Arlington, VA

by Peter Rousselot September 14, 2017 at 1:00 pm 0

Peter RousselotPeter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

Last year, responding to years of community pressure, the county government finally adopted a new review process in which the County Manager’s close-out surplus recommendations were first proposed in October, but not voted upon until November.

I strongly recommended last fall that almost all of last year’s $17.8 million close-out surplus be kept in reserve until the FY 2018 budget was approved.

Despite support from Board member John Vihstadt for such a reserve, the Board voted last fall to spend most of the surplus. When it came time to approve the FY 2018 budget this spring, the Board approved a tax rate increase of 1.5 cents, estimated to produce $11.1 million.

Discussion

Arlington should follow certain principles to guide its decisions in allocating any close-out surplus.

  1. A fair and reasonable percentage (i.e., a percentage higher than 0 percent) of any close-out surplus always should be allocated to moderate the tax rate and/or reduce bonded indebtedness

Adopting this principle would mean only that a fair and reasonable percentage of any FY 2017 close-out surplus would be earmarked for property tax rate moderation in calendar-year 2018. Adopting this principle would not necessarily mean that the calendar-year 2018 property tax rate would fall, rise or remain the same.

What is “fair and reasonable”? That should depend upon the close-out surplus amount in any given year and careful consideration of public input. But the fair and reasonable percentage should be multiplied against the entire surplus, and set aside for consideration next year before any final decisions are made regarding how to allocate any remaining surplus.

Similarly, we should consider using some percentage of any close-out surplus for early debt retirement when that makes financial sense. Retiring debt early will help free up more bond capacity in addition to reducing interest expense.

  1. The remainder of any close-out surplus (after setting aside a percentage for tax rate moderation and any debt reduction) should next be considered to address any emergency that requires funding before final adoption of the FY 2019 operating budget

An “emergency” expenditure is one that simply cannot be deferred until the FY 2019 operating budget is approved in April 2018. Reasons for not waiting until April 2018 might include the complete loss of a current vital opportunity or the strong likelihood of sharply escalating costs to meet a core government function.

However, before using surplus close-out funds, the county should first determine whether it already has an appropriate reserve fund set aside which it could tap to cover the emergency.

  1. All other proposed uses of any close-out surplus automatically should be deferred, and the remaining funds’ allocation should be decided in conjunction with the FY2019 budget process

Close-out surpluses are one-time funds rather than ongoing revenue. They exist solely because the County collected more tax revenue than required to meet its budgeted commitments. Therefore, these funds should be used for nonrecurring expenditures (e.g., replacing a bridge, acquiring land).

Conclusion

In its final FY 2018 budget guidance adopted this spring, the County Board directed the Manager “to provide an option for County Board consideration that would direct all carryover funds to consideration in the FY 2019 budget process, except for what the Manager deems to be emergency or unanticipated needs that, in his best judgment, require immediate allocation or appropriation.”

At a minimum, the Board should adopt that option this fall.

by Peter Rousselot October 27, 2016 at 12:15 pm 0

Peter RousselotPeter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

Arlington County seeks public input on the Manager’s recommended allocation of $17.8 million in surplus “one-time” close-out funds (from FY2016) and on the Board’s proposed budget guidance to the Manager for FY 2018.

The Board will vote on both matters in November.

Discussion

Kudos to the Board and Manager for embracing reform in choosing to discuss the surplus close-out funds’ allocation and the Board’s budget guidance in October and wait to adopt them in November. This gives the public more time to weigh in before decisions are made.

Submit public comments on both matters here.

Arlington should follow certain principles to guide its decisions in allocating the close-out surplus.

  1. As a matter of prudent financial management, a fair and reasonable percentage (i.e., a % higher than 0%) of any close-out surplus always should be allocated to moderate the tax rate and/or reduce bonded indebtedness.

Adopting this principle would mean only that a fair and reasonable percentage of the FY2016 close-out surplus would be earmarked for property tax rate moderation in calendar-year 2017. Adopting this principle would NOT necessarily mean that the calendar-year 2017 property tax rate would fall, rise or remain the same. A final decision on that would be made next year.

