Looking into Winsted’s finances

We’ve had plenty of discussions regarding the financial status of the town recently. The detail and depth of the conversations can be somewhat confusing to most residents who have never had the opportunity (or perhaps desire) to examine municipal finances. Nonetheless, it is imperative that you at least understand some of the basic concepts of the ongoing discussions. Several issues warrant closer examination.Municipal government accounting operations are organized by funds. In general, think of each such fund as a separate checkbook or savings account. The three most important funds in our town government are the General Fund, the Water Fund and the Sewer Fund. Each of those funds has a specific purpose and source of revenues. The General Fund is the largest “checkbook” and is used to finance government operations: departments such as Police, Fire, Highway, Assessor, Clerk, Recreation, Town Manager, Board of Selectmen, etc. The primary source of revenues for General Fund operations are property taxes, intergovernment transfers (mainly from the state in the form of grants), and town fees, such as building permits, cemetery fees, etc.The Water Fund and Sewer Fund are separate from the General Fund. During the previous Board of Selectmen meeting, the interim finance director made several references to enterprise (also referred to as proprietary) funds. The Water Fund and the Sewer Fund are enterprise funds, and those funds are intended, and expected, to operate as a business, distinct from other government operations. A critical aspect of enterprise funds is that those funds and their related operations are to be sustained through user charges and fees. When charges and fees are not sufficient to fund operations, capital costs, and debt service, the enterprise funds are subsidized with other monies that are typically not intended to be utilized for that purpose.What made it easier to use different funds for unintended purposes was how the town accounted for the various funds. The revenues for each fund should have been segregated, but they were not (or at least not as precisely as should have been). When a resident submitted a payment for property taxes, water fees, or sewer charges, the money should have been allocated to the appropriate fund. It wasn’t — it was all put together in the General Fund, and then apparently transferred to the correct fund when needed. This failure tended to blur the accounting within each fund.Another fiscal challenge has been the various bonds and debt service required. Currently, the town has six outstanding bonds, with two each related to the General Fund, the Water Fund and the Sewer Fund. One of the Sewer Fund bonds is actually a refinancing of three earlier bonds. All of the bonds are General Obligation bonds, meaning that ultimately, the town, and its ability to levy taxes, is responsible for the annual debt service (principal and interest payments). According to a debt service schedule prepared by the town’s financial advisor, the total debt service is approximately 2 mills.But despite being General Obligation bonds, the apparent intent for debt service payments was that the Water and Sewer debt service was to be the responsibility of the Water Fund and Sewer Fund. Members of the Water and Sewer Commission have confirmed that intent, and that intent can be further validated by the fact that within each fund, the debt service is included as an expenditure (and has been for years). The two bonds related to the General Fund are illustrated in the General Fund budget (and have been paid for the current fiscal year), the two bonds related to the Water Fund are included in the Water Fund budget (and have been paid for the current fiscal year), and the two bonds related to the Sewer Fund are indicated in the Sewer Fund budget.The Sewer Fund budget, though, does not include all of the necessary debt service. The payment for the debt service of this combined bond is due June 1, 2013, and is almost $500,000. The other sewer debt service has been paid for the fiscal year.If the water and sewer bonds were to be paid “by the town” (using property tax revenues), why have those bonds and the related debt service not been included in the General Fund budget? When the budget was prepared for the current fiscal year (and scrutinized over four referendums), I do not recall the issue being raised by anyone about not including debt service in the General Fund. The debt service was not overlooked: it was included, as it had always been, in the water and sewer budgets, which are prepared by the Water and Sewer Commission.The problem with the debt service arises because, as enterprise funds, the fees and charges (revenues) do not cover the costs (expenditures) in those funds. Since the bonds are General Obligation bonds, the town (through property taxes) is ultimately responsible for the debt payments. Property taxes, which are intended to support general government operations, are being used to support enterprise funds, which should be funded entirely through fees and charges. To continue that course of action is financially irresponsible. Remember, though, this is Winsted. We’ve always done it that way.Dale Martin is the town manager of Winchester.