Davidson CIP: Shell Game or Just a Lack of Caution?

UPDATE 10/26: The latest Mi-Connection results posted at DavidsonNews.net look promising and could reduce considerably the Davison subsidy payments outlined below if the trend continues. However, the significant improvement was primarily driven by operational savings from bringing the daily operations under local contol. This is a one-time event, and going forward continued improvement will have to be driven by customer growth.

Over the past couple of months, the Davidson Town Board and Staff have been discussing a new Capital Improvement Program (CIP) for the town. The CIP will also be the main topic of conversation at the Board's upcoming "retreat" in Statesville. Since the renegotiation of the Mi-Connection interlocal agreement with Mooresville earlier this spring, Davidson's cash flow problems have eased considerably. After years of postponed spending due to the large Mi-Connection subsidies, the Town appears ready to open the spending spigot - at least a little - for now.

However, achieving better cash flow is not the same as finding new money, and opening the spigot a little can quickly become like drinking from a fire hose.

Here are some numbers everyone should keep an eye on...

49% - That's the percentage of town budgets that most towns Davidson's size had in Fund Balance Available (FBA) as of last year. Davidson's was projected to be only about 36% in 2011.

$1.087m - That's the amount of cash freed up this year by the new MiC agreement with it's $1m annual cap for Davidson.  Davidson Commissioners chose to not lower the tax rate after this new agreement, so that brought in the same tax dollars with less mandatory spending - thus, the freed up money.

$890k - That's the amount Davidson estimates it will owe Mooresville this year under the new agreement which caps Davidson's annual payment at $1m/year and a 30% ownership stake. (The annual shortfall is expected to drop year over year if the Mi-Connection subsidies continue to drop. The annual MiC payment deficit caused by the cap will add to the overall Mooresville debt.)

$300k - That's the amount tentatively being set aside annually from the freed up cash flow to pay back the accumulating debt owed to Mooresville.

Two things should jump out at you. First, Davidson is at a lower percentage of fund balance than our peers. Second, this year's IOU to Mooresville on MiC is almost 3 times what the Town is planning to put away to pay off that debt.

When the MiC interlocal was first renegotiated, the Town indicated it was planning to put the balance of the freed cash flow into fund balance to get the Town FBA% up to about 45% (See "Davidson commissioners approve revised cable pact"from DavidsonNews.net.) This would get the town more in line with our peers. Stabilizing the FBA% was considered an important metric and was one of the driving reasons behind the renegotiation of the MiC agreement. It was important to achieve this to get the State Local Government Commission (LGC) off the Town's back regarding town finances.

However, a few short weeks later the Town Board approved a budget that would eventually put zero dollars aside for increased FBA. The Town went from indicating $750k would go to fund balance to $0 going to increasing fund balance. Why did they do that?

The first part of the official answer is that by lowering the amount of money needed annually for MiC due to the $1m cap, that automatically raises the town's FBA% because the FBA is based on the amount of Fund Balance versus the current year's expenses. Since the $890k we now owe to Mooresville rather than paying MiC is not an "expense" it doesn't "count" when calculating the town's new FBA%. (This of course completely ignores the fact that this money is now a new debt.)

The second part of the official answer is that the Town is now "comfortable" with an FBA% between 35% and 40% which is conveniently where it will be under this new approach.

The more obvious answer is that saving money would preclude spending it.

So how does the Town propose to spend this $1.087m freed up by the new interlocal? 

• $325k went to balance this year's budget. (Yes, Town expenses are being paid with the Mooresville credit card the same as if you paid your electric bill with one.)
• $300k goes to a special fund setup to pay off the Mooresville MiC debt. (This does not contribute to FBA% because it's dedicated to paying Mooresville.)
• $457k has been requested in new spending by Town Staff this year as part of the new CIP. (  Little to nothing is being set aside even though originally $400k was supposed to be for "contingency".)

While this last $457k has not been fully approved by the Board, the Board has officially set aside $353k for this type of spending in this year's budget. Going forward, proposed additional spending actually increases significantly in future years according to the proposals put out by staff at the last work session. In order to pay for these proposals two things will need to happen. First, tax rates will need to remain at least where they are for many years. Second, the Town's assumptions on MiC will have to work out as expected. This second assumption is where things could get dicey.

Here's the model of how the math would likely need to work on the MiC subsidies and the debt to Mooresville going forward. This is based on MiC seeing drops in annual subsidies similar to what was expected this year prior to the renegotiation of the interlocal. These numbers are not official. They are simply the best estimate at this time with the limited information the Town has on the future.

The assumption is that MiC will hopefully get better, and within 5-6 years the subsidy will be less that $1m/year. The debt to Mooresville will be paid off completely. Cash will truly be freed up.

We all hope that to be the case.

However, history has shown us that Mi-Connection's results are getting better, but they are not yet predictable. Remember, last year's MiC subsidy started at $1.94m per the town budget, but then mid year the company had to ask for an additional $400k from Davidson. The above $250k/year drop in projected subsidies starts at this higher $2.34m total subsidy from last year to this year's projected $2.087m (the number before the renegotiation). If you compare last year's going-in number with this year's going-in number the MiC connection subsidy would have actually been higher this year. Instead, due to the added $400k required last year, the Town is acting like the subsidy will be $250k less this year over last. Without last year being worse than originally projected, there would not be a $250k improvement year over year. Yet, the Town is projecting this same amount of additional improvement every year into the future.

That should make everyone uneasy.

Before the Town embarks on more spending, it needs to very clearly explain to the public the tax implications and potential risks. To date, that has not been done sufficiently.  Hopefully, the Board will do so before making more decisions that put the town at further risk.

Said another way, that would be the transparent thing to do.