Source: Sherman Publications

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Village auditor: Tax revenues, fund balance keep shrinking

by CJ Carnacchio

December 21, 2011

The good news is Oxford Village's financial statements received a clean bill of health from the auditor.

The bad news is the village must somehow deal with a revenue stream that continues to decrease and a fund balance that continues to shrink.

"Our revenues are going down and our expenses are going up, so something's got to give," said Councilman Tony Albensi. "Our revenues are going to continue to decline, so our expenses cannot continue to go up."

Last week, the village council received the audit report for the 2010-11 fiscal year, which ended June 30. The audit was conducted by the East Lansing-based firm of Abraham and Gaffney, P.C.

The auditors gave the village an "unqualified opinion."

An unqualified opinion is issued by an auditor when the financial statements presented give a true and fair view of a company or municipality's condition, position and operations.

"That's the opinion that you want to see," said Aaron Stevens, a certified public accountant with Abraham and Gaffney.

Despite the favorable audit, things don't look very good for the village on the revenue front.

Property taxes accounted for 51 percent of the village's general fund revenue for the 2010-11 fiscal year, but unfortunately, they're not generating as much money as they used to. Property tax revenue was approximately $1 million, which was a 9 percent decrease from the year before.

Although council had increased the village's tax rate by a half-mill to 10.62 mills, it was not nearly enough to offset the 11 percent decrease in properties' taxable values.

"Your largest source of revenue is declining," Stevens told council. "(Tax revenue is) at its lowest point in the past five years."

In order to make up for this loss in revenue, Stevens indicated the village had to use $419,094 from its general fund fund balance (i.e. savings or reserves) to balance the 2010-11 budget.

As a result, the village had a fund balance of $318,999 as of June 30. Of that total, $288,050 is deemed "spendable."

"That total of spendable fund balance represents approximately 11.5 percent of your annual expenditures for 2011," Stevens said. "Our general rule of thumb is to shoot for a fund balance of approximately 20 percent of your annual expenditures. That would give you approximately two months worth of (funding for ) operations before you needed to generate additional revenue."

Stevens explained his firm used to recommend a fund balance of 8 to 12 percent, but in recent years, Abraham and Gaffney's been recommending 20 percent given the economic downturn and its effect on local governments.

"Property values have been down for some time now," he said. "There's some question as to whether or not you're going to have personal property tax in the future (as the state government is considering eliminating it). Interest rates have been terrible. You've got a lot of uncertainty on the revenue side."

Stevens stressed the 20 percent fund balance is his firm's "rule of thumb recommendation." It's up to local officials to decide "what fits or what works for your community."

For instance, the village's guideline is to keep a fund balance of at least 10 percent.

"I think a better way to target this is to see where you've been and are you improving or are you deteriorating," Stevens said.

Stevens presented a five-year trend analysis chart to council that showed the village's fund balance has been steadily declining since 2008.

"You can see that your fund balance, as of June 30, 2011, is at its lowest point in the past five years," he said. "We think that should be higher."

Of the $288,050 of spendable fund balance, the village has already designated $206,398 for the current fiscal year's expenditures in order to have a balanced budget.

That means the village actually has only $81,652 in unassigned fund balance to deal with unforeseen expenses.