What is a reasonable allocation

Enterprise funds managed by the Town of Saratoga are restricted but those funds should have also been charged an overhead interfund allocation. That appears to be the argument presented by James Childress, the accountant engaged by the Saratoga Town Council, during the May 19 meeting of the governing body.

Over the past several weeks, Councilmember Jon Nelson has been determined in his argument that approximately $1.2 million of enterprise funds were essentially “stolen” to prevent a general fund deficit. A February 28 email from Childress (see “Casting a dissenting vote” on page 1 of the March 11 Saratoga Sun) appears to support this argument and the most recent ongoing financial debate has been whether or not enterprise funds are considered restricted.

“There is a reason why people have some hesitance (sic) answering that question directly,” said Childress on May 19. “They are restricted and, when we kind of go through why and what is related to those funds we’ll all understand and agree, but the thing that clouds that issue is what we call an interfund overhead allocation.”

According to Childress, he was finishing up a report composed of a 20 year analysis of the relationship between the general fund and the enterprise funds. This included the water fund, the sewer fund, and the weed and pest fund. He added that while there was activity in which amounts were allocated to enterprise funds from the general fund, there should also have been activity in the opposite direction.

“There is activity amongst those employees that rightfully belongs under the general fund,” Childress said. “Suzie (Cox) and I looked at some time sheets and that came down to about 20 percent. There’s these different areas of work that these employees will allocate their time on their timesheet. Some of those areas are very clearly under the general fund. So, we have an allocation back in that case.”

The certified public accountant informed the Saratoga Town Council that, over the past 20 years, allocation percentages for specific funds could have ranged from four percent to 25 percent. He added that potential allocable expenditures over the 20 year period would come to a total of $36 million before quoting a total of $4.4 million for totals of overhead interfund allocations for the 20 year period based on various percentages.

“I think it would be fair to say that the town council wouldn’t want to find some way to ratify that. It’s just a matter of showing what is a reasonable allocation,” said Childress. “So, that’s what that report is going to come down to.”

When the floor was opened up for questions, Nelson brought up his concern about changes made to various enterprise funds between March and April (see “Questioning changes” on page 1 of the April 29 Saratoga Sun). In regard to those changes, the council member connected them to the 20 year analysis performed by Childress.

“You’ve gone back 20 years and figured out how to allocate overhead and administrative fees to the enterprise funds to tie back into those transfers,” said Nelson. “Is that an accurate way to put it?”

“No, it’s not,” replied Childress. “It’s meant to simulate what an estimate would be, along those lines. It’s not meant to prove out (a) fund balance. Only to the extent that the council can make a decision on whether or not they feel those fund balances are correct.”

While Childress stated that the analysis of the various funds wasn’t intended to tie out to the fund transfers made between March and April, he did state that the analysis did substantiate those fund transfers. When asked by Nelson a second time if the analysis was intended to tie out to the fund transfers, Childress clarified that it couldn’t or wouldn’t tie out due to the inaccuracies of the combined cash balance reports given to the council on a monthly basis.

“When you look at that report and you see millions in the positive and you also see hundreds of thousands of dollars in the negative, that’s the indication that that report needs review and is not correct,” Childress said.

As Nelson continued to ask how it was that Childress came to the amount in the balances changed between March and April, Childress responded that he came to the amounts because there had never been overhead interfund allocations recorded and by relying on previous audits. 

“So, you’re saying that prior to June 30, 2018 there was roughly $900,000 of unrecorded transfers?” asked Nelson.

“That would be fair to say,” Childress replied.

Appearing to follow Childress’ line of thought, Councilmember Bob Keel made the argument that instead of the general fund being supported by enterprise funds, the enterprise funds were being subsidized by the general fund due to unrecorded or inadequate administration fees. Nelson disagreed with Keel’s argument but stated that he wasn’t opposed to appropriate administrative fees moving forward, adding that there should be an agreement with the Saratoga-Carbon County Impact Joint Powers Board.

“Having an agreement to charge an administrative fee moving forward is something I think we can all get to,” Nelson said. “The difference is that going back and retroactively charging that fee in order to justify some account balances that you needed to justify in order to make the general fund solvent, I don’t think is ethical.”

Following nearly an hour of back and forth between Nelson and Childress, the certified public accountant stated that the council would get the analysis upon completion.

The next meeting of the Saratoga Town Council will be at 6 p.m. on June 2 at Saratoga Town Hall.