SPECIAL CALL JOINT FINANCE/UTILITIES COMMISSION MINUTES THURSDAY, JANUARY 13, 2011-2:00 P.M. CITY HALL, COUNCIL CHAMBERS, VERO BEACH, FLORIDA PRESENT: Utilities Commission: Chairman, Lee Everett; Members: Jason Fykes, Herb Whittall, Don Hawkins, Robert Blumstein, Edgar Wiegner and Alternate Member, Jane Burton Finance Commission: Chairman, Bill Teston; Members: Bill Fish, Richard Winger and Warren Winchester Also Present: Records Retention Specialist, Heather McCarty Finance Commission Excused Absence: Laura Torres 1. CALL TO ORDER Mr. Everett called the meeting to order at 2:00 p.m. 2. ITEM FOR DISCUSSION A) Discuss Quarterly Budget Mr. Teston said that they have been sent budget material for the first quarter of this fiscal year and also documents concerning the general ledger for the last fiscal year, which included the year end numbers which have not been audited (on file in the City Clerk s office). Mr. Steve Maillet, Finance Director, said that this meeting was called at the request of Council to discuss the quarterly budget. He said he has received some emails that had some general questions about some of the variances that there are in the different funds. He explained that some of the variances are seasonal, such as property tax, and some things happen early in the fiscal year like debt service. He has also had some questions in the general fund on parks maintenance. He pointed out when they sent this, the December books were not closed. He explained that once a quarter, they charge the different funds for maintenance and that is not in there. He said on the three small funds (Airport, Marina and Solid Waste), their revenues are down, which is partly due to the economy. He added that from his standpoint, there is nothing that stands out as needing extra discussion or questions, other than the three small funds. Mr. Fish said he would like an explanation of some of the larger numbers and big swings, such as in Grounds Maintenance, Facilities Management, and also in Information Systems. Mr. Teston said some of it may be seasonal, but he does not know what is seasonal. He asked about the $100,000 difference shown under other, and if that is something that is going to recover or if that is a trend they need to be concerned about. Also, he pointed out that, in the accounts that Mr. Fish referred to, when you compare the revenues and expenses, the expenses are going up and revenues are going down. 1
Mr. Winger suggested having a comment on the reports that would answer some of the questions, such as if something is seasonal. Mr. Teston asked if there is software capable of sorting them from the largest variance to the smallest. Mr. Maillet said the order is how they appear in the general ledger, but he could resort them. Mr. Teston said if there is a swing, he would like to have some kind of a comment there and then if they need more insight, they can discuss it further when they meet. Mr. Maillet explained how he is trying to show if, within a range, they are approximately on target. Mr. Teston said that time is valuable and if they can t have a level of tools that they can look at and say whether it is something they need to pay attention to, then they are wasting their time. He said there needs to be a balance where they can get some kind of insight. He said a good example is the $100,000 variance in the Year to Date (YTD) actual and YTD budget. He asked what is going on and what it is that created the variance. Mr. Maillet explained it includes items like interest earnings and actual miscellaneous revenues, which can come in at any time of the year. Mr. Winger said that the cause should be on the report. Mr. Teston agreed. He said that goes for expenses also. Under expenses, the budget versus the actual is a difference of $600,000. He asked if that is a seasonal factor, or if it is going to wash out, or if it is a trend that they need to look at now. Mr. Maillet agreed that would be a good place for a comment, such as on October 1 st there are debt service payments that the General Fund has to make around $600,000, which would cause that bulge on the expenditure side. Mr. Teston asked if they know that there is a seasonal bulge that you have to pay in the first quarter, why don t they budget their best estimate in the first quarter so they don t have the big variance in the budget versus actual. Mr. Maillet explained that the report is based on something a previous Councilmember came up with. He would like to know what they would like presented to them so that it would be useful. He said he could change the format however they like. He added that historically, the Finance Commission was involved in the larger items, such as debt service and major capital. Mr. Winchester said he has concerns about what it is this Council wants this Commission to do. He said historically the Finance Commission and the Utilities Commission have been an Advisory Board to the Council only. He said they are now being asked to look back at what management has done and that is extremely difficult. He said all of us know that there are 2
peaks and valleys in every municipality because of taxes, tourist, etc. He wants to be helpful to the Council, but he does not want to get in the way of management. He said he did not find much of anything in the report and feels it is just a snapshot of where they are in the budget year. He thinks it would be useful to the department heads, but he is not sure what they are doing with it as a body. Mr. Winger said it is just showing them whether they are staying within the approved budget. He said the question becomes are the proper things being done to maximize those enterprises and minimize the expenses. Mr. Winchester said as a Board, if they are really concerned with helping the Council and the City they ought to start with the budget process and be a part of it. He does not understand how they can effectively do anything for the taxpayers when they are looking back at a budget that started three and a half months ago. Mr. Winger said they could spend some time with the Marina or the Airport and others over