From the Archives: What’s an "Undesignated Fund Balance"?

With the budget season upon us, I thought I would re-post this explanation of the Undesignated Fund Balance. Originally posted on HereCast on September 10, 2018.

The Undesignated Fund Balance (UFB) is an important measure of the financial health of a municipality. 

In Norwich, the UFB is or will be underfunded by the end of the fiscal year, according to Selectboard Financial Policy #2.  That introduces an element of financial risk for the Town, though there is no immediate crisis. In a later post, I plan to ask why this happened without public discussion. First, as a warmup, I thought I would provide my layman's (not an accountant's) understanding of the purposes of the UFB.

The Undesignated Fund Balance is an amount the Selectboard holds in reserve to cover cash flow needs and emergency expenses. An earlier blog post of mine referred to the UFB as a 'rainy day fund' but that term understates its purpose. 

The  Selectboard Financial Policy #2, Undesignated Fund Balance describes its purposes as follows*:

1.1.1    To fund operations by providing sufficient working capital for adequate cash flow, tax rate stabilization and as protection against uncollected taxes, economic downturns, or shortfalls of revenues, imposition of additional costs by other governmental agencies including courts, errors in financial forecasting, natural disasters and cutbacks in distributions from the state government.
1.1.2     To reduce the cost of long-term borrowing by maintaining an appropriate level of undesignated general fund balance, which is reviewed as part of the evaluation of a municipality's creditworthiness by bond-rating agencies.

Tax rate stabilization in the quote above was a new concept to me. When the Undesignated Fund Balance is used to make a 'tax stabilization payment', the Selectboard takes money from the UFB, instead of raising it through property taxes.  Not uncommon in Norwich. This year the Selectboard specifically earmarked $264,290 in setting the property tax rate at its meeting on July 11. The $264,290 reduced the property tax rate by over three cents.

 

How much money should the Undesignated Fund Balance hold?  The recommended level of reserves is often expressed as a percentage of the annual budget, rather than a dollar amount. For example, the Government Finance Officers Association thinks that at a minimum, general-purpose governments should keep in reserve  two months of expenses. That equates to 16.67% of the annual budget. At the July 11 Selectboard meeting, the Town Manager expressed a preference for an UFB of 17%. 

Selectboard Financial Policy #2 at section 4.2 says the UFB should be "between 10 and 20 percent" of the annual budget. The Town’s budget for this fiscal year is $4,502,386, making 10% equal to $450,238. However, by using $264,290 as a tax stabilization payment, the UFB is closer to 9% than 10%. 

 

Going below the minimum was not discussed by the Selectboard. The lack of transparency regarding that situation is troubling and will be the subject of  a later blog post. 

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*  All Selectboard policies are not currently online. I located what appears to be a copy of Selectboard Financial Policy #2, Undesignated Fund Balance in the Selectboard packet of October 11, 2017

POSTED: 09.10.2018 

CORRECTION: In Norwich, the UFB is or will be underfunded by the end of the fiscal year .... 

Without Inquiry, Selectboard Approves Use Of 'Designated' Funds For Non-designated Purpose

When can designated funds be used for non-designated purposes? To my consternation, no public official gave the question much thought, at least publicly at the [Norwich, VT] Selectboard meeting on November 20, as seen on CATV.  I was hoping for somewhat better oversight of taxpayer money.

Police Chief Frank at Norwich Selectboard meeting on November 20. Source: CATV screen shot.

At the meeting, Police Chief Jennifer Frank made a compelling case for the Police Department to purchase new computers for the station and for the four police cruisers, without waiting for the next budget cycle.

The expense is not the issue, but rather the funding source. The Police Chief sought, and the Selectboard okayed, funding for the purchase from the remaining balance in the "Communication Study Designated Fund", about $16,000. Not a peep from any Selectboard member, Treasurer, or Town Manager about whether this was an appropriate use of that Designated Fund.
Residents may recall that the Communication Study Designated Fund was established to study options for building the emergency communication tower. After the tower was built, a balance of over $28,000 remained in Communication Study Fund.  At Town Meeting in 2018, voters approved using the balance in that fund to pay down bond debt regarding the tower.

Excerpt from Minutes of the Annual Meeting, March 5, 2018 Town of Norwich, Vermont, 2018 Norwich Town Report at I-6.

I wish a town official had asked these three questions at the November 20 Selectboard meeting, even if just to keep the public informed.