What is “fair and reasonable?” That should depend upon the close-out surplus amount in any given year and careful consideration of public input. But the fair and reasonable percentage should be multiplied against the entire surplus, and set aside for consideration next year before any final decisions are made regarding how to allocate the remaining surplus.

Similarly, we should consider using some percentage of the close-out surplus for early debt retirement when that makes financial sense. The County’s bond capacity is limited, and retiring debt early will help free up more capacity in addition to reducing interest expense.

  1. The remainder of the close-out surplus (after setting aside a % for tax rate moderation and any debt reduction) should next be considered to address any emergency that requires funding before final adoption of the FY2018 operating budget.

An “emergency” expenditure is one that simply cannot be deferred until the FY2018 general fund (operating) budget is approved in April 2017. Reasons for not waiting until April 2017 might include the complete loss of a current vital opportunity or the strong likelihood of sharply escalating costs to meet a core government function.

However, the County should first determine whether it already has an appropriate reserve fund set aside to cover an emergency before tapping surplus close-out funds.

  1. All other proposed uses of the close-out surplus automatically should be deferred, and the remaining funds’ allocation should be decided in conjunction with the FY2018 budget process.

County Board action on all other proposed uses of close-out surplus funds should be automatically deferred until more is known about the County’s financial position in the coming calendar year. Close-out surpluses are “one-time” funds rather than ongoing revenue. They exist solely because the County collected more tax revenue than required to meet its budgeted commitments. Therefore, these funds should be used for nonrecurring expenditures (e.g., replacing a bridge, acquiring land, etc.) rather than for supplementing the County’s ongoing operating expenses.

Conclusion

The County Board should direct the Manager to reconsider his current recommendations by applying the guiding principles discussed above.

by Peter Rousselot October 9, 2019 at 3:30 pm 0

Peter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

If the County Manager follows recent practice, he soon will propose how to spend any budget surplus remaining after closing out Arlington’s budget for fiscal year (FY) 2019, which ended June 30.

What percentage of this “close-out surplus” will the Manager propose to spend immediately?

What’s been happening

Typically, 47% of surplus dollars are automatically allocated to APS under a revenue-sharing agreement. Most of the remaining surplus is often allocated to “commitments already made by the Board.” Missing is a clear, written statement explaining how, when and why such “commitments” were made. Also missing is a written, publicly available policy clearly defining a “one-time” expenditure, and why “one-time” surplus funds are frequently spent on recurring needs.

Recently, the County Manager has reduced the close-out-surplus amount somewhat from previous years — when annual close-out surpluses ran as large as $36 million. But neither the Manager nor the County Board has fully adopted a key reform proposal recommended by the Arlington County Civic Federation (Civ Fed):

In 2016, Civ Fed passed a resolution urging “the Arlington County Board to annually consider setting aside a fair and reasonable amount of any surplus for the reduction of real estate taxes.”

Because the Board has allowed the Manager to allocate, or spend, almost all surplus cash at closeout without waiting until the following Spring when needs or shortfalls in the coming fiscal year are known with greater certainty, decisions on how millions of dollars are spent remain largely beyond taxpayers’ scrutiny.

Beyond the “close-out surplus”

What the Manager and the public generally call the “close-out surplus” reflects only a small part of the County’s overall surplus cash on hand. Once allocated, surplus funds end up in what is called the County’s “Fund Balance,” similar to what we would think of as a savings account. With these huge cash surpluses accruing year after year (some of which remain allocated but unspent for long periods of time), the size of Arlington’s Fund Balance has grown very large.

For example, as of June 30, 2018, the County reported combined fund cash balances of $634.8 million.

Do you know if, when, where, and how Arlington plans to spend the current Fund Balance?

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by Peter Rousselot April 12, 2018 at 2:45 pm 0

Peter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

In two columns last fall, I asked: Does County government commit too much surplus revenue for spending?

Progress on unallocated closeout surplus

In his proposed FY 2019 budget, County Manager Mark Schwartz notes that he has whittled down the level of surplus funds available at closeout.