a period of time and probably give some insight as to how they could improve those operations and maximize them. He said the proposal that he would give to the City Council is that the City needs a Chief Financial Officer. He said that person should work with each of the managers and look at the departments and bring back to the City Council what should be done with them in the future. He said with the situation that Vero Beach is in, they need very good financial analysis and then financial management. He thinks the answer is if they have a very strong Financial Manager as the City Manager, a lot of improvement could be made. Mr. Teston said the charter of this Commission is all over the place. He said unless the City Council puts a document out and says what they expect out of this Commission, they are going to continue to have an issue. He added that he does not know of anything of significance that this Commission has done and he feels that is going to continue. Mr. Maillet said it is good to see the quarterly reports, and even to get information monthly. He said the City of Vero Beach gives the public a variety of services that they want, at a level they want and it also allows the taxpayers to get a profit from those enterprises. What is being pushed now is that the taxpayers need to give up all their utilities. And when you get rid of all your utilities, there goes your revenue sources and flexibility in services and you end up being another general city that relies on ad valorem taxes, like the City of Sebastian. He said the people of Vero Beach should get some third parties in to take a look at it. He said on the high level, there is a question of whether or not the taxpayers should be stripped of all their enterprise funds. He said there has been no philosophical discussion of how they got here. He said that Rob Bolton, Water and Sewer Director, has been going over the 2009 rate study and somehow, it has gone around the Utility Commission and the Finance Commission so there is no input from them. Historically the Council has given the staff enough money so they can run but no more than to run. Now the sea change has been that since now they don t have much money, the taxpayers can no longer have solid waste, or water/sewer, or their electric system, and the taxpayers have to justify why they should be allowed to keep all this stuff. He said if 3
you have government, you can t run it like a business, but in as business-like manner as possible. He agreed with Mr. Winger that they need to get people in to look at some of this stuff. He said he would like to give the information to them quarterly, but he would like them to tie it into some of the bigger items. Mr. Winger said an observation that he would make to this City Council is that they have what he calls an Ad Hoc Government. He said programs start, construction starts, but he has to question whether the City Council is really running the ship. He said they need to hire a captain to do that. He said they (Finance Commission) are capable of doing quite a bit and telling Council whether a given enterprise is going left or right, but they have to decide what they want them to do. He said they have evolved into Ad Hoc Government and it is up to this Council to reign in the people who work for them and tell the Commission what they want them to do. Mr. Winchester disagreed that it is an Ad Hoc Government. He said they have a Council who is looking at things and are trying to run it in accordance with the Charter. He understands making profits and using tax money. He said that finding a City Manager that meets all those requirements is extremely difficult. He said the budget process does work as well as any democratic process does, but they do make mistakes sometimes. The bottom line is that he will do whatever the Council wants him to do as long as they have some guidelines. Mr. Teston said if any message is to be delivered from this meeting, it would be that if they want an effective Commission, they need to clearly delineate what they want and choose the people who will give them the greatest resource. Councilmember Brian Heady said he doesn t think the staff or Commissions have been left out. He also doesn t think this City Council is on some mission to strip the City of water, sewer or police. He said he went before both Commissions last year and asked them both if they could do some brainstorming before the budget was put together so they could give the City Manager some input. He said he ran into some opposition from Board members and was told that Commissions should not be brainstorming. If you look at the current City Council, what they will find is five very active, very committed, very busy Councilmembers. He said he told the Finance Commission that one of the problems that continues is that the City gives its employees benefits and puts the cost on a credit card to be paid in the future. One example is pensions. He said they need to do something to reign in the expense, but particularly putting off the expense of things on future generations. Pension plans need to be funded in the year that the benefit is earned. Mr. Teston said they were called into the meeting to review the quarterly budget and they have ranged pretty broad on it. What he is saying makes sense, but before they can address any issues of that nature, they need the City Council to let them know where they can be of service. They would like something simpler and straight forward and that is to give the Finance Commission a directive that is clear cut where they can be of the greatest service. If it is to review the retirement, then give them some insight to that. 4