1. Isn't voter approval required to use 'designated' funds for non-designated purposes? The Selectboard thought so in 2018. Then, the Board asked voters for approval to use the Communication Study Designated Fund to pay bond debt. See Article 10 above. Three Selectboard members as well as the current Town Manager held office at the time the Article was placed on the ballot. Prior practice in Norwich is to the same effect. Voter approval was sought at Town Meeting in 2009 to move money from the Fire Training Facility Designated Fund to the Tracy Hall Designated Fund. See 2009 Town Report at I-5 (Minutes of Annual Meeting). I don't know the answer to this question but past practice indicates voter approval is the preferred course. I also don't know if the Selectboard even considered the issue before approving the Police Chief's request.
2. Why not use money in designated funds earmarked for the police department? The Town has at least three designated funds set aside for police department expenditures. According to information in the Selectboard packet for that meeting, they are (and the balances in each): Police Cruiser ($80,754), Police Special Equipment ($12,385), and Police Station ($10,630). No Selectboard member asked why those designated funds were not being used to fund these police department purchases.
3. Isn't the money in the Communication Study Fund already spoken for? As noted in Article 10, voters approved the speeding of "any remaining" funds in the Communication Study Designated Fund to "reduce" Communication Tower Bond debt. Apparently, that debt has not yet been retired. A preliminary iteration of next year's proposed budget has $30,738 allocated for "DEBT SERVICE ON TOWER BOND". If the debt is outstanding, it would seem the voter mandate is not satisfied.

Questions 1 and 3 go to the legitimacy of the Selectboard approval. Perhaps the Board will address the topics at its next meeting, before releasing the funds.

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Originally posted on HereCast on November 24, 2019.

Cyber Scam Questions: Why didn't anyone tell the Town Manager?

Norwich Town Manager Herb Durfee at recent Selectboard meeting. Source: CATV screen shot. 

One of a series of posts raising questions that occurred to me in reading the Burgess Report, the Selectboard commissioned report investigating the business email compromise (BEC) scam that saw $250,000 stolen from the Town. CAVEAT: Hindsight is 20/20.
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First, a brief recap. In response to urgent emails purporting to be from the Town Manager, Finance Director Donna Flies, two months on the job, made ACH (electronic) payments on the following dates and in the amounts indicated: August 6 for $35,820; August 12 for $38,740; August 19 for $88,680; and August 23, 2019 for $86,480. The recipient was Donald S. Jefford, Jr.  The payments were all fraudulent, part of a cyber scam.
The Finance Director knew each transfer violated a Selectboard policy requiring Board approval for the payments but said she took her orders from the Town Manager.
Even though several Town officials had concerns, Town Manager Herb Durfee was not informed about any problematic payments until the Selectboard met in executive session on August 28.

Why didn't the Finance Director ask the Town Manager about the payment requests?

Town Manager Durfee was away on vacation at the time of the first email but was back in the office on August 12.  Yet, the Finance Director never talked with him about the transfers. "[W]hen Flies made the last three payments to Jefford, she never discussed, nor mentioned anything to Durfee about the payments, the lack of invoices, the lack of purchase orders, or lack of Board approval," states the Burgess Report, observing that "regular personal interactions occurred between them daily."

An evil Town Manager could have embezzled a million dollars, seemingly without a peep from this Finance Director.  Was the Finance Director in on the scam? The Burgess Report says that she "believed that the emails were actually from her boss."

What about other Town officials?

By August 18, the day before the third transfer, five town officials, in addition to the Finance Director, knew that one ACH payment had been made in direct violation of Selectboard policy, according to the Burgess Report. These officials were the Town Treasurer, three Selectboard members including the Chair and Vice-Chair, and the Finance Committee Chair.

At that point, the Finance Director was on record as saying she would ignore Selectboard financial policies if the Town Manager told her to make a payment.

In addition, Jefford was not a familiar vendor. Neither the Selectboard Vice-Chair nor Treasurer "knew who Jefford was," says the Burgess Report. On August 16, while on the phone together, "both did a Google search, with no results."

The Treasurer was worried about embezzlement. Although concerned about the violation in policy, the Selectboard Chair, who was away on vacation and had talked with the Treasurer by phone, was "not concerned about embezzlement," says the Burgess Report. A cyber scam was not on anyone's mind. It was decided that the matter could wait until the Selectboard meeting on August 28.