“[T]he amount of funds that are ‘discretionary’ for allocation at closeout have been reduced annually ($11.1 million in FY 2017, compared to $17.8 million in FY 2016 and $21.8 million in FY 2015). Of those closeout funds that have been made available, immediate spending has been limited to commitments already made by the Board or for emergency needs,” the budget wrote.

This is a positive step.

More budget reforms

However, of these closeout funds, the majority remaining after allocating the APS revenue-sharing portion is automatically allocated to “commitments already made by the Board.” Missing is a clear, written policy explaining how, when and why these other “commitments” were made.

The County Board essentially has allowed the manager to allocate/spend the remaining closeout funds without adequate opportunities for residents to weigh in on millions of dollars of spending.

The Civic Federation has asked that a fair and reasonable portion of surplus funds be plowed back into the coming-fiscal-year budget to reduce the need for a tax-rate increase. County officials, however, claim that best practices dictate that surplus funds be used only for “one-time” purposes since the county cannot rely on future surpluses to meet ongoing needs.

But there is no written, publicly available policy clearly defining what a “one-time” expenditure is, and this “one-time” money is often spent on recurring needs.

What experts say

At a County Board work session last spring, Public Financial Management, Inc. (PFM) described how other jurisdictions manage their fund balance accounts.

PFM noted that Fairfax, Loudoun and Prince William counties have a 10 percent operating/contingency reserve, twice Arlington’s level.

PFM also observed that:

  • Arlington’s General Fund reserve policy levels are below the median level and among the lowest in the triple-A group (Arlington’s bond-rating peer group).
  • FY 2016 is the second consecutive year of decline in the General Fund balance ratio, and this could begin to concern Moody’s, if it becomes a trend.

More County Board oversight

Too often, committed and allocated funds are established in the fund balance with substantial cash accumulating over time, apparently with little or no monitoring of the reasonableness of the balances. New York State’s Local Government Management Guide on Reserve Funds warns against this.

“Reserve funds should not be merely a ‘parking lot’ for excess cash or fund balances,” the guide wrote. 

The County Board should answer questions like these:

  • Has the financial purpose served by each reserve fund been identified and published?
  • Has a written reserve fund policy been developed and published?
  • Has the Board reviewed all reserve funds currently established, and determined if the balances in each are reasonable?

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by Peter Rousselot October 26, 2017 at 10:30 am 0

Peter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

In last week’s column, I discussed the County’s General Fund (GF) Fund Balance. The County Manager subsequently posted a proposed FY 2017 Close-Out Report and 5-year budget forecast.

The 5-year budget forecast projects ballooning deficits in the out years.

Past Practices and Policies

Based on past County Board actions and policies, the County Manager historically has allocated the majority of any close-out surplus either to a spending category or, if needed, to keep the County’s reserves at the current required minimum (5 percent of operating expenditures).

The Manager also typically has identified a small remaining portion of the surplus (the available balance) that has not yet been allocated to any purpose. Over a seven-year period, this unallocated surplus has ranged from $36.1 million (FY 2012) to $11.1 million (FY 2017). Every penny of surplus revenue exceeding the dedicated 5 percent minimum operating reserve gets allocated to spending.

Last week, I posed this question:

Does County government commit or earmark too much surplus revenue for spending rather than beefing up reserves or offsetting tax or fee increases?

The answer is: yes. Therefore, the County Board should act this November to change or clarify the County’s policies regarding both allocated (particularly the “assigned” or earmarked portion) and unallocated close-out surplus funds. This transition might take more than one year because organizations and individuals have planned based on the County’s current seriously-flawed approach.

Increasing Reserves

Because the County holds a large balance of earmarked/assigned funds in its GF Fund Balance ($51,946,981 million in FY2016), it has argued that it has sufficient flexibility, and doesn’t need more than a 5 percent operating reserve.

The credit/bond rating agencies (Fitch, S&P and Moody’s), however, view this earmarked money as being of questionable availability to pay debts. So, they recommend that the County raise its dedicated operating reserve toward 10 percent. 

