At the City of Tallahassee’s budget workshop on June 19th, Commissioners wrestled with staff’s proposal to handle a $5 million General Fund deficit with a property tax increase and a $2 million increase in the electric utility transfer. See TR story here.

In addressing the Commissioners concern about the revenue increases, City Manager Anita Favors Thompson spoke of staff challenges in the police department and the results from the three citizen budget workshops where approximately 100 citizens indicated that the community did not want service levels to be cut.

Also at the meeting, the City budget staff handed out a document to City Commissioners that showed the City’s operating budget for each year from 2008 through 2014. The annual numbers in the document,  recreated in the table below, appear to show a downtrend in spending. According to the staff’s document, spending has decreased from $730 million in 2008 to $697 million in the 2014 proposed budget, a decrease of $33 million.

After reviewing the document provided by city budget staff, Commissioner Nancy Miller, responded by saying “we can only be in a holding pattern so long.”

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However, the annual budget data handed out by staff included budgeted fuel expenditures for the electric utility. These expenditures can account for approximately 30-40% of the overall budget each year and can fluctuate dramatically, depending on world-wide market forces.

When fuel is removed from the budgeted expenditures, as in the table below, a completely different picture of the City spending trend over the last 5 years emerges. Instead of a decrease of 33 million, the budgeted spending since 2008 has increased $77 million.

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The data in the table shows that the inclusion of fuel costs in the overall budget -as in the document provided to the City Commissioners- can hide actual trends that are taking place.

Here’s what this means to you:

•  City Staff has suggested that spending has decreased by approximately $33 million since 2008, a span of five years.
•  Staff achieved this by not attributing the change in spending to the decrease in utility fuel expenses.
•  When looking at non-fuel spending City spending has, in fact, increased $77 million since 2008.
•  City Staff has proposed a tax INCREASE and an increase in the electric utility transfer for the upcoming 2014 budget to cover increased spending.

Yesterday, City Manager Anita Favors Thompson released her recommended 2014 (FY14) budget for review by the City Commission. A review of this budget shows that the City Manager has looked to revenues and not cuts to account for the $5 million deficit in the General Fund.

Ms. Thompson has proposed raising $2.3 million in new property taxes and, in what appears to be a one time stop gap measure, she is proposing a move of $3 million from the Capital Improvement program to the General Fund.

Also of note, according to city policies the transfer from the Electric Utility Operating Fund to the General Fund is supposed to be approximately $23.9 million. However, without explanation, the budget document proposes an increased transfer, in violation of city policy, of $2 million.

Check back to Tallahassee Reports for updates.

Yesterday, City Manager Anita Favors Thompson released her recommended 2014 (FY14) budget for review by the City Commission. A review of this budget shows that the City Manager has looked to revenues and not cuts to account for the $5 million deficit in the General Fund.

Ms. Thompson has proposed raising $2.3 million in new property taxes and, in what appears to be a one time stop gap measure, she is proposing a move of $3 million from the Capital Improvement program to the General Fund.

Also of note, according to city policies the transfer from the Electric Utility Operating Fund to the General Fund is supposed to be approximately $23.9 million. However, without explanation, the budget document proposes an increased transfer, in violation of city policy, of $2 million.

Check back to Tallahassee Reports for updates.

“No increase proposed for millage rate – City Manager Anita Favors Thompson today released the recommended $724.9 million fiscal year 2012 budget for review and action by the Tallahassee City Commission. The proposed amount is $2 million less than the current year budget and reflects feedback received from the community during budget public meetings earlier this year.”

The above statement, while absolutely true, fails to mention a few details.

Notice the city manager compares one budget to a previous budget. This approach allows the City of Tallahassee to never address actual spending. Why not compare the 2012 budget to a full year of actual expenditures for 2010?

If you make this comparison, the result is much different than the information in the city’s press release. In fact, the 2012 budget proposes $40 million in new spending over 2010 actual expenditures.

What the City manager forgets to tell the community is that while the 2012 budget is $2 million less than last years budget, last years budget projected $179 million in fuel costs and this years budget projects $155 million in fuel costs! Doesn’t this mean that citizens of Tallahassee should experience a windfall of $24 million this year due to the crash of the natural gas market?

A more accurate statement would have been “the 2012 budget does not increase property taxes, but increases non-fuel spending by $40 million over actual expenditures for 2010.”  In other words, non-fuel spending increased from $499 million in 2010 to $537 million in 2012, a 7.4% increase

Where is all the additional spending?

Tallahassee Reports compared the 2012 proposed budget with the actual non-fuel expenditures in 2010 in major fund categories and found the Electric fund increased by $19 million, the General Fund increased $6 million, the Sewer Fund increased $5 million, the Gas Fund increased $4 million, the Solid Waste Fund increased by $2 million, and the Fire Services increased by $2 million.

