Hamilton discusses ‘quite striking’ Rainy Day Fund

Updated, 9:57 a.m.: Copy edits, revised headline

NORWALK, Conn. – The growth of Norwalk’s Rainy Day Fund over the last four years is “quite striking,” Norwalk Public Schools Chief Financial Officer Thomas Hamilton said this week, attributing the growth to “ultra conservative budgeting assumptions.”

Hamilton, in multiple meetings with elected and appointed Norwalk financial shepherds, has fielded a variety of questions about the 2019-20 recommended operating budget, many about the unassigned fund balance, or Rainy Day Fund, which has grown from $34.6 million in 2014 to $57.7 million in 2018.

The recommended budget Hamilton helped craft plans a $6 million drawdown from the fund balance. Hamilton said he personally would be comfortable drawing down $4 million next year and $2 million the year after that, to bring the fund down to $45 million.

Hamilton is former Norwalk Finance Director. He became NPS CFO in August 2015 and has assisted Director of Management and Budgets Angela Fogel in formulating the recommended 2018-19 budget, after the sudden, unexpected departure of Chief Financial Officer Bob Barron last month.

Hamilton and Fogel in each of three budget presentations have pointed out that Norwalk’s fund balance policy changed in 2016, when Barron was working with the Board of Estimate and Taxation, from requiring a fund balance of at least 5 percent of general fund revenues to requiring at least 7.5 percent.

“The city has traditionally employed very conservative budget assumptions,” Hamilton said Tuesday to Common Council members. “Back when the City had a $25 million fund balance or a $30 million fund balance, employing those conservative assumptions I would argue made sense. But when you’ve got a $60 million fund balance you don’t need to use those same conservative assumptions year after year.”

The general fund balance is $61,221,446. As a point of clarification, it’s the unassigned fund balance that is $57.7 million.

The major variance that allowed Norwalk’s fund balance to grow by $5.6 million last year was back tax collection, Hamilton said.  The proposed budget for 2019-20 assumes back tax collections of $3 million for 2019-20, up from the $2 million budgeted in 2018-19.

The audit done on Fiscal Year 18 states that budgeted property tax collections were $6 million higher than the budgeted amount.

In 2017-18, $3.9 million was collected in back property taxes, Hamilton said, using that as a comparison because it was also a “lead-in” year for the biannual tax sale. The recommended budget also raises its assumed tax collection rate to 98.6 percent, since Tax Collector Lisa Biagiarelli’s success rate last year was 98.9 percent.

If you are thinking, as Council member Doug Hempstead (R-District D) suspected Wednesday, that building permit fees from The SoNo Collection bolstered the Rainy Day Fund up, you are mistaken. The building permit fees were built into the budget, Hamilton said.

Some have criticized Mayor Harry Rilling for not using the Rainy Day Fund last year. Asked about this Tuesday, Rilling said that the $2.9 million proposed drawdown for City-side expenses is exactly the same as what was done in the 2018-19 budget.

A $2.95 million drawdown was factored into this year’s budget, Hamilton said to the BET on Monday.  “If I had to state a number on it right now, I bet we will probably end the year with maybe a $2 million surplus. Not a $2.95 million draw.”

BET Chairman Ed Camacho asked Hamilton if the fund would be too low at $45 million, given that the budget is going up every year and one of the goals is to keep the Rainy Day Fund at 7.5 to 15 percent of total revenue.

“I think you should target to keep it at 10,” Hamilton said. “… I wouldn’t be uncomfortable with 11.5 personally.”

“Obviously it’s a rainy day fund. There’s things that even the federal government is anticipating maybe a recession or something coming up,” BET member Troy Jellerette said.  He noted that the fund balance ratio is just one component rating agencies look at, that there’s also debt ratios to be concerned about and Norwalk is borrowing money to build new schools.

“I would rather err on the side of caution because there’s many components and obviously unforeseen things with the economy, at least with the fed, might be something on the horizon,” Jellerette said.

“You’ve been indoctrinated by Bob Barron,” Camacho said, drawing laughter.

“Who?” Jellerette replied.

The rest of the proposed $6 million drawdown is directed at one-time Board of Education expenses.

The drawdown potentially raises Minimum Budget Requirement (MBR) concerns, arising from a state mandate that a municipality cannot reduce its funding to its Board of Education. This means that even if the $2.3 million Rainy Day Fund drawdown is for one-time expenses, the City will have to pay that money again in 2020-21, and into the future.

But education spending is going up anyway, Hamilton said.

“We know that our expenses are going to be going up at roughly $3.2 million a year just to cover contractual increases, based on union contracts for current existing staff. So hitting the $2.3 million number is not a stretch,” Hamilton said at Thursday’s Council Finance Committee meeting.

The budget calls for $1.8 million in cuts to the Board of Education’s budget request. Hempstead asked if any of those cuts would result in increases in the projection for next year’s BoE budget.

Hamilton couldn’t quite commit to that.  “We are hoping to shave it out of as many non-programmatic areas as we can, but we may say there are programmatic implications,” Hamilton said.

There’s also a plan to generate a surplus this year to carry over into 2019-20, he said.

Adamowski plans a hiring freeze, Board member Bruce Kimmel said Monday.

“The Board of Education very much appreciates the Mayor’s support and agreement, and the cooperative proposal that was incorporated as part of this budget is something the Board of Education strongly supports,” Hamilton said Wednesday. “We certainly want to avoid a repeat of last year and a protracted budget battle. We think this is a budget compromise that does require some sacrifice on the Board of Education’s part to the tune of $1.8 million reduction to our request, but it does find I think creative ways to fund the rest of that request. So by using the city’s fund balance on a one-time basis, and the Board has been clear they wouldn’t look to repeat this in subsequent years, but to use $2.3 million to one-time expense that helps bridge the gap considerably.”

The 4 percent budget increase planned for the Board of Education includes the $2.3 million drawdown, he said.

Council member Nick Sacchinelli (D-At Large) asked Thursday about possible emergencies that would require the use of the fund balance.

“What amount do you think the city needs to keep in reserve? What amount do the rating agencies want you to maintain and how much is actually necessary?” he asked Hamilton.

“The city has a very stable and diverse tax base. We are not a one-company town,” Hamilton said.  He added that Norwalk benefits from having a mix of commercial and residential properties.  The City is not heavily exposed to cuts in state aid since it doesn’t receive much, and local property taxes do not fluctuate.

“You put all those together, and I come to the conclusion, I don’t think you need a 15 percent fund balance,” Hamilton said. “I think if you were down at 12 percent or 11 percent, I think you would be perfectly fine.”