Auditor relays how city dug itself out from financial hole

“I have a high degree of confidence that fraud has not taken place in the city office,” stated Doug Hollingsworth, the auditor for the City of Eastport, during a city council workshop on September 6. During the meeting, which was called to address questions by citizens about the city's finances, Hollingsworth reviewed budget data from 2008 through 2011 to show how the city had gotten into a financial deficit that has now been largely resolved.
Hollingsworth outlined that the financial problem started with the year ending June 30, 2008, when the city had a deficit of $82,000, which he speculated was probably caused by property taxes that the city expected to collect but did not receive. He noted that a municipal budget is based on "the best guess on revenues" but that guess will vary some from actual collections.
With the year that ended on June 30, 2009, the deficit had ballooned to $537,000, and the council decided to use its $440,000 surplus to help prevent a significant increase in the tax rate. The city also borrowed $175,000.
For the year that ended in June 2010, the deficit was still at $457,000, and Hollingsworth noted that the city did not end up receiving almost all of its projected intergovernmental revenue, which he assumed was caused by the Baldacci administration cutting back on funds to municipalities that year.
With the year that ended in June 2011, the financial picture improved, with a $227,300 surplus of revenues over expenditures. That surplus, he noted, was caused partly by more property tax revenue and partly by more money from the schools' tuition income. However, the city still had overruns on its budgeted amounts for general government, public safety and debt service.
Jon McNerney, chair of the budget committee, felt that excess income from sources such as The Boat School and the Eastport Business Development Center was simply going into the city's general fund, and that the council had not been authorizing excess revenue to go into the budget. He noted that the school department wanted to know how the city had spent during 2010-11 the $270,000 in school budget surplus without any action taken by the council to authorize the spending of the funds. He contended that the money was made up by raising taxes. McNerney also felt that funds from different sources such as economic development projects were being commingled, when they should be broken out on separate line items. City Treasurer Traci Jamieson said those revenues are being broken out for this fiscal year.
Eastport resident Will Bradbury asked how the city could spend $103,000 more for general government than was budgeted during 2010-11. "There's no fiscal control" with the city going 30% over budget in that category, he stated. With the school department, the budget is frozen when it looks like the schools may go over budget, he noted.
Council President Bob Peacock said councillors are very careful in looking at every bill that is paid and that anyone is welcome to look at the city budget at city hall.
Concerning the $103,000 deficit under general government and $114,000 deficit under debt service in 2010-11, Peacock said the city had taken out two lines of credit, totalling $250,000, when the city didn't have enough tax revenue coming in during the period from the beginning of the fiscal year in July to when most taxes get paid in October. They were paid off the next fiscal year, with one payment being placed under general government and one under debt service, Hollingsworth said. Bradbury asked why the city is paying $115,000 extra to cover one of the lines of credit. Once the money is taken in as revenue, the line of credit just should be paid back. Sally Erickson said it looked as though the city took the $270,000 school surplus to pay off the lines of credit.
Peacock observed that the city council adopts a budget in June without knowing what state revenue sharing amounts may be or what percentage of property taxes will be paid. "We make assumptions. The budget is your best estimate, and sometimes it doesn't work very well."
In an interview, City Manager Jon Southern says the city did not receive $220,000 in property taxes in 2011-12 that it had anticipated and also had not received a significant amount in property taxes the previous year, which is why the line of credit resulted in a deficit.
During the workshop, Merilyn Mills said the schools have cut their budget to address funding gaps, but the city does not seem to have done so. Hollingsworth replied that the city and school department are considered one entity and the council has the authority to move money from one line item to another. He also noted that, from 2008 to 2011, the total budget dropped from $5.2 million to $4.2 million, with the school budget decreasing from $2.9 million to $2.2 million. While about 70% of the cuts are coming from the school, "the rest of the city has taken its hits, too," he said.
McNerney said he didn't question the validity of the city's expenses, but he felt there is a procedural issue, since the council needs to authorize the increased expenditures and approve the use of excess funds such as economic development monies. "It comes down for me to accountability and procedures," he stated. Peacock responded, "I agree with you. We can do a better job." He said the city has taken his suggestions and is "trying to get this corrected."
Hollingsworth noted that the city has only a $40,000 fund balance now, which is "very small" for a city with a budget as large as Eastport's. The standard rule for municipalities is to have enough surplus to cover 90 days of expenditures.
Erickson said it was scary that residents didn't realize that the city was in a deep financial hole in 2008-09. She urged the council to "get serious" about watching its budget, since the economy is so sluggish.
Councillor David Morang observed, "We're offering services like New York City" but with a limited number of taxpayers to support those services.
Hollingsworth said that in the future, if there are changes in the budget, the council should take a formal vote to modify the budget at the end of the fiscal year. He also suggested that more could be done by the council to approve use of funds from other sources of income.