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Episode 7 Ridley Park Financial Stress - Debt Growth & Debt - Tax Anticipation Notes Part 2 of 2

Episode 7 Part 2 of 2 - Debt Growth and Debt - Tax Anticipation Notes

I apologize in advance for the length of this Episode but there was a lot to cover.

A Tax Anticipation Note (TAN) is issued when Ridley Park, and most municipalities in Delaware County, do not have sufficient reserve funds for payroll and critical bills from January to March. In March tax and service revenues start to come in. The Tax Anticipation Note charts shown below show that when the reserves were high in 2000, 2001, 2002 and 2003, it was not necessary to issue TANs. The reserves were sufficient to cover payroll and bills until tax and service revenues were received.

The Pennsylvania Borough Council Handbook, published by the Governor’s Center for Local Government Services, and administered by the Department of Community and Economic Development, page 36, Municipal Borrowing item 6, states:

  • TANs must be repaid during the fiscal year incurred.

In 2004 with the reduced level of reserves due to the deficit spending, Council started issuing TANs and this has continued through 2010. The auditors’ reports show that in the years 2004 to 2008 the TANs were repaid prior to December 31 of each year.

In December 2007, council had to choose between repaying the $400,000 TAN and paying the $333,382 in bills that were due in 2007. They chose to pay the TAN. The incoming Council was confronted with using 2008 financial resources to pay off the $333,382 of bills that should have been paid in 2007.

As Warren Buffet said regarding investments, "It's only when the tide goes out that you learn who's been swimming naked." I say it is only when the TAN is paid you learn the truth about the state of Borough Finances on December 31st of each fiscal year.

A Certified Public Accountant examined Ridley Park finances in January of 2008 after the disastrous $333,382 of 2007 “Accounts Payable” due was discovered. He noted that in 2008, before the newly elected council was sworn in, the departing council issued the 2008 $400,000 TAN and spent almost $300,000 before the new council was sworn in. This left the new administration short on funds to meet the 2008 early month expenditures and payroll. They did not pay the “Accounts Payable” bills because they were left in a file box in the Borough Office for the new council to pay. Where did they find $300,000 of bills to pay in the first week of January? More on this in Episode 8. Stay tuned.

I have the TIVO recording and a VHS copy of the February 16, 2010 Council Meeting. In that meeting Councilor Murtha, Chair of the finance committee, criticized the previous Council, in particular Councilor Frantz, for the 2009 year-end repayment of the TAN. Councilor Murtha used a very large photocopy of the $413,805.56 check dated November 23, 2009, signed by Jeanne Frantz and Joe Yorke, to illustrate her point.

Payment of the note was a fiscally responsible action. Not paying it would have been contrary to the Pennsylvania “Borough Council Handbook”, contrary to the year-end actions taken by council from 2004 to 2008, contrary to what solvent municipalities do all over Pennsylvania. Not paying would have defaulted on the loan agreement with TD Bank to repay the note by December 31, 2009. In the “TAX MATTERS CERTIFICATE” for the $500,000 TAN for 2010 signed on January 15, 2010, by President Berger, Item 2 states that “The Note will mature on December 31, 2010, and will not, therefore, be outstanding beyond the last day of the fiscal year in which such tax anticipation note is issued.”

In summary, repayment of a TAN at year end in 2009 was business as usual and in accordance with:

  1. Many years of precedent in Ridley Park and throughout Pennsylvania,
  2. A bank note that stipulated payment by December 31, 2009
  3. A requirement stated clearly in the Pennsylvania “Borough Council Handbook” and
  4. The current council’s “certificate” that commits repayment in 2010.

I cannot find any fiscally rational reason for Councilor Murtha’s criticism of repaying the TAN before December 31, 2009.

Councilor Murtha asserted that, as a result of paying the TAN, with $237,350 of Ridley Park funds deposited in various accounts with M&T Bank:

  1. “Checks Bounced”
  2. A $19,239.40 overdraft resulted in the following:
  • Insufficient funds were available to meet payroll needs in January
  • Inability to pay Highway Department Employees for Snow Removal
  • Had to move $44,000 from Capital Reserve to General Funds.
  • Council being forced to issue an emergency $500,000 Tax Anticipation Note and
  • Council being forced “with a heavy heart” to increase taxes for 2010.

My review of the bank statement for January 2010 shows that the short answer is:

  1. No checks bounced. Councilor Murtha contends that a covered overdraft is a bounced check. That is incorrect. Overdraft protection pays checks that are presented and does not return checks unpaid which would be “bouncing” the check. No checks were returned, no checks bounced.
  2. At worst, the $19,239.40 overdraft was an administrative error with no adverse financial consequences, because:
  • Throughout the month of January there were sufficient funds deposited from various sources ($174,484) and imbedded in the various accounts which totaled $237,350 to meet all payroll obligations and pay all bills without using the $500,000 Fiscal Year 2010 TAN. The facts are in the bank statements and paragraph b below, but not in Councilor Murtha’s incorrect selective portrayal of financial information.
  • Marjorie Parris of PENNDOT says snow removal is a proper expenditure under the Liquid Fuel Fund. This fund had $94,907 in the account so the Highway Department Employees were, or should have been, paid out of the Liquid Fuels Account which Councilor Murtha said could not be touched.
  • The bank statement shows only $17,500 was transferred from Capital Reserve to the General Fund, not $44,000 as stated by Councilor Murtha.
  • Council President Berger took office on December 15, 2009. The “TAX MATTERS CERTIFICATE” for the $500,000 TAN for 2010 was signed on January 15, 2010, by President Berger. President Berger signed the Proposal Acceptance with M&T Bank for the $500,000 note on January 7, 2010 – 7 days before the “CERTIFICATE” was signed. If there was an emergency, which there was not, it was caused by administrative delay by the current council.
  • The 4.4% real estate tax increase for 2010 is about $80,000. The contract for the lower lake baseball field is for $47,000. If there is no grant money forthcoming for the lower lake baseball field contract, 60 percent of the tax increase will be eaten up by construction of the ballfield located on a flood plain along the creek flowing into Eastlake.
  • I believe an even greater tax increase was needed to begin the recovery from the 2007 “Brink of the Abyss” that will be described in Episode 8.

Compared to the desperate situation faced by the new council in January of 2008, January 2010 was a walk in the park. If necessary, an appendix after Episode 10 will include detailed substantiation of the above findings.

My main point here is that in my 37 years experience at Boeing we knew we could rely on accurate financial reporting from our finance people who were obsessed with being accurate. Management could count on information from this group to make decisions. I am uneasy with the enormous political spin Councilor Murtha puts on public financial reports to the residents of Ridley Park. We deserve accurate reporting.

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