Apparently, the Treasurer was reluctant to talk to the Town Manager by herself. The Burgess Report says the two do not have a good relationship.

Had someone talked to the Town Manager anytime before August 19, over $173,000 in financial loss could have been avoided. By August 23, about $86,000.

The Burgess Report's finding is that it "appears" that Town officials responded appropriately "based on the facts of what people knew, at the time they knew it."

At the Selectboard meeting on the 28th, the Town Manager learned of the embezzlement concerns and about Comerica Bank flagging as suspicious two payments from the Town.

However, the cyber scam implications only became clear after three officials met with the Finance Director the next morning. "[W]hen they first looked at the emails they knew it was a scam," says the Burgess Report. Later that day, the Finance Director received another email from the fraudster asking for two more payments be sent to Jefford that day. She did not reply.

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Originally posted on HereCast on 11.02.19.  Contact me at: norwichobserver@gmail.com

Draft Future Land Use Map Impacts Route 5 South

The Future Land Use map under discussion by the Planning Commission may impact the development of Route 5 South in Norwich. The map, see below, will be one of the topics addressed at the Planning Commission workshop scheduled for November 7.

The draft map designates the Easterly side of Route 5 South as Mixed Use. That designation is consistent with the draft regional plan proposed by the Two Rivers-Ottauquechee Regional Commission.  At present, the area is zoned Commercial/Industrial.

Part of the westerly side of Route 5 South is designated as Residential. The area is currently zoned Rural Residential.  Over 95 percent of Norwich is zoned Rural Residential. The Future Land Use map classifies areas of land along major roads within a mile or so of the Village, as Residential, with the remainder labeled as Rural. The mapped distinction between Residential and Rural could result in zoning regulations setting a different minimum lot size for each area.

 

The minimum lot size in Rural Residential is 2 acres, although the minimum size increases the further the property is from Tracy Hall. In contrast, the minimum lot size for land in the Village Business and Village Residential I Districts is about one-half acre.

Mixed Use is defined in the amended draft of the 2019 Regional Plan as follows:

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Current zoning districts in Norwich. http://norwich.vt.us/wp-content/uploads/2019/08/1-Zoning_Districts-Rev-txt-2019-8_26.pdf

This post originally appeared on HereCast on November 5, 2019.

UVLT Takes Hypertherm To The (Norwich) Woodshed

The Upper Valley Land Trust (UVLT) recently took Hypertherm North America to the the woodshed, not for punishment but for good works, as the trip was to the Norwich Woodshed. 

About a week before the annual Norwich wood bee, "UVLT took a group of Hypertherm volunteers to the Norwich Woodshed where we bucked and split 10 cords of wood together," said Alison Marchione, UVLT Programs Director in an email. "Most of those 10 cords were logs donated from the Robert Areson Conservation Area near Butron Woods/Bragg Hill roads."

Winter logging at the Robert Areson Conservation Area in Norwich. Source: UVLT.org

The Robert Areson Conservation Area is owned and managed by UVLT. Some logging was done there last winter (see picture above).


The ten cords of wood are now part of Norwich Wood Fuel Assistance Program. The program provides firewood to needy residents of Norwich and other communities in the Upper Valley to heat their homes.


UVLT Outreach and Donor Programs Coordinator Paul Balzevich said on Facebook:

WOW, what a special group. Thank you for coming out to volunteer again ... . There will be many families kept warm this winter because of the work that you all did on Friday. Your impact will be felt throughout the entire winter. TEN CORDS! IN HALF A DAY! The Firewood Assistance Program managers could not believe it, and neither could we. Just remember, Hypertherm CST workdays make a world of difference on our conserved properties and to the members of our Upper Valley community. Especially when working on projects like this.

Check out the 22 second time lapse video of the Hypertherm volunteers at work on the Facebook page of the UVLT.

The Norwich Woodshed project was part of the Corporate Volunteer Program run by UVLT. Volunteer opportunities are available for groups large and small. The UVLT website says:

UVLT staff are always looking to foster new partnerships with Upper Valley businesses. Workdays can be scheduled at any point for all seasons of the year, featuring indoor and outdoor projects, and a large variety of group sizes can be accommodated. UVLT is also exploring options to create a multifaceted experience by including team building activities, mindfulness, and environmental education in the volunteer workday.

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 Originally posted on HereCast on 10.30.19