The city of Carmel’s revenue is millions of dollars short this year, which has left the city scrambling to determine how to pay its bills.
The culprit—at least in part—is Carmel Utilities, where the water division is in the red for the second year in a row. The agency failed to pay the city some $1.2 million in fees for shared services, money the city had allocated for its budget.
That, plus other miscellaneous revenue misses, has left Carmel short of the cash it needs to pay claims, debt service and payroll for the rest of the year.
The state of the city’s budget has been a heated topic all year—particularly during the mayoral primary election—as incumbent Jim Brainard’s opponents argued that Carmel was headed toward a financial cliff. Now they’re singing, “I told you so.”
In November, Brainard issued an executive order to cut $1.1 million in expenses from the 2015 budget and introduced an ordinance to the council to reappropriate an additional $5.38 million the Indiana Department of Local Government Finance had previously cut.
The money is needed for the basics—including payroll—through the end of the year. But the Carmel City Council deadlocked 3-3 on the proposal at a Dec. 7 meeting. Brainard, who can otherwise break tie votes, was in Germany.
Covering those expenses will drop the general fund, which essentially serves as the city’s checking account, to nearly nothing.
Council President Rick Sharp is among those who voted no.
“Not only had it never been done before, but it strikes me as extremely unwise,” he said. “It’s a shame that the wealthiest city in Indiana should be run paycheck to paycheck.”
Curt Coonrod, a financial adviser for the city, said the bulk of the shortfall is from a lack of revenue from Carmel Utilities. The utilities department annually reimburses the city’s general fund for shared expenses, including the use of city legal staff, but couldn’t meet its obligation of $1.2 million this year.
“We absolutely did come up short in what we predicted,” Coonrod said.
He said a wet summer resulted in fewer residents watering their lawns, lowering revenue. The water division is projected to end the year $400,000 in the red.
“In a normal year, they can pay their annual reimbursement,” he said.
But last year, the division also finished more than $400,000 in the red—although that year it reimbursed the general fund.
The financial woes in utilities are already hurting Carmel: Standard & Poor’s reduced its rating for several water and sewer bonds in September, citing a decline in the revenue stream backing those bonds and low cash balance of the funds.
At that time, Brainard said the city would consider raising utility rates as much as 10 percent in 2016 to bring in more revenue. He also blamed the City Council for reducing a proposed rate increase in 2011 to less than what the department had requested. The rates have not been changed since then.
Now, with the general fund nearing zero, some council members are worried the city will tap into its $8.5 million rainy day fund—a move that could hurt its other bond ratings.
“Saying that the money is there is certainly true,” council member Luci Snyder said at the Dec. 7 meeting. “But should we spend it? Certainly not.”
How much reserve?
Coonrod said a low general fund balance isn’t a problem and that the rainy day fund is meant to be used as a cushion.
“Ideally, the balance would be zero because we don’t want to tax people to have money in the bank,” he said. “The purpose of an operating balance is to be used. We’re not trying to impress shareholders here.”
Larry DeBoer, a local government expert at Purdue University, said some municipalities have negative balances each year but can manage as long as upcoming revenue can cover debt payments.
And he agreed that keeping large balances in the general fund means taxpayers’ money is being stored rather than used to deliver services, which isn’t desirable.
But DeBoer said that, while a rainy day fund can be used as a general fund stopgap, that doesn’t mean it should be.
“The rainy day fund really is for rainy days—temporary bad times—and should not be funding chronic shortfalls of revenue below expenditures,” DeBoer said.
Financial experts recommend that local governments keep 10 percent to 20 percent of their general fund—or two months’ worth of expenses—in reserves.
“That’s plenty. It’s unforeseeable that the city would need more than that,” Coonrod said.
Currently, Carmel’s rainy day fund is at the low end of that range—about 10 percent of its operating expenses. Coonrod said the balances are only one factor considered in setting bond ratings and don’t have as much impact as property taxes, employment, income and assessed value.
The city’s money in the bank is “not directly related to the payment of debt, so it isn’t really that important,” Coonrod said. “Really, the security for most Carmel bonds is practically a lien on all the property in Carmel, and that’s a pretty good security.”
But Sharp said, given Brainard’s plans, the rainy day fund could easily be depleted.
“There’s little money to do these grand projects,” he said. “This city spends every dime available to it.”
Had Brainard’s appropriation ordinance passed, it would have marked the first time since at least 2000 that the city’s general fund dropped to zero before year-end outstanding payments were taken into account.
“This is skating on the financial edge,” Snyder said. “What the mayor told the public about this this year wasn’t true.”
And it’s possible the money will be spent—even without council approval. Brainard issued a statement the day after the vote, encouraging the clerk-treasurer to pay claims as if the ordinance passed.
“It is the position of the mayor’s office that the city should continue to meet all of its obligations,” Brainard said in the statement.
But one prominent attorney–conservative Jim Bopp Jr.–questioned the move.
“Brainard right now thinks the secretary of Carmel can pay bills with no legal authority,” he said “So the law doesn’t seem to impress him much. That was so stunning.”
Coonrod told the council before the vote that the ordinance was necessary to continue paying all city staff, but Sharp rejected that argument and accused Coonrod of using a scare tactic to persuade the council to approve the request.
Council member Kevin Rider, who voted in favor of the ordinance, confirmed that city employees will be paid.
Brainard also noted in his statement that the three dissenting council members were all defeated in the May primary election—Sharp ran against Brainard for mayor, and Snyder and Eric Seidensticker lost re-election bids for their council seats.
Brainard said he plans to ask the new council to retroactively “legitimize the payment of claims” in January.
A representative with the State Board of Accounts said if the appropriation had passed, it would still need approval from the DLGF. And it’s uncertain how that agency would act on a retroactive request.
DLGF spokeswoman Jenny Banks would say only that additional appropriation requests are due Dec. 16.•