Updated, 5:18 a.m. Wednesday: Pension Board info.
NORWALK, CONN. – Norwalk’s Rainy Day Fund, the municipal version of the stash some households set aside for unexpected events, is often a topic during budget season, prompting debate over how much to spend and how best to spend it.
This year, with the city changing auditing firms, brings an added wrinkle: Blum Shapiro, the new auditor, calculates the RDF differently from former auditor, RSM. It’s a weighty change for municipal leaders charged with protecting the city’s credit rating.
Under the guidelines used by Blum, when a city obligates some of its RDF to cover part of its operating budget, the money is subtracted from the Rainy Day calculation. It’s “assigned,” not “unrestricted.”
Under the formula used by the previous auditor, which didn’t exclude money the Common Council agreed to draw down over the course of the year, as of June 30, Norwalk’s RDF totaled $66.4 million, or 18.2 percent of its expenditures. Under Blum’s, the corresponding numbers fall to $58.4 million, or 16 percent.
Norwalk’s policy, according to Chief Financial Officer Henry Dachowitz, is “to maintain reserves, unrestricted and unassigned, of between 7.5 percent and 15 percent. When we went up to 20 percent or 18 percent, there were real questions about that. As the Mayor has said, and I repeat, we got hit by COVID, the unanticipated expense, and it was very beneficial to the city that we had the state’s largest Rainy Day Fund.
“It insulated us a great deal…It’s our buffer. It covers us for contingencies and unexpected events.”
Dachowitz said the City planned an $8 million drawdown in the current fiscal year “because we did this budget right after COVID hit. And we said we have so much uncertainty, we don’t know, but at the same time, we knew that our citizens and taxpayers were under financial duress. This is when we had the illness raging. And we had lockdowns. So we said let’s use $8 million of our surplus to diminish the amount of increase in the mill rate.”
Dachowitz said he is hopeful the City won’t need to use the entire amount. That would be in line with recent history: in 2018-19, the City planned a $6 million drawdown and instead added $2 million to its coffers, Dachowitz said. Last year, the City again planned a $6 million drawdown but expenses only exceeded revenues by $850,000.
“That was almost dollar for dollar, what our COVID expenditures were,” Dachowitz said. “So in essence, our managers came in on budget, revenues equal expenditures, except for that 850,000. So therefore, out of the $6 million drawdown, we needed less than 1 million.”
However, the City “voluntarily and consciously” rolled over $4 million to the Board of Education, in a non-expiring account so it doesn’t have to be used in 2020-21, he said. “We also took about $1 million and gave it to certain departments on the City-side because some of those expenditures they planned were delayed because of COVID, and they got pushed into fiscal year 21, into the fall and winter.”
So, again, “we planned on needing a $6 million drawdown if there was no COVID, we wouldn’t have needed a penny,” he said.
And the $8 million that was planned for this fiscal year, 2020-21, may not be used in its entirety. So the coming budget may start with a bigger RDF than is conservatively projected. But even with worst case scenario for 2021-22, if the entire $8 million is used two years in a row, Norwalk would still be left with a reserve fund equal to 10.6 percent of its expenditures, within the City’s guidelines, Dachowitz said.
Dachowitz added, “As a CFO, I will never say that we have too much unassigned, unrestricted fund balance.”
Not everyone sees it that way.
Bryan Meek, an accountant and former Board of Education member, is among those who clashed with the City over its management of the RDF when it swelled to 18 to 20% of expenditures, arguing that the conservative budgeting had diverted money from the schools and that it should be drawn down to fund education. Mayor Harry Rilling and the Common Council rejected that as not being fiscally prudent, saying that the RDF is for one-time expenses.
More recently, Meek has mined the annual audit, officially the CAFR (Comprehensive Annual Finance Report), to criticize the City’s financial management.
“Then there are lots of goodies to unpack in the annual report,” Meek wrote in a Jan. 15 comment on NancyOnNorwalk.