Tallahassee Reports also compared the Personnel Services category from 2010 with the 2012 proposed budget. This category includes all salaries and benefits for all city employees. For the major fund categories, Personnel services increased approximately 8.5% over 2010 levels. This translates into approximately $13 million in additional expenditures.

The bottom line is the study indicates that, even though electric consumption is projected to be down, the COT electric utility needs $178 million more in revenue than existing rates will produce from 2012 to 2016.

The largest deficiency, $43 million, occurs in 2016 and is not addressed in the proposal by the city consultant, RW Beck.

Instead, the proposal calls for electric customers to pay approximately $134 million in higher rates from 2012 through 2015. In the short term, for fiscal year 2012, the plan means electric customers would pay $31 million more in rates followed by smaller increases in each of the next three years.

In the end, base rates would increase approximately 25% from fiscal year 2012 to 2015.

Base rates are the part of the electric bill that pays for operational expenses like salaries, benefits, system maintenance, debt service and the $22 million transfer to the general fund. The total electric rate is the combination of the base rate and the cost of fuel – which the COT has little control over.

The residential rate impact of the proposal on a $250 monthly electric bill would be 11% in fiscal year 2012 or $27.50. For a restaurant with a current monthly bill of $4000, the new bill would increase by approximately $440 or over $5000 per year.

The detailed study indicates that overall consumption will decrease by 1.5% over the period of the study and that approximately $10 million in rates will be used to pay down the loan taken out by COT to pay for smart meters.

It is important to point out that the study by RW Beck relies on information provide by the COT and their rate proposal is a starting point. Rate increases could be offset by deferring maintenance expenses and using revenues in the Electric Operating Reserve. This approach was used last year to avoid a rate increase to the tune of $20 million.

RW Beck also analyzed the COT water and wastewater functions and concluded that there is $28.7 million deficiency from 2012 through 2016. Their proposal calls for a 10.8% increase in water rates and a 4.3% increase wastewater rates in 2012. The combined increase would raise rate revenue by $4.6 million in 2012.

The base rate portion of the electric bill covers expenses like salaries, benefits, debt service, and funds the $22 million transfer to the general fund.

Now comes the news that a base rate increase is indeed on the horizon. Reese Goad, director of Utility and Business Customer Service stated that the electric utility revenue deficiency is “sizable.” This means “new revenue” from a rate increase or from the reserve fund will be needed to balance the electric utility fund.

Tallahassee Reports recently published an article that showed total electric rates were trending downward due to the decrease in the cost of natural gas. While the trend was downward, the COT was still tied for the highest rates in the state among the other municipalities that generated their own electricity.

The chart below shows the trend of base rates for Tallahassee since 2005 is headed in the upward direction. Base rates have increased approximately 39% since October, 2005. During this period the CPI, a measure of inflation, has increased approximately 12%. This means that COT base rates have increased at a rate equal to three times the CPI rate over the last five years.

CHANGE IN COT BASE RATES SINCE 2005

What is the source of this increase? Tallahassee Reports compared expenditures in 2005 and those in the budget in 2011 to determine what functions were responsible for the increase in base rates.  The comparison yielded three areas that increased at rates that exceeded the 12% inflation rate.

First, debt service and maintenance expense increased a combined total of $12 million from 2005 to 2010. Based on budget projections, this category is due to increase by $18 million from 2010 to 2011. That would be a total increase from 2005 of $30 million which is approximately a 75% increase from the 2005 level.

Second, personnel services, which include salaries and employee benefits, increased from $18.2 million in 2005 to $23.7 million in 2011 for 291 employees. This is a 25% increase.

And third, unclassified supplies and services are scheduled to be $10.5 million in 2011. This is an increase of approximately $4 million from the 2005 amount of $6.2 million. This is a 70% increase over 2005 levels.

During this period of time, sales of electricity have remained relatively flat and average annual usage per customer has been below 2005 levels for each year from 2006 through 2010.

During the city commission meeting on January 26, 2010, other rationales were discussed. Several commissioners argued that the surplus should be kept because the city has put money back into the economy through customer assistance programs and appliance rebates. However, one of the more intriguing rationales was put forth by Commissioner Gillum.

Commissioner Gillum argued that since the utility ran deficits of $6.8 million and $8.4 million in 2003 and 2004 respectively, and did not ask the citizens to cover those short falls, the city now is justified in keeping the $8 million surplus. Commissioner Gillum basically said “the reserve covered you then, so the reserve gets the $8 million surplus now.”

What Commissioner Gillum failed to mention is that the City electric utility would have run a deficit of over $50 million since 2006 without a rate increase. And guess who covered that? You got it – we did – the citizens of Tallahassee, not the reserve. The citizens of Tallahassee have covered these deficits through base rate increases. These are not increases for fuel, but for operation expenses.