Mr. Winchester said they work at the will of the Council and not for an individual Councilmember. He said he did his brainstorming on the budget and he will do that every year. If this Council wants them to do something, they should be advised what they are supposed to do by a majority vote of the Council. Mr. Whittall said looking at the information, if they had last year s budget and last year s month it might help them to see if it is always that way in that month. Mayor Jay Kramer said they are in the same boat in that they don t know what the Commissions want from them. He said if they need all of the Council to agree to tell them what to do, then it would have to be an agenda item for Council to approve sending it to them to discuss. Mr. Winchester said the Charter says that they are to act as an Advisory Board to the Council as a whole. Mayor Kramer said then they would need to bring them up as agenda items and agree to pass it down to the Commissions to discuss. Mr. Winchester said that is what they used to do. Mayor Kramer said he would love to talk with the Commissions on some of the items they are dealing with today. He said he would love to have the Commissions look into some of the issues, but sometimes they are not ripe enough to bring up as an agenda item. Mr. Teston said Mr. Maillet gave them what he felt would be useful for this meeting. He explained that there were many places where they thought there was a cause to investigate and ask questions, but they found out that those are either seasonal or the way it is. He said he spent a number of hours trying to get ready for the meeting. He questioned why they would call them in if it is not to review it or question the numbers. He said the whole point is that they are disorganized. He added that he doesn t think they give any advice back to Mr. Maillet or to Council that they can take and come up with a conclusion on. Mr. Fish said they did that at their last meeting and they made a recommendation. Mayor Kramer said he really liked that meeting and felt it was valuable. Mr. Fish said they need to have quarterly meetings. He pointed out that the Marina Director is looking at other areas to see what they are doing and how they compare. He said waste management could be a very clear thing to look at and see if somebody is doing it better than they do. Mr. Winchester thinks they best serve the Council when they participate in the budget process from the beginning and are involved in all of it. He said he heard that there were very few who sat through the entire hearings. He said if they don t participate in the budget process from the beginning, it is hard to complain about what anybody does. Mr. Winger suggested they could have monthly meetings and have the Council ask them to look into one issue per month that they would like them to discuss. He said one example he would 5
like to look into is unfunded pensions. He said they could ask them to look into things that interest three out of the five Councilmembers. Mayor Kramer said he does not want to waste their talents by not giving them something to do or talk about. Mr. Blumstein said they have traditionally stood between the staff and the Council for new projects or budgetary items as they develop and those are passed through them before they are presented to the Council. He noted that they have not been used very well in the last few months. He pointed out that at the last Council meeting there was a lot of discussion about repairing a roof on one of the utility buildings, but that was not sent to their Commission to discuss. Mr. Whittall said there are a lot of things going on with utilities these days. He said one example is the pollution of ground water from drilling and whether the price of natural gas is going to sky rocket. These are issues that are going to need to be looked at in the future and they could help out Council by keeping up to date on them. Mr. Winchester said speaking as a taxpayer, he lives close to the Power Plant and on the recent cold days, all five generators have been on line. Mr. Whittall said he thought it would be helpful if they put in the monthly bill how many hours the Power Plant ran that month because it is a lot more than people think. Mr. Everett said there are times that the Power Plant runs to stop rolling blackouts from happening in Central Florida. He said there are a lot of communities on the coast that would not have power all the time if it weren t for Vero s Power Plant. He said what they should be looking for is leadership. He said there is no leadership emerging from the Council yet that he sees, but he hopes there will be and that everyone will get behind them. He said they have no City Manager. He said there are all kinds of reasons why they are not functioning smoothly and maybe they never will function smoothly. They do have to interact and they do have to look for leadership. He said the City needs a leader in the utility business and City Council needs a leader in all of the other aspects. He said there is no magic formula in being well run. They have to deploy the people they have in a way that they will work together to achieve common ends that are going to benefit all the people being served. Mr. Teston said utilities for the first quarter had a 111% reduction and they were supposed to have $1.7 million profit. He asked why. Mr. Maillet said at the end of FY10, the electric system had over $20 million in unencumbered cash which is almost 90 days of operating cash. Historically they have wanted 45 days. They wanted to pass that money back to the ratepayers. So on October 1 st, they had a rate cut that amounted to 3%. Some of what they are seeing is the rates coming down. On January 1 st, they had another rate cut of about 3%. What they expect is that over the next few months, the 6
