Note: Ben Holland responded promptly to my request for information that went into this post. I was the tardy party. CTH
In an earlier post on a story I wrote about the first of the county’s public workshops or “Conversations” on its budget deficit, Bob Meadows said that, by his calculations, the gap between revenue and expenditures was not as large as county officials have said.
Ben Holland, the county’s director of administration says the county’s revenue has been growing at “about” 4 percent per year and its expenditures at “about” 6 percent since 2003, a trend projected out through at least 2012 unless significant adjustments in the county’s budget are made.
Bob Meadows, wrote,”The county’s general fund revenue grew at an average annual rate of 4.994 percent from 2001 through 2005, not the 4 percent stated by Holland. … You will also see that the general fund expenditures grew at an average annual rate of 4.251 percent — not the 6 percent stated by Holland.”
Bob detailed how he came to this conclusion, and at the bottom of this post, I’ll give you the numbers he was looking at.
I sent Ben Holland a copy of Bob’s post and asked him about the apparent discrepancy. I’ll try to summarize Ben’s response here, and if I’m being overly simplistic, I’m sure I’ll hear about it. Then I’ll paste comments from both Meadows and Holland.
Holland says the discrepancy results from:
1. The difference between how county budget officials and the state
auditor count transfers from one fund of the county budget to
another.
2. The fact that Holland and Meadows were looking at different
years to make their calculations.
3. The fact the county uses complex formulas to factor in
trends.
To summarize Bob’s point of view: The county is exaggerating the revenue/expenditure gap, which is “a prudent way to budget, since it makes an unexpected deficit less likely.” But in addressing the impending deficit and what is needed to fix it, the county should use “actual numbers.” The county’s budget also should make clear expenditures which contributed to the deficit so that excess spending can be avoided in the future.
How am I doing so far guys?
Here’s What Bob wrote:
Go to the county auditor’s web page and put your cursor on
“Financial
Services” on the left side.
http://www.kitsapgov.com/aud/
Download the CAFRs for the years posted.
(My note: That’s “Comprehensive Annual Financial Reports,” for those of you who may not consider budget analysis a recreational activity.)
In these “pdf” files, look at the “Statement of Revenue,
Expenditures,” and
Go to the county auditor’s web page and put your cursor on
“Financial
Services” on the left side.
http://www.kitsapgov.com/aud/
Download the CAFRs for the years posted.
In these “pdf” files, look at the “Statement of Revenue,
Expenditures, and
Changes in Fund Balances” in the “basic” financial statements.
The
electronic file page numbers are:
2001–pg 5; 2002–pg 24; 2003–pg 18; 2004–pg 20; and 2005–pg 22.
You will find the actual General Fund revenue and expenditures figures.
Soon, the 2006 CAFR ought to be posted.
(My Note: They’re posted now. I’ve included the numbers at the bottom of this post.)
Go to the “Local Government Financial Reporting System” on the
State
Auditor’s web site:
http://www.sao.wa.gov/applications/lgfrs…
You can extract different reports based on the CAFRs.
Click “Report menu” in the upper left corner. Then, choose
“counties/cities”
and “category with years across.” You can use that report to see
the amount
of “diverted road fund” property tax revenue used in the General
Fund. When
the county uses less of the road fund for things other than roads,
the
property tax revenue in the CAFR appears to grow by only a tiny
bit.
The county’s general fund revenue grew at an average annual rate
of 4.994
percent from 2001 through 2005, not the 4 percent stated by
Holland. I doubt
the 2006 CAFR will drop it to 4 percent.
You will also see that the general fund expenditures grew at an
average
annual rate of 4.251 percent — not the 6 percent stated by Holland.
If 2006
makes that figure jump up to 6 percent, it will be because of a
large
spending increase.
There is a difference between actual numbers and budget numbers.
The budget
always exaggerates expenditures and underestimates revenue. It is a
prudent
way to budget, since it makes an unexpected deficit less
likely.
You have to look at what actually happened to find the actual
revenue and
expenditures.
