com defines it it as “money earmarked for a lo loosely osely defined, but legitimate, purpose that is instead surreptitiously used for an illegitimate ill egitimate purpose (i.e., using charitable donations to pay for personal personal expenses)”. Businessdictionary.com defines “slush “slush fund” as a “secret reserve of cash held in an organization, generally by the top management, for which the executives administering it have informal discretion and are not made fully accountable over its use use (such as in payment of bribes).” The definitions vary slightly, but but the basic meaning is the same: slush funds are hidden or concealed, ou outside tside the scope of public accountability and scrutiny, scrutiny, and used for illegal and illegitimate purposes. To say that the County has $47 million in “slush funds” is grossly misleading and simply not true. The article incorrectly uses the terms “fund “f und balance” and “cash” interchangeab interchangeably, ly, as if the two were the same thing. thing. They are not the the same thing; thing; in fact, they are quite different. “Fund balance” is the difference between the assets and liabilities of a specific fund and a sizable portion of fund balance consists of receivable balances (sales tax receivable, property tax receivable, federal and state grant reimbursement receivables, etc…) This is one of the reasons County officials adopted a policy to require a minimum fund balance for the major operating funds so as to ensure adequate cash flow. The article incorrectly states that having a net fund f und balance in the General Fund in excess of the minimum fund balance “violates “violates County policy”. This is a false statement a and nd very misleading. The County’s Fiscal and Budget Policies are presented in the budget document, within the General Information tab section (page 74 of the proposed budget document you referenced in your article) and states:

 

Fund Balance—major operating funds: funds: In preparing and adopting the ann annual ual budget, the County will calculate and maintain a projected net fund balance equal to at least   two month’s operating expenditures, which is approximately 17%.  In the the event that fund balance is projected to fall below the minimum amount, the County will develop a plan for restoring the minimum fund fund balance. [bold and italics added] added] As noted above, the County’s policy imposes a minimum fund balance requirement. requirement. The purpose of the policy is to ensure that the fund has at least  the  the specified minimum fund balance. There is no violation of County policy if the fund balances exceeds the minimum and to make such a statement is false and misleading. misle ading. A primary focal point of your article appears to be the significant increase in projected net fund balance at the end of FY 2014 as compared to the previous year, something which is specifically discussed on page 33 of the Budget Message. The table and discussion presented on page 33 illustrate that net fund balance is projected to decline in all governmental funds except the two new funds, Community Children’s Services Fund Fund and the 911/OEM Fund. Fund. The discussion presented on page 33 provides the reader with an explanation of why the various net fund balances are expected to increase or decrease. But as to your focal point of the increase in overall net fund balances: two new voter-approved st sales taxes became effective in 2013 (children’s services on April 1  and 911/OEM on October 1st ). As explained in the Budget Message, Message, the Commission-appointed Commission-appointed governing governing board for children’s services is gathering community input and developing funding policies reflective of evidence-based approaches with an emphasis on outcomes measurement. These efforts must be completed in order for an annual spending plan plan to be developed. Likewise, for 911/OEM, operations cannot be expanded until the new facility is constructed, at which time the annual operating budget will be increased as planned. The unspent monies that acc accumulate umulate in the 911/OEM fund can only be used for f or 911/OEM purposes and will be available to cover some of the capital-related costs, thereby reducing the amount to be borrowed, which in turn will reduce future principle and interest costs. In the foregoing discussion, I have made several references to “funds” and I want to make sure that this concept is correctly correctly understood. If I may, I would like to highlight the bas basic ic differences between fund accounting used by governments and the financial accounting model used by the private-sector. Understanding these these differences is essential to understanding a government’s financial budgeting and reporting activities. I have attached information from Governmental  Accounting, Auditing, Auditing, and Financial Reporting Reporting, an authoritative guide for governmental entities, which provides helpful information and I encourage you to read it. The primary focus for a government’s budgeting and financial reporting is stewardship and accountability  whereas for the private sector the primary focus is profitability and return on accounting system investment. As a result, result, governments use Fund Accounting: an accounting emphasizing accountability rather than profitability whereby separate and distinct funds are