revenue they collect should start going down and it will show up as decreased revenue collection. Mr. Wiegner asked when they get the unencumbered cash to where they want it, how much are they going to have to raise rates to get back to a stable state. Mr. Maillet said they will just go down in steps when they feel it is prudent to do so. Mr. Wiegner asked what the target for unencumbered cash is. Mr. Maillet answered it is around $12 to $13 million. Mr. Wiegner said when they get down to that, then the rates can t stay at that level because the rates have been reduced and you re running a deficit. If they stay at that rate level, the glide will continue to go down. He said they will have to make an adjustment. Mr. Everett said they are dealing with something that they can t quite predict, which is the cost of producing power. If they look at the rest of their costs, besides the generation of power, they are right in line with every utility that runs a good ship. All they have to do is raise the cost of power and they get back to where they were. Mr. John Lee, Acting Electric Director, said the first thing they need to do is stop the increase in the accumulation of working capital, and they can do that in several ways. They can anticipate how far down they need to go and go there immediately. Or, they can stage themselves slowly down so that they can stop it at a point that they can sustain it. If they feather it down to a point where they stop the increase and they can anticipate their capital needs going forward, then they don t have to get to a point where they immediately have to go back up. That is why they are doing it in stages and in small increments. Mr. Everett said these changes are outside of the fuel adjustment. He said they need to be very careful about adjusting the rates on top of that. Mr. Teston said there is a $2 million swing. He sees a loss of $192,000 and a budget of $1,697,000. He asked when they come back together for the second quarter, is the projection for another loss. Mr. Maillet said that would tie back into reducing the rates so that they delete some of the cash out. Mr. Teston said his question is they budgeted a profit or net income at $1.697 million. The net income for the first quarter was at a negative $192,000. He asked if they don t change the policy of how they are dealing with their operations, is there any reason to believe they won t have another $2 million spread? Mr. Maillet does not think they will see a $2 million spread, but he would expect now that they have had another rate decrease, to have less income. He said they are charging less per unit. He added they are not going to be $8 million down at the end of the fiscal year. 7
Mr. Teston asked what changes are going to be implemented to stop that downward curve. Mr. Maillet said part of it will be that they will have to see how sales go. Mr. Teston said you put yourself on a slide and you re not going to stop that slide unless you do something physically to stop it. He asked how is that going to happen. Mr. Maillet said lately they see the price of everything fluctuating and people treat that as natural. But if there are any fluctuations in the water, sewer and electric rates the City charges, then that is a problem. He said historically three to four times a year, they look at their whole operations and adjust the fuel adjustment up or down. He believes as they watch the cost of power, watch the capital, watch their operations, they ll be able to manage this as they have over the years. He said where they had the problem in 09 was when FMPA raised their rates so much and they had no control. Mr. Teston said they have made a formal rate reduction and they are going to be faced with the same kind of issue that hit them before. He said they are going to have to increase rates significantly. Mr. Maillet said historically they have had 45 days of working capital. If they want to set their rates so that they are comfortable, then what they would do is change their policy and maybe keep 90 days. Mr. Whittall said he did not understand the YTD actual. He said the three months is up and that is where, if they had more data, they could maybe understand. He said it might be helpful if they saw last years numbers to tell them why it is that way. Mr. Maillet said every month for decades Customer Service has produced a report showing this years and last years kilowatt and water and sewer gallons and usage. He asked if in the future they would like him to attach some of those. He said they can look at those reports and let him know if they are useful, or if there is another way they would like to see the numbers. For example, in December of 2009 the total kilowatts sold were around 53 million and in December 2010, it was 54 million. Mr. Winger suggested he add two columns and put the prior years numbers right on the report. He re-asked the question if they can expect the $192,000 loss to continue. Next quarter, are they going to see a loss in the YTD actual or are they going to see a change and something to indicate they are moving it back into a profitable position. Mr. Maillet pointed out that they did this budget in June and July of 2010 to be effective October 1, 2010. They are now starting to get the experience of the lower OUC rates. He said he could send them this information every month so they can see it. Mr. Teston said they have an annual budget for fiscal year 2011. He asked what the bottom line of the power is supposed to be in terms of the net income at the end of that fiscal year. 8
Mr. Maillet explained when they set the budget, they were looking for $775,000. Mr. Teston said they took an approach in order to make some adjustments and have brought the revenue number down. He asked if he still expects to have $775,000 at the end of the year. Mr. Maillet said that is what they are trying to work on. He said they are looking at controlling the expenditures, like routine capital. Mr. Everett said that the big expenditure is the cost of bulk power. He said they need to have an Electric Director who can follow that from day to day and month to month and know exactly why the variance from budget is what it is. He said they will have to wait and see if they make it up. Mr. Winger said he doesn t think they should wait and see. He explained that he thinks they need a rolling budget month by month. Mr. Everett said somebody needs to be following it and making adjustments. Mr. Maillet said he would send this to them every month. He said he would put another column on it and for the electric/water/sewer, he will put those reports in there as they discussed and see if he can put some notes in there that would be helpful. Mr. Teston said he is missing the point. He said they recognized the ability to give some money back and they did that