Small Towns and Combined Municipal Positions – A Worthy Risk?

While cities and towns have had problems finding qualified individuals to guide their operations for the past decade, smaller towns have had an even greater disadvantage. Many are too remote, or do not have the ability to pay for experienced professionals to run their administrative functions, such as the duties performed by the administrator, town accountant and the treasurer/collector.

Many of these roles were traditionally performed by residents who took the posts as part of their civic duty, or by professional “circuit riders” that took the same part time position in several towns. Both of these options are waning in the 21st century, leaving small towns with far fewer options.

In response to this new reality, some towns are looking to single individuals to not just oversee, but to actually perform the tasks that historically have been kept separate. This is allowable through Section 20 of the conflict of interest law; G.L. c. 268A, which exempts employees of towns with a population of less than 3,500 from the prohibition of holding one municipal position, as long as the board of selectmen formally approve the additional appointments.

 While this option is legal, it is not without risk. Allowing a single individual to manage all sides of a town’s financial process compromises internal controls, allowing for the possibility of fiscal mismanagement or fraud.  This risk is compounded in that many small communities are not audited regularly, allowing these actions to go undetected for years. 

 The most infamous case of fraud due to a lack of internal controls is that of Rita Crundwell, who as the appointed comptroller AND treasurer of Dixon, Illinois, embezzled 53.7 million dollars over 22 years as part of the largest municipal fraud in American history.

Citizens entrust their selectmen and administrators to efficiently and effectively manage their town government.   Placing too much responsibility with one individual, no matter how capable or honest they appear, is a risky proposition. 

 

What's in a Name? The Role of the Finance Director

Towns far and wide are structured many different ways, but the core operations are all based on a tried and true history that dates back to the founding of the Commonwealth.  There is one position that we find time after time to be difficult and sometimes controversial to define, and that is the role of the Finance Director.

The Finance Director in many Town's is defined as the Chief Financial Office (CFO) and is responsible for the general oversight of the financial departments such Accounting, Treasurer, Collector, Assessing, and sometimes also HR or Payroll.  The position is generally held by either the Town Accountant, or the Treasurer/Collector, and in some places, is a free standing management position, a step just below the Town Manager/Administrator.  The position is generally responsible for the creation of the annual budget, as well as ensuring the outcome of that budget throughout the year.

So what's the problem with creating the Finance Director position, or hiring someone new into the position?  I think it really boils down to a few factors including the obvious such as skill set, and experience, but also a few less obvious traits such as personality and management ability.  In the municipal finance market in Massachusetts, there is already a very apparent lack of qualified candidates to perform the more basic roles that are necessary for the operation of the Town - accounting, treasurer, assessments, etc.  Add in the fact that you need to recruit and hire someone who can do these primary functions, on whatever software or platform your Town has, and you have limited your hiring pool generally by 60% or more.  To then expect that you will take the remaining candidates, and find someone who possesses the skills and personality traits that make for a successful Finance Director, is a tall order.

In Fiscal 2014-2015, based solely on a review of Selectmen meeting minutes and articles in the local papers around the Commonwealth, there were 31 Finance Directors hired as either part of the Town Accountant or Treasurer/Collector position.  Of those 31 hirings, 18 of them lasted a year or less, citing reasons for the resignation or dismissal as being for either personality conflicts with management or the staff, or for technical and experience reasons that caused the Town financial difficulty, unrest, or complex budgetary situations that could not be addressed.  A 58% washout rate is not a good start given the time, money, and transition time necessary to onboard any municipal finance professional.

Of the 13 or so remaining hirings from the previous example, 6 Finance Directors managed to convince their communities that the reason the financial functions were not producing at capacity was because the financial system or platform that was installed was poor, lacking functionality, or was setup incorrectly.  In this day and age, regardless of the vendor you are switching from, or switching to, the average cost of a full systems conversion package will run you between $70,000 to $120,000.  As if the money that you are spending to hire a "qualified" Finance Director isn't enough, if you are approached for a system conversion warrant article, that should be a red flag that there is potentially a problem in the technical skill set.  Any Finance Director who is worth their value will take reports and data anyway they can get it, and turn it around into a functioning financial analysis and budget document.  There are software platforms in the market that make the process easier, but what is your cost versus return on "easier", especially when you factor in the problems and disruption that are inevitable with a software conversion.

