Reservations About Reserve Funds?

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The use of reserve funds by the City of Northport to pay general operating expenses is a practice that is not fully understood by many taxpayers in Northport, Alabama.

Mayor Bobby Herndon said that former City Administrator Scott Collins had moved money from a reserve fund and replaced it, an act that should have resulted in only a slap on the wrist by the Civil Service Board. Herndon said that Collins’ resignation is in some way associated with this common practice of shifting funds and accused Council members of “sneaky snake moves.”

The use of reserve funds may have been used to pay bills in the past. But under the leadership of Mayor Bobby Herndon and former City Administrator Collins and with the advice of the LeCroy auditing firm it was thought by some to have become a standard practice.

In 2010 the Northport City Council met with the auditor at a work session as reported in The Tuscaloosa News  by Lydia Seabol-Avant “to review the city’s 2009 financial audit.”

Because the city depleted its reserves in 2009, the city must make drastic cuts or find other sources of revenue, said accountant Richard LeCroy.

“We are bleeding cash down over the last three years and cannot continue without some changes,” LeCroy said. “The city cannot continue at the rate it is going now and have anything left in a couple of years.”

Accountant Courtney LeCroy added, “Cost control is going to be the name of the game, and there is not a lot to play with, as far as revenue.”

The problem is a combination of a poor economy, stagnant revenue and poor financial practices by the city in the past, said City Administrator Scott Collins.

Small utilities increases for city have helped, but not enough.

In 2008, the Northport City Council increased the water and sewer rates for the first time in more than two years.

More rate increases are necessary to keep the system afloat, Richard LeCroy said.

The Mayor of Northport is given the authority of appointing an independent auditor.

  1. Pursuant to §11-43-85, Code of Alabama 1975, “…the mayor, at least once a year, shall appoint an independent public accountant or the department of examiners of public accounts to conduct an examination in accordance with generally accepted auditing standards of all books and accounts of the city or town since the preceding examination and to make a full report thereof in writing, under oath, to be submitted to the council at its first meeting after the completion of such report, and the same shall be spread upon the minutes of the council.* For his services said independent public accountant or the department of examiners of public accounts shall be paid such sum as may be agreed upon.” *The auditor’s report has never been presented at a Council meeting where minutes have been kept.

Under the term of Mayor Bobby Herndon, the “independent auditor” has been Lecroy, Hunter & Co. From the very beginning it might appear that the accounting firm has done more than just prepare an audit. In many cases people might be excused for thinking that the job of a Finance Director was assumed by the independent auditor. Of course that would not be a correct assumption. For long periods of time Northport has actually had no Finance Director. The most recent director Kenneth McKeown was fired after only a few months on the job.

In a 2011 Tuscaloosa News article Adam Jones reported that City Administrator Scott Collins requested that emergency reserve accounts be created

Collins asked the council to consider setting up in city code an emergency reserve account for both the city’s main operations and its water and sewer operations. He suggested the savings account for both be about 10 percent, or about $2 million for the general budget and $1 million for the water and sewer budget.

“There’s just so much more the city can do if we have those reserves,” Collins said.

In August, Collins said he was able to transfer $1 million into a general fund reserve account and $300,000 into a water and sewer fund reserve. It can be used to start the reserve funds and fully fund them by the end of 2012, he said.

In 2014 in a Tuscaloosa News article by Lydia Seabol-Avant it was reported that the city’s Water and Sewer Fund was kept separate from the General Fund.

The city’s water and sewer fund, which is kept separate from the general fund, ended 2013 with $2.5 million in unrestricted cash and a reserve of $1.1 million, according to the audit. Although it performed well financially, the water and sewer fund did bring in less revenue than in 2012, with revenues declining by 7 percent due to heavier rainfall in 2013 than in 2012.

The city’s auditors suggested that Northport have three to six months of operating expenses on reserve. At the end of 2013, the water and sewer fund had two and a half months of operating expenses in reserves, which is close but not ideal, said accountant Courtney LeCroy. Still, with the fund increasing its reserves, the city is on track to hit the three-to-six-month goal, he said.

“We are moving in the right direction,” LeCroy said. “Overall it’s been a positive year.”

In 2015 the Council approved an automatic yearly increase in reserve funds by passing Ordinance 1872 “amending Chapter 34 of the Municipal Code pertaining to Reserve Fund Accounts.” Lydia Seabol-Avant reported that former City Administrator Scott Collins said, “With the increased revenues, we are making increased efforts toward our reserves. What we learned from the tornado is that emergency funds are vital in a disaster. We are trying to ensure there would be no disruption in (city) services.”

Ordinance 1872 pertains to the Budgeting requirements for the City of Northport:

There shall be maintained within the water/sewer enterprise fund of the city a reserve fund account balance. Funds held or maintained in the water/sewer enterprise fund reserve account, regardless of the account balance, shall only be available for obligation and expenditure pursuant to a permanent resolution adopted by the city council with a minimum of four affirmative votes. Said permanent resolution shall include the specific dollar amount of funds to be used, shall include a stated and descriptive declaration that the proposed use of the funds is necessary and required by extraordinary circumstances to preserve and protect the health, safety and welfare of the citizens of City of Northport, shall include the method of repayment or reimbursement of the funds to the reserve account, shall include the source of reimbursement funds, and shall include the date by which the funds will be reimbursed to the reserve account.

Money from a reserve account can only be spent after a resolution is passed by a vote of four Council members on the specific amount and there must be an extraordinary reason for the expenditure. Would meeting the payroll, for example, meet that criteria?

The taxpayers in Northport deserve an explanation of just how reserve funds are used. Can they used without the consent of the Council each time they are used? If they are used to pay for “emergency” shortfalls in the city’s revenue, then the definition of what constitutes an emergency would be helpful. A natural disaster would be construed as an emergency by most people, but a shortfall in sales tax revenue might not be looked at in the same way.


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