Berlin Enterprise Funds Continue Operating Losses

BERLIN – The town’s annual audit revealed the sewer fund remains a cause for concern.

Leslie Michalik of PKS & Co. told the Berlin Town Council Monday that while the town was essentially in good financial position, its sewer fund had an operating loss during the last fiscal year. She noted that while last year’s rate increases had helped, more action needed to be taken.

“Work is not done,” she said. “Going forward you really need to continue to monitor the sewer fund. You need to continue monitoring your rates to make sure they’re set at a high enough level to cover not only your operating expenses but your capital expenses and your debt service costs.”

Michalik and Michael Kleger, a partner with the company, said the town’s financial statements presented fairly and offered a clean or unmodified opinion.

“This is the highest level of assurance that we can give as auditors,” Kleger said.

Michalik provided an overview of the town’s general fund, which is broken into various categories.

“A lot of readers of financial statements focus on the fund balance,” she said. “And so if the fund balance is low, they feel like the town is in financial difficulty, if it’s high, then the town’s in good shape. It’s true that a low fund balance or a deficit in your fund balance means that you’re probably having some financial difficulties, however it’s not necessarily true that a high fund balance means that you’re financially strong. You have to dig down a little bit deeper.”

The town’s general fund balance of $6,168,982 consists of $3,375,304 that’s nonspendable, $994,629 that’s restricted, $791,005 that’s assigned and $1,008,044 that’s unassigned. The town’s total unrestricted funds (assigned and unassigned) is $1,799,049, which represents 3.75 months of operating expenditures.

“That three and three-quarter months is your cushion or your buffer for future unanticipated needs,” Michalik said.

She added that while the Government Finance Officers Association recommended a buffer of no less than 60 days, the town should likely have more than that on hand to deal with things like nor’easters or flooding.

The town’s biggest source of revenue continues to be property taxes, which make up 60% of revenues, while Berlin’s biggest expense is public safety, which makes up 39% of expenditures.

As far as the enterprise funds, Michalik stressed that they were to be run like a business.

“Your fees are intended to be set high enough they cover your expenses,” she said.

The town’s electric fund operated at a $144,054 loss in fiscal year 2020 while the water fund operated at a loss of $127,494. Sewer operated at a loss of $140,924 and stormwater operated at a loss of $74,430.

While the sewer fund’s operating loss was $140,924 in fiscal year 2020 versus more than $900,000 the prior year, Michalik encouraged officials to continue to monitor the fund closely.

According to Michalik, the Government Finance Officers Association recommends no less than 45 days of working capital — current assets less current liabilities — for enterprise funds. That means the town’s electric and water funds are in pretty good shape.

“The sewer fund has negative working capital which means it might not be able to pay its debts because its current liabilities exceed its current assets,” she said.

Michalik added that for all the funds, the need for capital improvements would have to be taken into account as well.

Mayor Zack Tyndall asked if other towns had capital reserves within their enterprise funds.

“Generally most towns struggle with this,” Kleger said. “They do have enough to cover current operating expenses but when it comes to capital projects there’s typically not reserve funds for those. It is an area the towns seem to struggle with.”

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.