Offsetting Tax Increases

In 2016, the Civic Federation passed a resolution asking the County Board to use a “fair and reasonable” portion of the close-out surplus to offset tax increases.

Why? Because the cumulative impact of successive real estate tax increases (a combination of assessment and/or tax-rate increases) has become burdensome for many County residents and businesses, as The Washington Post has documented:

These cumulative increases — assessment or tax rate, or both — make housing less affordable for all Arlingtonians, and render our expensive commercial office space less competitive (as tax increases are passed along to tenants by property owners).

Real estate tax increases disproportionately harm residents living in the County’s committed “affordable” housing units — undermining the housing subsidies the County provides — as well as those lower/middle-income and fixed-income residents who receive no County housing subsidy.

Conclusion

The County Board should act this November to change or clarify Arlington County’s current seriously-flawed approach to allocating close-out surplus funds. This is a major issue that extends far beyond the unallocated surplus (this year: $11.1 million).

Whether the County Board chooses to lessen the impact of tax increases in the upcoming fiscal year, add to dedicated reserves or simply stash the cash in a flexible “unassigned” category, Arlington County’s current approach of spending or earmarking every penny of surplus revenue isn’t in our community’s best interests.

The current “budget roundtables” could be strengthened substantially if the public were offered a manageable number of choices, each of which would eliminate the ballooning five-year deficits forecast by the Manager.

by Peter Rousselot October 19, 2017 at 10:30 am 0

Peter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

In September, I explained why county government should temporarily defer until the following spring allocating any annual close-out surplus.

Here’s that column’s most up-voted comment (24 up votes):

Spend a $17.8M surplus one year, then raise taxes the next year by $11.1M. I don’t care who you are…this single fact should make smoke spurt out of your ears.

Today, I pose a related question: does County government commit or earmark too much surplus revenue for spending rather than beefing up reserves or offsetting tax or fee increases? (The final 2017 close out report was not available when this column was submitted.)

An October 3 Arlington County Civic Federation report (drafted by former Deputy Arlington County Treasurer John Tuohy) analyzes the County’s FY 2016 General Fund (GF) Fund Balance, an account that receives surplus close-out funds (collected revenues minus budgeted expenditures) at the end of the June 30 fiscal year.

Below, you can see how money in the GF Fund Balance is allocated:

What Portion of the Fund Balance Is Reserves?

Of this $191,243,859 in the GF Fund Balance, the County Board sets aside a “no-touch” operating reserve of $59,885,262 — or about 5.16% of budgeted revenues — for the County AND Arlington Public Schools. Board policy restricts use of these reserves to unforeseen emergencies (e.g., natural disasters, economic emergencies).

There is an additional $5 million self-insurance reserve and a small, separate “economic stabilization” contingency reserve within the GF Fund Balance.

Experts, including bond rating agencies, set 5 percent as the minimum operating reserve, but many recommend reserve levels as high as 10 percent of operating expenses. (Even when the percentage remains constant, the bigger the budget, the more you must set aside for reserves.)

Committed Vs. Assigned

By County Board action or policy, the rest — $131,358,597 — is committed or assigned (earmarked) for spending. Committed funds (approved by Board action) cannot be reallocated without a new Board action. Assigned funds (earmarked by the County Manager based on Board policy) can be reallocated.

Allocating Unallocated Close-Out Funds

During the close-out process, the Manager has historically identified a modest amount of surplus funds that are not yet allocated for spending or reserves:

Using County Board policy guidelines, the County Manager recommends how these unallocated surplus funds could be allocated.

Conclusion

By policy and practice, the County Manager does not recommend allocating a portion of the unallocated close-out surplus to offset increases in taxes or fees for the coming fiscal year. (Each 1-cent increase in the real estate tax rate currently generates roughly $7.4 million in ongoing revenue.)

Should the County Board take a different approach next month? Should the county allocate less for spending and more for reserves or to offset tax/fee increases?