 

used to segregate and account for resources dedicated/restricted for specific purposes and/or subject to special restrictions and limitations. Although the annual budget for the county’s numerous funds are presented together on a single two-page schedule with a “grand total” column (this is the schedule from which you lifted the amounts referenced in your article), it is inappropriate to treat the grand total as if i f it represents a single budget budget consisting of fungible resources. resources. Rather, the reader should understand that each individual individual fund has a legally-adopted and legally-enforceabl legally-enforceable e budget. It is impossible for the County to present each individual i ndividual fund on this two-page schedule because the number of funds is too great; however, a Fund Statement is presented for each individual fund within the Fund Statement tab section of the budget document so that this information is available to the reader. Knowing this, the County’s two-page budget summary is better understood as a presentation of discrete individual budgets. While it may be helpful to compa compare re the aggregate total b budget udget of Boone County to that of another governmental entity for purposes of gaining a sense of comparative size and complexity of the two governments or to compare the aggregate total budget of the County between years to note trends t rends and changes, it is a serious error to read, interpret, and report on the “total” budget in a way that implies or suggests that the aggregate resources are fungible and available for appropriation to any of the County’s various governmental purposes. purposes. This is simply not true. The resources within within the County’s special revenue funds, debt service funds, internal service funds, and trust funds are restricted as to use; this is the very reason they are accounted for in a fund other than the General Fund. I make a point to emphasize e mphasize this each year during my presentation of the budget to the Commission and in public hearings pertaining to the annual budget and this basic understanding runs throughout the Budget Message and other sections of the Budget document. Readers can learn more about the purpose and restrictions applicable to each fund by referencing the General Information tab section of the budget document, specifically the Overview and Description Specialof Revenue and Other Funds . This section listing listing of each individual fund, theofpurpose t he fund, the applicable state statute, andprovides the fund anumber for easy reference to the Fund Statement. Fund Statements are presen presented ted for each individual fund; these are located in the Fund Statement tab section of the budget document.

As explained within the General Information tab section (the Description of the Accounting and Budgeting System), the County’s operations operations and activities fall into three broad categories: (1) governmental activities, (2) internal service activities, and (3) fiduciary f iduciary activities. Governmental activities are accounted for within the General Fund, major special revenue funds, non-major special revenue funds, and debt service funds. Internal service activities (suc (such h as facilities maintenance, capital repair and replacement, self-insured health/dental, etc…) are accounted for within Internal Service Funds, and fiduciary activities are accounted for within trust and agency funds. The two-page budget budget Budget Summary by Fund Type, Type, presents information in accordance with theseschedule, three broad categories:

 

 

  Governmental Activities: Major funds are presented presented in their their own column. column. All nonmajor



funds are combined into a single column and then a grand total for all governmental funds combined is presented. presented. As previously noted, individual individual Fund Statements are are presented for each individual fund in the Fund Statement tab section.

 



Internal ServiceIndividual Activities:Fund the various funds internal inte rnal service are combined combined a single column. Statements Statemen ts are presented forfunds each each individual fundinto in the Fund Statement tab section.

fiduciary activities (such as p property roperty tax   Fiduciary Activities: most of the County’s fiduciary



collection and distribution) are excluded from the annual budget, because the monies don’t “belong” to the County and consequently there are no resources to subject to an annual appropriation process. However, the County has been been named as trustee for several trust funds (cemetery and educational educational trust funds) and these few funds are subject to an annual budgeting process and are therefore included in the County’s overall budget document. Individual Fund Statements Statements are presented for each each individual fund in the Fund Statement tab section. The foregoing discussion is necessary background for an informed discussion of the County’s revenues, expenses, and net fund balances. balances. Based on the information presented ab above, ove, it should be clear that referencing the grand total net fund balance has limited li mited usefulness and actually can be misleading in that it leads the reader to an erroneous understanding that the net fund balance amounts are fungible fungible and can be re-directed to other purposes. Rather, one must “unpack” this grand total into its individual fund components. components. So, for instance, of the projected grand total $47 M net fund balance at 12/31/2014 12/ 31/2014 which you label as a “slush fund”:

  $72,000 belongs to trust funds; restricted as to use. This is not a slush fund. 



