Berlin’s Annual Audit Reveals Concern Over Shrinking Fund Balance

Berlin’s Annual Audit Reveals Concern Over Shrinking Fund Balance
General Fund balances are pictured over the last six years, according to town auditor PKS & Company. Submitted Image

BERLIN – Auditors cautioned town officials regarding a declining fund balance during a report this week.

As representatives from PKS & Company presented Berlin’s annual audit report to town officials Monday, they recommended that the town develop a formal policy to ensure the general fund balance didn’t dip too low. A fund balance that exceeded $8 million in 2016 has now dropped to slightly more than $5 million.

“It’s essential for the town to maintain an adequate level of a general fund balance,” said Leslie Michalik of PKS & Company. “It helps you to mitigate current and future risks such as revenue shortfalls, unanticipated expenditures. It also helps you to stabilize your tax rate. You want to work very hard to not continually chip away at your fund balance.”

Michalik told officials the annual audit again resulted in a clean, unmodified opinion. She said PKS did not identify any deficiencies in internal control over financial reporting.

In fiscal year 2018, the town brought in revenues of $5,954,879 but faced expenses of $7,755,863. As they typically do, property taxes made up the bulk of the town’s revenues (52 percent). Municipal expenditures — which increased 4 percent over the prior year — related primarily to public works (14 percent), general government (18 percent), public safety (27 percent) and capital outlay (30 percent).

Michalik said the town’s current $3.7 million unassigned fund balance represented slightly more than five months’ worth of operating expenses.  She pointed out that the fund balance had decreased substantially during the past two years. She said the town had been using prior years’ surplus funds to finance capital projects. Because of that, she recommended the town establish a formal policy to set the level of fund balance that should be maintained.

“You need to come up with and develop what the right number is for you,” she said.

When asked to provide an idea of what that might be, Michalik said municipalities determined those levels on a case-by-case basis based on their vulnerabilities and risks.

“It really needs to be developed by each region or municipality,” said Michael Kleger of PKS & Company.

Michalik also alerted officials to the fact that some of the town’s funds (particularly sewer and stormwater) had operating losses and were receiving loans from the general fund.

“The cash being generated in these funds has not been sufficient …,” she said. “They’ve been forced to borrow funds.”

Kleger said that was a concern because the loans impacted a sizable portion of the town’s unassigned fund balance.

“Most of that’s tied up in these two operating funds here,” he said. “Realistically there’s really not enough cash there to pay that back, then there’s a question as to how you’re going to handle this thing. To us those are kind of critical issues, getting those couple of enterprise funds at least to break even.”

Mayor Gee Williams said the bottom line was that the town would have to consider adjusting fee structures.

“In the past couple years, it shows that really for both of these funds they’re being subsidized at a greater and greater level by the general fund,” he said.

Kleger stressed that in addition to the interfund loans, the town’s recent capital improvements — projects like the new police department — had cut into its surplus.

“If you look at the last three years, you’ve averaged $2 million a year in capital expenditures,” he said, adding that during the three years prior to that the town had averaged less than $500,000 a year in capital expenditures.

Williams said the various infrastructure improvements requested by the town’s citizens came at a cost.

“Nobody ever says ‘I’ll wait,’” he said. “We have to decide what level of fees, what level of property taxes, will support what people desperately need or really want. That’s going to be the very interesting part of this year’s budget process.”

He said the town would have to decide what level of service to maintain. He added that a large part of the town’s expenses came in the area of public safety. In addition to funding the construction of a new police station, the town recently increased its EMS funding.

“This again, temporarily, is coming from prior year surplus,” Williams said. “You can’t keep doing that … I think we’re looking forward to having some very good community conversations on ‘okay, where’s the balance?’ I don’t think it’s all one or all the other. I think it’s somewhere in between. We’ll figure it out.”

About The Author: Charlene Sharpe

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Charlene Sharpe has been with The Dispatch since 2014. A graduate of Stephen Decatur High School and the University of Richmond, she spent seven years with the Delmarva Media Group before joining the team at The Dispatch.