The remaining 6 people, or a mere 22% of the recruitments, took the job, hit the ground running, and were able to succeed through either a combination of experience and personality, or good old fashion hard work, without massive overhauls to the Town's departmental structure, workflows, or software platform.  There are so many variables that define the turnaround time, and the successfulness and timeliness of the outcomes, that sometimes a washout in one community is a perfect fit for a neighboring community, due purely to a slight change in those variables.  In an employment market that is largely dominated by recycling the same personnel around the Commonwealth, Town administration needs to be aware of what attributes make a great Finance Director, not just an above average accountant or treasurer.

One last thought on the matter - do you need an in house Finance Director?  My opinion is no, you do not.  If you have done a great job hiring at the department head level, and the financial departments are strong, and independent, then the Finance Director position in its most pure form becomes about management, coordination, and evaluation of the financial function of the Town, and about data analysis, collaboration, and production of the budget on an annual basis.  These fundamental responsibilities, especially when executed by a person who knows the intimate details of the daily departmental processing, can ensure that the Town's core financial function is well managed, productive, and stable in order to act as the foundation for all other Town operations. 

Baystate Municipal Accounting Group, as well as several other firms in the market, have successfully fulfilled the Finance Director role in various forms over the past several years. If for nothing other than simplifying the hiring process, we would love to discuss various delivery options for this service with you.

Enterprise Indirect Cost Allocations

There has been a lot of talk of the past few years on different methods of calculating indirect costs for Enterprise funds, to recover costs being budgeted in the General Fund.  The DOR has also been cracking down on communities who have long used the vague guidelines to bolster the General Fund on the backs of Enterprise receipts.

There are a number of different categories of costs, as well as calculation methods that can be used.  We are fans of a fairly straight forward method that looks at three categories of costs:

 

1) Employee benefits costs - The cost to the General Fund of retirement, town contributed employee benefits, and federal medicare cost, for each employee who is employed within an Enterprise Fund, or if working between a GF department and Enterprise Fund, has at least .25 FTE in said Enterprise Fund.

2) Direct Town Operational Costs - The cost to the General Fund for insurance, fuel, infrastructure, software, technology, and maintenance for assets related to the operation of an Enterprise Fund.  This category also included Debt Service, if not already being raised in the Enterprise Fund. In many cases the biggest contributing factors to these costs in the General Fund will be fuel for vehicles related to Enterprise Fund Operations, and coverage on specialty buildings in the Property/Liability policy Statement of Values.  Water and Wastewater Treatment facilities are complex operations, and a lot of relief to the General Fund can be recovered by assigning these costs back the Enterprise Funds.

3) Town Administrative Costs - The cost to the General Fund for staff to provide services for the operation of the Enterprise Fund.  This is by far the most controversial of the categories due to the wide latitude and fuzzy boundaries in calculating the quantity of time, and therefore cost, associated with the Enterprise Fund.  The best example is the chargeback of the Town Manager or Administrator's salary to the Enterprise Fund.  Many Town's will make the argument that this is an acceptable practice as the Town Manager is responsible for the oversight and management of all departments.  However on a day to day basis, the oversight responsibility generally falls more on the Public Works director or similar position, which begs the question of how to calculate the time the Manager spends on the Enterprise.

Once you have decided on what costs to recover, the next question is how to calculate the amount to recover. In our opinion, whenever you can use an actual amount tied to a definitive source document, that should be the path to take.  However, when you once again get to item #3,  there are several ways to slice the pie, and very few are considered "better", however several are not as bad.

If you are receiving push back from your Enterprise Funds on the amount they should be budgeting for these cost recovery items, there are several firms in the market that specialize in formulating policies, procedures, and calculation methods.  BMAG has completed a number of these assessments, and would be happy to discuss your project with you.