It is sometimes a difference of millions of dollars.
The past doesn’t predict the future, but the trend can give you
an idea of
the average around which the future will probably bounce up and
down.
I believe the difference between future revenue and expenditures
isn’t huge.
Unfortunately, that point isn’t being made — and no hint of what
would be
needed to close the deficit with new revenue was included in
the
presentation.
Also, there is nothing I’ve found so far which would make it
easy to figure
out what expenditures caused a deficit in the recent past or may
cause it in
the near future. If the county’s projections are realistic, they
ought to be
able to say what they’re based on.
Here’s what Ben wrote:
What Bob says is correct, I checked it. The Comprehensive Annual Financial Report (CAFR), prepared by the auditor in accordance with State requirements, looks at revenues and expenses in the General Fund (all funds actually but here we are talking about the General fund as is Bob) a little differently than the budget shop. The difference is the way we look at “operating transfers” which are transfers between funds within the budget. A for instance is our operating transfer to CenCom (Central Communications – 911 service) where in 2006 we transfered $1.059 million from the General Fund to CenCom to pay for the County’s share of Central Communications. Because CenCom is also a County Fund, we “transfer” the $$ instead of CenCom billing us and then we out of an expense account. It’s a kind of gray distinction but we call that an expense (in budget) and the Auditor does not. There are also “transfers in” which we count as revenues. So that’s one distinction.
The other distinction is that we’re looking at different years. I was using 10 years from 2003 through 2012 (projections for 7 thru 12), and according to our projections, expenses will grow 6.0% percent and revenues by 3.8%. I rounded both amounts to a single the nearest whole percent for my talks. These numbers match the graph I used in my town hall meeting talks.
Looking closer at statistics, you can actually get a lot of different numbers depending on the years you choose. If you do it the way the Auditor does it, for the 4 years from 2003 through 2006, revenues increased at 4.47% and expenses increased at 8.08%, if you include the operating transfers, these numbers change to 3.32% and 8.03%. Either way, it is clear that in the last 4 years, expenses have outpaced revenues by quite a lot.
Finally, we used statistical methods like linear regression and some MicroSoft tools available in their spreadsheet programs to look at trends and these are more affected by the most recent years than earlier years. It’s another reason things might look a little differently depending on what years you use.
Let me know if you need more.
Sincerely,
Ben Holland
Kitsap County
Director of Administrative Services
(360) 337-4504
Revenues:
2001: $63,921,928
2002: $67,457,333
2003: 72,060,258
2004: 75,157,443
2005: 77,681,656
2006: 82,151,573
Expenditures:
2001: $67.720,391
2002: $70,464,237
2003: $68,023,476
2004: $74,465,000
2005: $79,992,602
2006: $85,875,496
Excess (deficiency) of revenues over expenditures:
2001: ($3,798,463)
2002: ($3,006,904)
2003: $ 4,036,782
2004: $692,443
2005: ($2,310,946)
2006: ($3,723,923)
Kitsap County Diverted Road Taxes:
2001: $1,359,765
2002: $1,467,010
2003: $2,354,856
2004: $1,929,926
2005: $1,434,053
2006: $1,412,891
Ben Holland chooses 2003 as his starting year. In that year, actual revenues increased by 6.8% — the biggest annual increase in the period from 2001 through 2006. It was also a year in which “operating transfers in” equaled $4.4 million, thereby making the total available to spend (or transfer out) bigger.
Had he chosen 2001, the “transfers in” would have been a similar amount, and the big increases in what I would call “actual revenue” (meaning income received that year) which occurred in 2002 and 2003 would be reflected in the average annual increase.
So, yes, it does make a difference when you choose one year or another as your base year to start the comparisons.
I chose 2001 since that was the last year before I-747 took effect. The county says property tax revenue grows too little under I-747, so it seems obvious that 2001 ought to be the base year.
Why did Holland choose 2003?