  $3.6 M belongs to internal service funds of which more than $2 M is intended for



facility-related maintenance and major repairs and the rest belongs to the funds that account for self-insured health, dental, and workers workers comp. These resources are restricted to these purposes. purposes. In order to demonstrate demonstrate county official’s stewardship stewardship in maintaining county facilities, the county systematically sets monies aside each year in order to provide resources in future years for significant capital repairs (roofs, HVAC, parking lot resurfacing, resurfacing, carpet carpet replacement, etc…). Therefore, net fund balance balance will increase in the years of accumulation and decline in years where planned expenditures occur. This is not a slush fund. 

  $8.17 M belongs to the new 911/OEM Fund. Fund. As I point out in the Budget Budget Message



discussion of fund balances on page 33: “The 911/Emergency Management Fund is a th

new fund, resulting from a voter approved permanent 3/8  cent sales sales tax. tax. The tax

 

became effective October October 1, 2013. As previously noted, noted, the tax revenues revenues will be used to construct a new facility and expand operations operations and the t he planning and design processes are underway. The net fund balance is expected to increase during this transitional transiti onal  period.” Note: by using fund accounting, accounting, these resources resources are legally segregated and and accounted for within a special revenue fund and cannot be used for purposes other than 911 and Emergency Management. As noted above, the operations cannot be expanded until the new facility is constructed; the resources that accumulate in the fund between now and then will be available to pay for capital-related costs, thereby reducing the amount of debt incurred. incurred. Going forward, the resources resources in this fund will be use used d to cover the annual operating budget of the expanded 911/OEM center, debt service (principle and interest) associated with the new facility, and on-going future equipment replacement. This is not a slush fund. 

  $11.19 M belongs to the new Community Community Children’s Services Fund. Budget Message,



page 4: “The County Commission appointed the nine-member voluntary board, the Boone County Children’s Services Board (BCCSB) in April 2013, and the Board has been meeting regularly regularly since then. The board is responsible responsible for establishing by-laws, po policies, licies, and spending allocations. allocations. In addition to gathering gathering community input, the BCCSB BCCSB is developingmeasurement. funding policesAt reflective of evidence-based evidence-ba sed approaches with an outcomes the conclusion conclusio n of the policy-setting policy-setti ng process, theemphasis board on BCCSB will establish appropriations appropriations for services. services. Therefore at this time th the e FY 2014 budget includes appropriations for professional and administrative support only and the employees to be part of the newly formed Community Services Department.”  

Later in the Budget Message discussion of projected net fund balance at 12/31/14 (page 33), the reader is advised that the net fund balance is expected to increase during the policy development phase. Again, by using fund accounting, these resources resources are legally segregated and accounted for within a special revenue fund and cannot be used for purposes other than Community Community Children’s Services. Once the board completes completes its initial work, these resources will be appropriated by the board. This is not a slush fund. 

  $6.7 M belongs to a myriad of special revenue funds where the use of the resources is



restricted for specific allowable allowable purposes. Individual Fund Statements Statements are presented for each and every one of these funds and the General Information tab section of the Budget document includes a section, Overview and Description of Special Revenue and Other Funds, where the reader can educate him/herself as to the purpose of each fund and the fund number is provided to allow all ow the reader to cross-reference to the Fund Statement. These special revenue funds are not slush funds. 

  $.88 M belongs to the Law Enforcement Services Fund (Prop L Fund) and $5.6 M belongs



to the Road and Bridge Fund, both of which are legally restricted funds. These two  funds are not slush funds.

 

  $10 M belongs to the General Fund. Fund. The General Fund provides funding funding for the general



functions of the County including: including: public safety (Sheriff, Corrections, Corrections, Prosecution, Court, Juvenile Court, Public Administrator, Medical Examiner); public health; and general government operations (Auditor, Commission, Recorder of Deeds, Collector of Revenue, County Clerk, Voter Registration and Election, Treasurer, Human Resources, Purchasing, County Counselor, Information Technology, property & casualty insurance, etc..). The General Fund is not a slush fund.  I hope the foregoing helps you understand my concerns regarding the errors and mischaracterizations included included in your article. I would be more than happy to meet with you so that I can better understand your concerns. Sincerely, June Pitchford

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