JOSH DAVIS/BAYSIDE GAZETTE
A fiscal year 2018 audit report release on Monday during a Berlin Town Council meeting came with a note of caution. Auditors PKS & Company said deficits in several utility funds were eating away at the general fund.

By Josh Davis, Associate Editor

(Dec. 13, 2018) A Town of Berlin fiscal 2018 audit report on Monday night came with several notes of caution, as representatives from Ocean City firm PKS & Company said negative fund balances were rapidly eating away at the general fund.

Auditing Partner Michael Kleger began by presenting an unmodified, or clear, opinion overall, which is the highest level of assurance and means the town financial statements were presented fairly and in accordance with generally accepted accounting principles.

PKS Manager Leslie Michalik said total revenues for the year were $5.9 million, against total expenditures of more than $7.7 million. She said overall the general fund decreased by more than $1.8 million.

The general fund balance has declined from approximately $8.4 million in 2016 to $5.25 million at the end of fiscal 2018. According to PKS projections, the balance could fall to $3.7 million by the end of next year.

Largely to blame were losses by three of the town’s utilities that operate under separate funds, or budgets. Of those, the sewer fund was hit the hardest with an operating loss of more than $900,000.

“Because these funds have had operating losses over the last several years, the cash being generated in these funds has not been sufficient to cover the operating expenses … and the capital costs, so you’ve been forced to borrow funds from the general fund,” Michalik said.

She said over a four-year period, more than $3.9 million in operating losses from the sewer and stormwater funds was replenished by the general fund, including nearly $3.4 million from the sewer fund alone.

“It’s really gone up over the last two years – about a $1 million a year – to reach that point,” Michalik said.

Kleger said it is a concern that “those funds have not generated enough cash flow to pay those funds back.”

“Realistically, there’s really not enough cash here to pay those [funds] back and it’s a question of how you’re going to handle this,” Kleger said. “To us, those are kind of critical issues, getting those couple of enterprise funds at least to a break even.

“You quickly run out of your so-called fund balance of the general fund by these funds not being able to repay what they owe,” he added.

Michalik said it was “essential for the town to maintain an adequate level of a general fund balance.”

“It helps you mitigate current and future … risks, such as revenue shortfalls [and] unanticipated expenditures,” she said. “It also helps you to stabilize your tax rate, so you want to work very hard to not continue to chip away at your fund balance, so that it reaches an unhealthy level.”

Included in the report was a recommendation that the town “establish a formal policy setting the level of unrestricted fund balance that should be maintained in the general fund.”

“The Government Finance Officers Association recommends a balance no less than 60 days of general operating expenses. However, for most governments, including the Town of Berlin, realistically you need a significantly higher fund balance than that two-month minimum,” Michalik said.

“You need to look at the unique characteristics of the town and your circumstances. Look at some of your history and look ahead at your plans, and you need to come up with and develop what the right number is for you to maintain a balance in the general fund.”

Councilman Zack Tyndall asked what levels PKS sees in the other municipalities they serve, but Michalik said those range “all over the spectrum.”

“It kind of needs to deal with … the particulars of the town. Look at how consistent your revenues and expenses are from year to year. You have to look at your vulnerabilities and your risks,” she said. “It’s really kind of a case-by-case basis.”

Mayor Gee Williams said the Town Council for months has tried to “plant the seed” that some fees might soon have to increase to cover rising costs.

“It’s something we started talking in the early part of this year, publicly and in the papers and so forth,” Williams said. “As a community, and as a mayor and council primarily, we have to decide what level of fees – utilities and what level of property taxes – will support what people either desperately need or really want. And that’s going to be a very interesting part of this year’s budget process.”

Williams said the town recently tackled several longstanding issues, including operating its own electric utility to help dramatically lower electric bills, and building a new police station, “which needed replacing when I was young.”

“We got that squared away, and we’ve gotten some other major utilities and upgrades to some of our streets that were in dire straits, and now we’re in decent shape,” he said. “Now we, as a community, have to discuss what level of service do we want to maintain.”

Also a factor was a significant funding increase to the Berlin Fire Company and EMS services, Williams added.

“Temporarily [that’s] coming from a prior-year surplus, but we can’t keep doing that,” he said. “I think we look forward to having some very good community conversations about, OK, where’s the balance?

“I don’t think it’s all one or all the other – I think that it’s somewhere in between. But, we’ll figure it out,” Williams added.