Politics & Government

Town, School Officials Clash Over Draining Surplus Account

Flatto Says Town's Highly-Prized AAA Bond Rating at Risk; Title Says Flatto's Side Agreement With Former Supt. of Schools Allows Flatto to "Snatch Up" Surplus

In First Selectman Ken Flatto's view, the Board of Education is putting the town's highly-prized AAA bond rating at risk.

In Supt. of Schools David Title's view, the Board of Education isn't "wearing the black hats" in a dispute over the proposed 2011-12 town budget that erupted late Tuesday in the Education Center, 501 Kings Highway East.

Flatto said the Board of Education planned to drain $2 million from a medical insurance reserve account for school board employees to help fund its proposed $148.5 million budget for 2011-12, which Flatto cut to $146.9 million. The Board of Education used $1.6 million from the reserve account to offset a $3 million cut to its budget in 2010-11.

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The problem with taking $2 million in 2011-12 is Moody's, a bond rating agency, warned the town about a deficit in its "internal service fund" - which includes workers' compensation and medical insurance reserve accounts for town and Board of Education employees - and the town's Board of Finance has been trying to build up reserves in that fund.

Flatto said the town's AAA bond rating, which allows the town to borrow money at low interest rates, could be in jeopardy.

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Michael Tetreau, a Board of Finance member, said he didn't like how the Board of Education was handling its medical insurance reserve account, which drew pointed comments from Title and Board of Education Vice Chairman Pam Iacono.

Iacono said Flatto had entered into a "side agreement" with former Supt. of Schools Ann Clark regarding the Board of Education's medical insurance reserve account and that members of the Board of Finance and school board should read it before they commented further.

Title quickly explained the problem with the side agreement. "Any balance left as of June 30 is liable to be snatched up by the first selectman. There's no guarantee it will roll over," he said.

Title said it was difficult to believe the Board of Education was "wearing the black hats" in the budget dispute when the school board's reserve account for medical insurance had a cash surplus of $5.2 million on July 1, 2010 and was projected to have a cash surplus of $4.1 million on June 30. By contrast, the town's reserve account for medical insurance had a cash deficit of $671,960 on July 1, 2010 and was projected to have a cash deficit of $821,016 on June 30.

Title said school officials are looking to keep the balance in their reserve account as low as possible because, under Flatto's agreement with Clark, they may not be able to use it.

Tetreau, though, said bond rating agencies looked at town finances as a whole and that the Board of Education didn't "operate as an island."

"You're not the Board of Education for some other town," Tetreau said. "In this case, your financial management impacts the town...There are certain accounts - and this reserve account in particular - that impacts all of us. If you draw that down by $2 million, there may not be much left."

Tom Flynn, chairman of the Board of Finance, said the school board in prior years had funded medical insurance to the level recommended by its consultant, which resulted in a surplus. "Where the breakdown was wasn't in the fact the reserve account can be utilized, it was the dramatic way it was utilized in one step," he said. "You are automatically building yourselves a $2 million hole."

"I'm frustrated. The lack of communication is a problem," Flynn said.

Selectman James Walsh was surprised the Board of Finance wasn't notified the reserve account would be drained by $2 million in 2011-12.

Title said he'd be much more comfortable with leaving the reserve account in place if he knew it "couldn't be scooped up by the town." He said some of the money in the reserve account came from Board of Education employees.

Title, asked if Flatto's side agreement with Clark pertained to him as well, said he'd like a new agreement drawn up. "I'd like an opportunity to revisit that. The way it's set up right now, given the way it's funded, there are certain provisions that should be revisited," he said.

Walsh said a new side agreement should be brought to the Board of Selectmen and Board of Finance for review.

"I think that's an excellent idea," Flynn said.

But the medical insurance accounts aren't the only ones in the internal service fund, and Mary Carroll-Mirylees, director of the town's Human Resources Department, spoke of the dramatic impact of workers' compensation claims on the "risk management" account.

That account had a cash balance of $715,144 on July 1 but was projected to have a cash deficit of $46,855 on June 30. The deficit on an accrual - or 10-year runout - basis swells to $8.4 million.

The projected June 30 deficit in the town's medical insurance account grows to $1.7 million on an accrual basis, while the Board of Education's surplus in its medical insurance account falls to $2 million on an accrual basis.

The three accounts, viewed as a whole, are projected to have a cash balance of $3.3 million on June 30 - and a deficit of $7.9 million on an accrual basis.

Flatto questioned whether workers' compensation should be included in the internal service fund, saying some AAA-rated communities don't identify it there. He noted that the internal service fund would have a surplus on an accrual basis if that were done and that bond rating agencies didn't care if workers' compensation were in that fund.

"We're artificially causing the picture to be worse because we put workers' compensation in here," Flatto said. "I just feel like we're hurting ourselves for no reason."

But Flynn said taking workers' compensation out of the internal service fund so it wouldn't be viewed on an accrual basis didn't address the problem and didn't change anything beyond disclosure. Flynn said he wanted to hear recommendations from the town's auditors and the Board of Finance's Audit Subcommittee. "There is a preferred method of accounting versus what is allowable," he said.


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