I will discuss these questions further in next week’s column.

by Peter Rousselot March 9, 2017 at 12:15 pm 0

Peter Rousselot

Peter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

ARLnow.com reported last week that the County Board has approved the County Manager’s request to advertise a property tax rate for 2017 up to 2 cents higher than the current rate and potentially the highest tax rate since 2001:

County Manager Mark Schwartz said the hike would pay for what he described as the “extraordinary circumstances” facing the board in increasing costs for APS and Metro.

Failing to Carry Over Last Fall’s Close-Out Surplus

The Manager’s proposed FY 2018 budget is supposedly driven by “extraordinary circumstances” attributable to increased funding demands from APS and Metro. To close this “gap,” the Manager’s proposed budget incorporates a 2-cent property tax rate increase to generate $14.8 million.

The Manager fully highlighted these “extraordinary circumstances” last fall, but he and the County Board failed to act then to address that potential budget gap.

Metro is critical to Arlington and our entire region, and our critically-important schools are experiencing dramatic enrollment increases. Without much-needed fundamental reforms, the long-term costs represented by APS and Metro will indeed put tremendous upward pressure on Arlington’s property tax rate in every year for the foreseeable future.

However, any need to increase that rate in 2017 is entirely attributable to Arlington’s failure to follow recommendations that John Vihstadt, the Civic Federation, I and others made regarding last fall’s $17.8 million “close-out” surplus.

In a column last October, I proposed that the Board defer almost all of the proposed expenditures that the Manager recommended for that $17.8 million surplus, and hold in reserve virtually all those funds for first-priority use to bridge any budget gap for FY 2018. Instead, the Board approved spending almost all that surplus. That was a mistake that should not be repeated.

Necessary Changes at APS

As John Vihstadt noted at the County Board’s February 25 meeting to advertise a 2017 tax rate, APS’ exploding enrollment will require substantially increased funding over time, but APS should no longer be permitted to rely on a blank check from the County to provide funds for APS enrollment growth just because our schools are — and we want them to continue to be — top ranked.

Instead, the time has come for the County Board to condition increased funding on APS’ willingness to implement changes — particularly with respect to new school construction — to reduce substantially the per-student cost of new seats.

Current APS practices regarding per seat construction costs for new schools are neither necessary to sustain excellent schools nor fiscally sustainable unless other core County services are to be “crowded out” and/or we are to incur successive annual property tax rate increases that further degrade affordability for all Arlington residents.

Necessary Changes at Metro

Arlington should go on record now in support of fundamental reforms of Metro funding and governance at the interstate compact level, such as those recommended by the Federal City Council.

Conclusion

Before the FY 2018 budget review process ends this April, the County Board should:

  • direct the Manager to reserve almost all of any fall 2017 close-out surplus to lessen upward pressures on the 2018 tax rate,
  • condition any increased APS funding on APS implementation this year of reforms to lower per-seat construction costs substantially, and
  • express support for Metro reforms at the interstate compact level.

Peter Rousselot is a former member of the Central Committee of the Democratic Party of Virginia and former chair of the Arlington County Democratic Committee.

by Peter Rousselot September 15, 2016 at 12:15 pm 0

peter_rousselot_2014-12-27_for_facebookPeter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

As my fellow columnist Mark Kelly and I both have previously advocated, it’s time to overhaul the seriously-flawed process Arlington County government has been using to allocate any surplus funds left over at the close of the County’s fiscal year.

Discussion

Both Arlington County and Arlington Public Schools (APS) have fiscal years that end on June 30. Both the County and APS are required by law to adopt a balanced budget. In many years, Arlington County has closed its fiscal year with substantial surpluses. Since APS receives the lion’s share of its revenues from the County under a revenue-sharing arrangement, APS automatically receives its defined pro-rata share of any locally-generated Arlington County revenue surpluses.

However, in past years, each Board has utilized sharply-contrasting processes for deciding what to do with any such surpluses.