I think it would be a good idea for our county leaders to state specifically during their budget presentations just what they are basing their statements on. In the case of the “community conversation” PowerPoint slides, Holland stated with regard to both revenues and expenses that they “are increasing at an annual rate of about” 4 and 6 percent.
His reply to you shows that those 4 and 6 percent figures were based on a projection of totals for this year and the next 5 years based on experience since 2003 – a period that includes only three annual changes (2003-04, 2004-05, and 2005-06). The words “are increasing” imply some kind of projection, but he omitted anything which would have told people what the projection was based on.
When I make a statement about the same matter, I say what year I start with and what year I end with – since I’m making a statement about past experience.
Holland is including “transfers in” and “transfers out,” but we need to know more to understand what those transfers are and how they affect the county’s budget picture.
Where do the “transfers in” come from? Does the county catch a leprechaun once in a while and use his pot of gold? The auditor’s financial statement doesn’t treat those as “revenue” – perhaps because they are not income received that year. (That’s my guess, but where does the money transferred into the general fund come from?)
Note also that the “transfers in” can vary greatly from one year to the next. What constraints exist on choosing the amount to transfer in? If the county can transfer in as much or as little as it wants from whatever source this money comes, the annual change in “revenues” in Holland’s method is skewed based on the county’s decision to transfer a lot or a little. It says nothing about the actual revenue received in any particular year, unless we know where it came from.
For example, in Holland’s base year of 2003, the transfers in totaled $4.4 million, and the following year the transfers in totaled only $1.97 million. They stayed in the neighborhood of $2 million thereafter – making it appear as though “revenue” had dropped by $2.4 million, when actually it was a decision to transfer less into the general fund. What drives this decision?
Since the “transfers out” are appropriated in some other fund, I don’t count them in the general fund. And, since they have been less than “transfers in” for every year other than 2002, I don’t know what to make of them anyway. Where do they go?
One place is CENCOM – for which the voters approved an additional source of tax revenue starting in 2004. Now that the CENCOM building is paid off, all the additional revenue is available for CENCOM’s operating costs, so I would expect “transfers out” to be reduced significantly – taking a load off the other revenue sources available to the general fund. How is that factored into the projections?
My method is nothing more than taking a look at the average annual increase over the period of years from 2001 through 2006 (and through 2007 for the property tax levy, since the amount collected is ordinarily close to the amount imposed). It is simply a way to see where the “line” is that the county’s expenditures ought to be near. If their expenditures exceed the long-term average revenue increase for a few years (as they have in 2004, 2005, 2006, and probably 2007), then my method makes it obvious that trouble is just around the corner.
When Holland says the county “expenses” have gone up, he is perhaps begging the question. The question is whether the county must increase spending as it has in the period since 2003. Saying merely that “expenses” have gone up assumes that the spending was unavoidable.
If annual spending increases greater than 9% in 2004 and above 7% in 2005, 2006 and 2007 were unavoidable, what drove those increases?
If we understood what drove those increases, we would know why the county is running a deficit. And, we might have an idea of what the future increases must be. (Hint: If the projected future increases exceed the annual growth in total personal income of all the people who would have to pay for them, trouble is waiting.)
There is another thing about choosing 2003 as Holland’s base year that skews the “revenue” increases he describes. It was the year in which the most actual revenue from the County Road fund was diverted to the General Fund.
2003 had the highest amount of money as “transfers in” and the highest amount of County Road levy revenue diverted to the General Fund.
The combination of “transfers in” and diverted road funds makes more than $3 million disappear from what Holland calls “revenues” in the later years. Comparing 2003 to 2006, $941,965 less was diverted from the road fund revenues, and $2,196,848 less was transferred in from some other funds.
The result is a significant skewing of the figures, making what Holland calls “revenue” appear to grow at a much slower rate.
Why did Holland choose 2003 as his starting point?
I am not going to read all these numbers, but can say that I was surprised when I heard that the county park’s department “misplaced” $200,000 that was supposed to be used for the Howe Farm. They found it later, but you wonder about their accounting when they do things like this.