New retirement expense complicates FRPD radio system payment options

And then there’s this – Town Finance Director B.J. Wilson explains how an unexpected $1.2 million hit to the Town’s $1.5-million General Fund reserve happened. Photos/Roger Bianchini

An August 27 post-meeting work session discussion revealed complications to the Front Royal Town Council’s apparent majority consensus on how to purchase a $545,000 modern digital radio communications system for the town police department.  That consensus was an internal General Fund loan paid back over an extended, perhaps as long as a 10-year, payback at as little as $54,500 annually with no interest involved.

A vote on that funding plan had been scheduled for the Monday, August 27 meeting – that vote did not happen.

“As Mr. Tewalt said, unfortunately reserves can come and go pretty quickly,” Town Finance Director B.J. Wilson told council to open the work session discussion.  That quick exit of an estimated $1.2-million of a $1.5-million General Fund surplus was due to a just-discovered increase in a retirement program known as GASB 75 – Governmental Accounting Standards Board Pronouncement 75.  A staff summary noted that GASB 75 “relates to post employment benefits other than pensions.”

While the Town began setting aside money for the program in 2014, recent information shows that set aside falling short by the estimated $1.2 million number.

Consequently, were the Town to borrow the necessary $545,000 for the FRPD radio system upgrade from its General Fund, its surplus would dip to an estimated $200,000 to $300,000 above the minimum recommended amount.  That compares to what had previously been estimated at a reduction from $1.5 million to $968,000 above the minimum suggested surplus in the wake of the internal loan for the police radio purchase.

Wilson also told council that in addition to the new retirement program commitment of $1.2 million, another Virginia Retirement System (VRS) hit whose number is still not known would likely reduce the General Fund surplus dangerously close to its bottom line.

The total General Fund balance that supports the Town’s non self-supporting fee-based or utility endeavors (Enterprise Funds) is estimated at approximately $7,632,807.

A failure to maintain recommended General Fund reserve level minimums could affect the Town’s financial-stability bond rating, negatively impacting access to lower interest rates on any loans the Town might require for future projects.  That suggested surplus requires a three-month operational reserve, as well as coverage of any outstanding non-enterprise fund encumbrances.

“There’s really no choice,” Wilson said in altering the staff and council-agreed upon internal loan recommendation to the 10-year, lower interest rate option offered through the Virginia Municipal League (VML).  The 7-year payback VML option would raise the Town’s annual payments by about $11,000 (to $65,821) and add $113,205 in interest to the payback.

“No, we do have a choice – we can still borrow from the General Fund or our Enterprise Funds,” Councilman Jacob Meza countered of Wilson’s “no choice” assessment.  And while a council consensus seemed to agree with the finance director that reducing General Fund reserves too much was not a good idea, in the end a compromise was reached.

That compromise was driven by a collective council desire to see the police radio upgrade realized as soon as possible.  Both internal and inter-departmental communications issues have been cited in justifying the radio upgrade.  FRPD Chief Kahle Magalis has estimated a 15-year life span – “20 with a little luck” – for the new radio system in the rapidly-changing technology environment.

New FRPD K-9 Bosco and Master Police Officer partner Tony Clingerman are introduced to council Monday evening. Seventeen-month-old Bosco was quite wound up for his first public appearance.

A three-month turnaround has been estimated by Motorola vendor Teltronic once the radio system order is placed.  Councilman William Sealock noted that the police department is scheduled to move into its new $11-million Kendrick Lane headquarters by the end of the year, adding, “Those radios better be ready” by the time of that move.

Consequently, council agreed to move the purchase forward by way of the internal General Fund loan, while reserving judgment on a long-term financing plan until Finance Director Wilson had the final VRS number on the additional hit to the General Fund reserves.  A vote to enable the perhaps temporary internal loan was scheduled for a special meeting called by the mayor for next Monday, September 3.

Comparative numbers

The above-cited internal loan, 10-year payback of $54,500 annually with no interest compares favorably with other financing options presented to council.

Third-party, interest-based annual payments ranged from as low as the $65,821 through a 10-year Virginia Municipal League (VML) loan at 3.55% interest totaling $113,205 in interest – the new staff recommendation – to as high as $93,709 in annual payments over a 7-year payback at 4.86% interest, with an interest total of nearly $111,000 through radio system provider Motorola.

Lower-year VML or Motorola option paybacks at slightly lower interest rates resulted in significantly higher annual payments – $88,639 to $151,986 that council expressed little interest (pun intended) in.

Council also gave little attention to a loan option through the New Market Tax Credit (NMTC) program at a 20 to 30-year payback at a 1.5% interest rate through the first seven years, with annual payments between $19,000 and $32,000 and a principal balance cited at just $381,500.  Council elected to go the NMTC route through the EDA on the $11-million price tag for the new FRPD headquarters.

It is unknown if a series of closed sessions recently called to discuss past and current debt services entered into by council involves long-term uncertainties surrounding that low interest loan program designed to reduce municipal capital improvement costs.

James ‘Jimmy’ Beatty is acknowledged for his retirement from the Town’s Wastewater Treatment Plant after 45 years of service.

Lorraine Hultquist bids farewell to the Urban Forestry Advisory Committee as committee Chair David Means looks on with the mayor and vice mayor.