Since 2006 base rates have increased over 38%. These increases have put over $50 million in city coffers to cover operating deficits since 2006. Without those increases the City would have run huge deficits. But the citizens stepped up and covered the deficits that were laid at their doorstep.

The residential customers of this community paid $7 million more in 2006, $11 million more in 2007, $14 million more in 2008, and $17 million more in 2009. Again, these are base rate increases, nothing to do with fuel. This does not even take into account the additional rates collected from businesses.

A complete analysis of the “tit for tat” rationale put forth by Commissioner Gillum indicates that it is the citizens of Tallahassee that have covered the deficits of the electric utility since 2006, not the electric reserve fund, despite the assistance in 2003 and 2004.

So given this new information, would Commissioner Gillum support the return of the $8.3 million?

The initial report compared the wealth of seven municipal utility systems using the combination of restricted and non-restricted portions of the electric utilities net assets (This will be referred to as “Current Net Assets”). The data clearly showed that the City of Tallahassee had the highest current net assets per customer among the group of utilities in the comparison.

As stated in the article, the purpose of the comparison was to provide information to aid in the discussion over the proper level of the electric reserve. The measure of restricted and unrestricted assets gives an indication of the “reserve wealth” of a municipal utility. That is why these categories were used in the original comparison.

The comparison was completed after the City Tallahassee informed Tallahassee Reports that the electric reserve goal of between $119 and $182 million was “generated by COT staff and not determined based on any outside sources.”

City staff has indicated that a comparison of Total Net Assets would provide a better measure of wealth. In an effort to move the discussion forward and to provide as much information as possible, Tallahassee Reports has provided that information in the chart below. Also included in the chart is the Current Assets per customer, which was included in the original analysis.

The information below was gathered from 2009 Annual Reports and Financial Statements.

The additional information shows that Austin, Texas is ranked first in Total Assets per Customer out of the six utilities. The City Tallahassee is ranked second.

This new information taken with the findings of the original report would still support the statement that the City of Tallahassee is the wealthiest electric utility in the comparison group.

Questions that remain unanswered:

Why is it necessary to have so much cash on hand?

Would it be better to have a credit line, like other utilities, and put the cash back in the economy or reduce debt?

How can Gainesville operate with just $60 million in reserves and the City of Tallahassee needs $248 million?

Why does the City of Tallahassee keep saying that the electric reserve is $105 million when audited financial statements indicate a much higher number in reserves?

There may be good answers to these questions, but they have not yet been provided by the City of Tallahassee.

City staff has reported that the current level of the reserve is approximately $100 million, with a staff proposed range of between $119 million and $185 million. To reach the midpoint of this range, $152 million, the city would have to collect an additional $52 million.

City Commissioner Miller opened the door to this discussion at the last commission meeting, on January 7, 2011, when she asked that the reserve level be the subject of an agenda item. City Manager Favors-Thompson has indicated that this issue would be placed on the agenda.

Tallahassee Reports has completed a comparison of electric utility financial data for seven cities. The purpose of the comparison is to provide a context for discussing the appropriate level of the electric utility reserve.

The research is based on information in audited financial statements produced by respected accounting firms.

In addition, annual reports are compiled using consistent accounting standards which allow for comparisons. Using ratios and calculations with the information on assets and liabilities in a balance sheet, analysts can determine the net worth and/or the financial health of a company, or in this case a municipal electric utility.

Tallahassee Reports compiled data from the annual reports of the seven cities listed in the table below. The cities were picked because each owns a municipal utility and are comparable to Tallahassee.

Information taken from balance sheets provided in 2009 annual reports. The bond ratings are for 2010 and are gathered from Fitch Ratings reports.

The information in the above table shows that the City of Tallahassee leads the category with $2,195 worth of assets per customer.  The next closest utility is JEA, with $1,852 assets per customer.  The three utilities with lowest asset per customer ratios are Orlando, Gainesville, and Lincoln, Nebraska. Lincoln, Nebraska is where the former director of the City of Tallahassee Utilities accepted the job of CEO a little over six months ago.

Based on this analysis, the City of Tallahassee is the “wealthiest” or the financially “healthiest” among the group.

What does it cost to be at the head of the pack? If the City of Tallahassee lowered the asset per customer ratio to that of JEA, Tallahassee electric utility customers would get a $38 million refund. If it was lowered to the level of Gainesville, Florida, Tallahassee electric utility customers would get a $130 million refund.

The analysis above is based on 2009 data. At that time the electric reserves were less than $100 million. All other things being equal, if the reserve level reached the proposed midrange of $155 million, the City of Tallahassee assets per customer ratio would increase to approximately$2,600 per customer.