- How about Chief of Staff overtime (?) of 18k on pdf page 51.
- “$38 million for the aquarium on page 65.
- “Rainy day fund down $8 million to pay for this years increased spending Page 66.
- “Most alarming…..Our pension funds only grew by 2% during the same period the S&P grew 10% with 2/3s of it allocated to equities page 70 and 73. It only grew $9 million when it should have grown about $30 million. Given we’re paying over half a million to manage these funds do you think we can do a little better?”
The CAFR shows the Chief of Staff’s office went over budget by $18,591. That’s officially called “expenditures exceeding appropriations.”
NancyOnNorwalk asked Norwalk Communications Manager Josh Morgan about that. Morgan wrote:
“I know where the question on the Chief of Staff budget is coming from. It’s painfully clear that Mr. Meek is no fan of this administration. His cherry-picking a $19,000 line item in a $363 million budget is such a transparent and failed political jab it would be laughable if it were not so sad.
“First- over the course of a Fiscal Year there will be variances. The real story here is the CAFR shows the City as a whole had a favorable variance of $10.29 million. That is indicative of strong financial planning and management from Mayor Rilling and his team across City and School Departments.
“Second- the Chief of Staff budget (which includes the Departments of Chief of Staff, Communications/Grants, City Clerk, and Customer Service – several different employees) is a small fraction of the overall City budget. Most likely some items were budgeted in one line item and the actual amounts were posted to different line items. These amounts are insignificant in the context of more than $363MM in total expenditures.
“Third- Mr. Meek should know better than to make guesses. Senior staff are salaried and not eligible for overtime.
“Again, the real story here is the City remains in a strong financial position, despite what Mr. Meek or other detractors in your comment section wish to believe.”
Meek’s comment about the aquarium refers to the CAFR’s summary of capital projects uncompleted as of June 30, the end of the fiscal year. The Department of Public Works is listed twice, first for Water Pollution Control Authority (WPCA) projects that are paid for by WPCA user fees, and then for “other.” This is explained as being “primarily for the Aquarium.”
DPW’s “other” column is listed as:
- $38,426,485 total bonded, assuming the construction budgets are equal to the gross authorizations for bonding
- $13,208,287 project expenditures in fiscal year 2020
- $15,113,637 cumulative project expenditures to date
- $23,312,848 expected future project expenditures
And at the bottom, there’s a footnote: “The Norwalk Aquarium project is being funded 100% by reimbursements from the State of Connecticut.”
That’s because the Department of Transportation needs to demolish the Aquarium’s IMAX Theater to make room for construction during the rebuilding of the aged railroad bridge over the adjacent Norwalk River.
NancyOnNorwalk asked Morgan about the pensions Monday, President’s Day. He promised an answer Tuesday but it has not arrived.
Norwalk Pension Board Chairman Francis Nash, in a comment on this story, called Meek’s criticism a “distortion of performance” of the Board. He wrote:
“In the first six months of the current fiscal year the return on investments in the fund was 16.9% vs a benchmark return of 14.33% this was an exceptional time, however, over the past seven years the net return in the pension plan is 7.19% vs a benchmark return of 6.9%. The Annual Discount Rate for the plan is 6.875%. Clearly we have performed at an above average level and at the same time maintained liquidity and reasonable volatility in the fund. The Pension Board also invests $100 million in the Norwalk OPEB (other post employment benefits) plan lowering our expense ratio.”
“I hope next year COVID is addressed with the vaccinations, businesses can reopen, and some of that financial pressure will be alleviated,” Dachowitz said. “But we budget for the worst and hope for the best, and manage for the best. So that’s what we’re doing with our fund balances.”
The Common Council has until Feb. 23 to sort all of this out. That’s the date when it sets a budget cap. It has the opportunity to revisit the budget cap on April 13, when a two-thirds majority could raise the cap that’s set next week.