School Board’s Current Close-out Process

The School Board first receives, posts on its website, and discusses in a public meeting its staff’s recommendations regarding how to allocate any surplus funds. But, the School Board does not vote on its staff’s proposal until the following month. This process allows the School Board to:

  • discuss the initial APS staff recommendations at a public meeting, and
  • receive a public report from the APS Budget Advisory Committee, and
  • wait a month to get further input from the general public, before finally
  • adopting the final allocation of any APS surplus funds.

County Board’s Current Close-out Process

The County Board’s current close-out process is seriously flawed because it fails to provide the extra month for input from the general public that the School Board’s process provides. For example, last November, the County Board approved $21.8 million in new spending from surplus funds without providing that extra 30-day public review and comment period.

In 2015, the general public was denied a reasonable opportunity to discuss and comment about the Acting County Manager’s recommendation that this was the very best way to allocate last year’s $21.8 million revenue surplus:

  • $1 million for economic development, including incentives to attract new businesses to Arlington
  • $7.8 million for land purchases and other capital investment, including schools
  • $0.8 million for a “larger than anticipated” class of fire recruits
  • $11.2 million to maintain investments in the Affordable Housing Investment Fund and housing grants
  • $1 million for any unexpected needs or issues that may arise next year

Many activists allege that County staff deliberately overestimate expenses and underestimate revenues in the operating budget the County adopts each spring. These activists claim that staff does this so that during the following fall’s fiscal year close-out, the County government can take advantage of a public review and comment period that bears little resemblance to the far more lengthy spring review and comment period that the full operating budget annually receives.

County staff have indignantly countered that any such suggestions are false because the County’s spring budgeting approach simply demonstrates prudent financial planning for which the staff should be praised not criticized.

It isn’t necessary to resolve this continued annual debate over motive, because there is a far better process available to guard against the possibility that the staff’s motives might be suspect.

Conclusion

Starting this fall, the County Board should adopt a new fiscal year close-out process similar to the process long utilized by the School Board.

by Peter Rousselot November 12, 2015 at 12:15 pm 0

peter_rousselot_2014-12-27_for_facebookPeter’s Take is a weekly opinion column. The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of ARLnow.com.

Early in 2016, the new County Board should overhaul the seriously-flawed process the current County Board uses to allocate any surplus funds left over at the close of the County’s fiscal year.

Background

Both the County Board and the School Board have fiscal years that end on June 30. Each Board is required, by law, to adopt a balanced budget. In many years, the County Board has closed its fiscal year with substantial surpluses. Since the School Board receives the lion’s share of its revenues from the County Board, the School Board receives a pro-rata share of any such locally-generated surpluses.

However, each Board currently has very different processes for deciding what to do with such surpluses. The School Board’s approach is far superior to the County Board’s approach.

Discussion

At its Nov. 19 meeting, the County Board is scheduled to vote to allocate tens of millions of dollars in prior fiscal year surplus funds. The County Board has scheduled that vote based on a proposed allocation contained in a staff report not posted on the County website when this column was submitted to ARLnow.com. This is exactly the same process the County Board has followed for years. You can review last year’s County staff report’s recommendations regarding how to allocate prior fiscal year surplus funds here.

Many activists believe that the County overestimates expenses and underestimates revenues in the operating budget it adopts each spring. They claim the County does this deliberately so that during the following fall’s fiscal year close-out, the County can eliminate a public review of its close-out recommendations comparable to the public review the budget receives in the spring. County staff counters indignantly that any such suggestions are false because the County’s spring budgeting approach simply demonstrates prudent financial planning for which the staff should be praised.

It isn’t necessary to resolve this heated annual debate over motive because there is a far better process available to guard against the possibility that the activists are correct.

The School Board first receives, posts on its website, and discusses in a public meeting its staff’s recommendations regarding how to allocate any surplus funds. But, the School Board does not vote on its staff’s proposal until the following month. This much fairer and more transparent process allows the School Board to:

  • discuss the initial APS staff recommendations at a public meeting,
  • receive a public report from the APS Budget Advisory Committee, and
  • wait a month to get further input from the general public, before finally
  • adopting the final allocation of any APS surplus funds.

Conclusion

The new County Board should adopt the School Board’s close-out process.

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