to bring the cash reserves down. He said the rates have been in the paper and they are higher, which has been the political issue. He asked did you choose the process of taking the rates down in order to address the political issue. If they had some spare money, why did they not do a rebate and not mess with the rates or the revenue flow. Are you going to have the $800,000 bottom line that you planned with the policies that you are using. Mr. Maillet said that is still their goal and that is what they are working on. He pointed out this is an annual budget. If they give a rebate, it is still going to show up in less revenue. He said they could do that in lieu of changing the rates. But that would be the type of thing for them to discuss and give some input on. Mr. Winger said they can't make policy if they don t know if they are going to hit their budget of $795,000. Mr. Maillet said they are moving towards it. He said their budget doesn t account for unusual weather such as two freezes in a year. He said they are watching it. He said he has heard no discussion today about changing the policy of having 45 day working capital. He pointed out that they are lower than the average for their rates. They are working on having rates as low as possible with reliable service. Mr. Everett said one of the rate reductions was due to the fact they probably over collected through the power adjustment clause and they feathered those back to the customers. Mr. Lee talked about the philosophy of electric. He explained the rate stabilization fund and that you can also hedge your prices. He said the City of Vero Beach does not hedge because 9
they are not big enough to hedge. He said they have developed more of a rate stabilization approach. They projected their budget, but the price of natural gas dropped dramatically, which caused them to accumulate cash. He said they need to be very careful how they get it to the balance point, which is why they are slowly reducing it. Will they be at $800,000? He said the answer is yes, unless they make too many corrections too soon. He explained they are looking at all the factors. He said he does know whether the money is flowing good. If their revenues are up and their expenses are down, they have an obligation to give that money back to the customers in a reasonable fashion. The bulk power cost adjustment is the flexible part of it that they are allowed to deal with. If they are accumulating cash too fast, he feels they have an obligation to slowly give it back until they reach the balance point. Mr. Teston said they are trying to determine if they have something occurring that is going to create a problem. At 3:54 p.m., Mr. Wiegner excused himself from the meeting. Mr. Maillet said they have a grip on this and they are going to continue to look at it. It is their goal for the year. He said they would like to have something more stable. He said if they think 45 days of working capital is too thin a margin, then they could keep it at 60 days. Mr. Whittall asked if there is an industry standard about how much they should have. Mr. Maillet said they use 45 days and have for decades. Rating agencies like to see 60 days and some utilities keep it at 90 days. They feel that heading out towards 90 days is too much money to keep and they would like to return some of that. He explained that FP&L rates are political rates. He said they have asked for permission to hold them until December 2012 and then they will raise their rates. He said they can t match it and don t even bother to try. At 4:00 p.m., Mr. Everett excused himself from the meeting. Mr. Winchester said the City of Vero Beach is not a profit and loss center. It is a not for profit corporation and it has a responsibility by law to keep its costs down. Mr. Fykes said they spent a lot of time at the beginning of the meeting discussing marching orders for both Commissions. He said he wants to make sure that message gets back to City Council. He asked if they need to do something in a more formal way to make sure Council gets the message. Vice Mayor Pilar Turner apologized if at the beginning of the meeting, their marching orders were not very clear. She said they are working on reconstituting all of the Commissions and trying to make clear mission statements for each of them. She had hoped that providing them the information today would help to build a background and give them some history. She said they are bringing forward a reconstituting of these Commissions with clearer directions. She added the City Council does hear them. 10
Mrs. Burton commented for the record that she is not a voting member of the City. She does not live in the City limits, but she does pay electric and water. Mr. Teston felt they accomplished as much as they could today. Mr. Winchester said he would like to explore the possibilities of these Boards trying to help the City sort out the options with the power system. He said last week, they discussed their frustration of sorting out what all the options might be and he wonders if that is something they can help Council with. Mr. Teston said if Council would like to make a formal request to have them do that and specify what part they would like them to play in that, then he invites the City Council to give them that information. Mr. Whittall said they would have to have a lot more information than they have had today. Mr. Teston agreed that without that information, they can t make a decision. He said they would need to give them all the information that is available to work with. Mr. Winger said he could raise another ten questions. He believes that they are just going over old ground. He agrees that the City Council should come back and give them direction on which way they should go. Mr. Winger made a motion to adjourn the meeting. Mr. Fish seconded the motion and it passed unanimously. Mr. Maillet said that they did not get to water and sewer today, but if they have any questions, they should call him or Mr. Rob Bolton and they can go over the statements with them. 3. ADJOURNMENT Today s meeting adjourned at 3:07 p.m. /hm 11