Why does the City of Tallahassee need this amount of cash assets? Is it because of bond rating?

As the chart indicates the bond ratings show little correlation to the assets per customer ratio.

Do we have this wealth because we are planning on building new power plants in the next 5-10 years?

The City of Tallahassee 10 year site plan states “the City currently expects that no additional powers supplies will be needed” between 2010 and 2019. (Page 40, Ten Year Site Plan, April 2010)

Given this information, what does it mean for the appropriate reserve level?

Does it really need to be increased? Does this information indicate the City could give a substantial refund back to customers?

And finally, how did the City of Tallahassee’s electric utility, during the worst recession in fifty years, become the wealthiest utility in the comparison group?

Our research continues!

City Commissioner Gil Ziffer told Tallahassee Reports his decision to vote to put the $8 million in the reserve fund that is already at a level of $100 million was based on advice by city staff. “Staff has set a target for the reserve fund and until I get information that the target level is inappropriate, I will continue to follow commission policy” said Ziffer.

Tallahassee Reports has requested documents from the City of Tallahassee that support the target level of the electric utility reserve fund.

When asked about returning money to the citizens, newly elected City Commissioner Nancy Miller said that, “this promises to be a cold winter for Tallahasseans, and truly one of the toughest our residents have faced in many ways.  The idea of returning the money to city residents could give our local economy a shot in the arm and I will bring it to the attention of our city manager.”

To date, City Commissioners Gillum and Mustian and Mayor Marks have not responded to our request for comment.

On Tuesday, December 14th, the issue came up in the last Leon County Commission meeting of the year. The COT electric utility has been an issue for the county because 15,ooo residents who live outside the city limits pay a city electric bill.

After Chairman Dailey reported that Mayor John Marks had assured him the county will have representation on the Citizens Utility Committee, Commissioner Bill Proctor made a motion that the county request the Citizens Utility Committee to seek the return of the $8 million surplus.

The motion died from a lack of support from the other six county commissioners. Newly elected County Commissioner Nick Maddox did not respond to our request for comment.

Deferred Compensation

On the deferred compensation, Mr. Lavin said:

“It is my understanding that this came up as part of a charter review commission discussion about commissioner salaries and benefits and after that it was brought forward to the commission in a publicly noticed meeting[…]”

Tallahassee Reports has obtained a copy of the Charter Review Committee Final Report (click here to view – see pages 5-15). A review of the document indicates a discussion on salaries, but does not show any discussion on deferred compensation or benefits.

Furthermore, the agenda item addressing deferred compensation and the minutes of the meeting never cites a recommendation from the Charter Review Committee (click here to view – see pages 1-4) as support for any recommendation in the agenda item.

Reserve Funds

Mr. Lavin, when asked about the electric reserve funds, indicated that the fund had approximately $60 million and the uses of this money is specifically tied to the electric utility.

Tallahassee Reports has reviewed proposed budget items for 2010 and found that the Schedule of Reserve Funds, on page B-12 of the 2010 budget, indicates an Electric Fund Reserve of $108,836,700. This is made up of a Long Term Rate Stabilization Fund of $94 million and a Bond Reserve of $14 million.

With regards to the uses of these funds, on page B-9 of the budget, it states that uses of the Long Term Rate Stabilization are to be determined by the City Commission.

In addition, it should be noted that there is an Electric RR&I (Renewal, Replacement, & Improvement) Fund that currently has a balance of $66 million.

Tallahassee Reports has focused its analysis on the City’s “Reserve Accounts.”  The City has reserve accounts for the General Fund, Electric Fund, Gas Fund, Water Fund, Sewer Fund, Airport Fund, and Solid Waste Fund.

Per City Commission policies, these funds are surplus revenues that are collected and saved “as protection against unforeseen financial risk or as a means of reducing the future cost of services or projects (COT Policy 224.04(8)).”

The total amount of surplus revenues in all reserve accounts is $172,240,900 as of March 31, 2009. The major component of this total is surplus revenues in the electric fund, which totals  $108,836,700.

Included in the Electric Fund is a “Long-Term Rate Stabilization” category which contains approximately $95,000,000. This category has increased from $79,000,000 in June 2005. This fund is designed to “provide stable rates in recognition of swings in revenue requirements.”

Tallahassee Reports researched the level of the Rate Stabilization Fund for the Gainesville Regional Utility (GRU), a utility that has about 10% less revenues than the COT utility. The findings indicate that GRU has a $50 million reserve while COT has a $95 million reserve.

The Fiscal Year 2010 Proposed Budget indicates that the use of accumulations in the Long Term Rate Stabilization Reserve is to be determined by the City Commission.

The obvious question becomes can the City of Tallahassee avoid tax increases and maintain appropriate service levels by using revenues already collected from taxpayers?