April 27, 2005

New Castle County is on a "collision course" with financial disaster if immediate steps are not taken to fundamentally reverse the direction set during the Gordon administration, according to an outside consultant the Coons administration hired to confirm its initial reading of the situation.

"Things are okay now, but the trajectory the county is on needs urgent attention," Howard Brownstein, a principal in Nachman Hays Brownstein Inc., a Philadelphia-based financial turnaround and crisis management firm, told County Council's finance committee.

He referred specifically to a widening gap between revenue and spending which, if not corrected, will result in a cumulative shortfall of $304.8 million by fiscal year 2011. That does not account for inflation between now and then. The total is nearly half again the proposed $214.5 million fiscal 2006 budget now pending before Council.

If the present trend is allowed to continue, for every dollar of increased expense, the county will take in 73 of general fund revenue. The gap is more startling in the sewer fund, where each dollar would be matched by only 16, he said.

David Singleton, the county's chief administrative officer, endorsed Brownstein's report. "Some of the next steps have already been taken ... [but] clearly more has to be done," he said. "We're committed to keeping up with this."

Brownstein said that County Executive Christopher Coons's proposed budget for next year, which includes a 28% increase in sewer fees while using some of the county's accumulated reserves to maintain the current tax rate -- 45.5 for each $100 of assessed property value in unincorporated areas -- is on the right track, but is not sufficient to do the job.

The proposed sewer rate increase, for instance, "begins to adjust the problem, but it's not a permanent fix," Brownstein said.

Possible scenarios could include "phased multi-year [sewer] rate and [property] tax increases;" and curtailing growth in the county workforce by a hiring freeze, elimination of positions and, possibly, offering a combination early-retirement and resignation buy-out incentive.

He said those ideas "did not consider political factors" and should be regarded as guides for what he referred to as "difficult [policy] decisions that have to be addressed now."

"We don't recommend that you do any of these [specific] things," he said. "All we can tell you is that [something] has to be done now."

"The longer you wait to handle it, the harder it will be. ... It's a lot easier and less costly to do it sooner rather than later," he added.

The study leading to the report, which Brownstein's presentation to the Council committee on Apr. 26 made public, was conducted before the budget proposal was completed. The report backs up many of the things Coons has been saying since he took office in January and confirms some previously reported findings concerning the condition of county finances while County Executive Thomas Gordon was in office.

It concludes, for instance, that the $230 million reported as a surplus at the end of fiscal 2004 last June 30 "was not [a] true 'surplus' in [the] ordinary meaning of the word."  Even if viewed as 'reserves' rather than as a 'surplus', the actual amount that was available was $29 million -- $10 million in the general fund and $19 million in the sewer fund. The balance was either in statutory 'rainy day' reserve accounts or earmarked for various specific purposes.

Brownstein said his firm's assignment was not to review history. "Surpluses at the end of [fiscal] 2004 are irrelevant today. The immediate [need is] to eliminate the [projected] shortfall," he said.

However, at several points in the report and during its presentation there were implicit criticisms of the Gordon administration. Tax and sewer rates "were frozen during [the] prior administration, [but] obviously it didn't take steps to freeze expenditures," Brownstein said.

The report cited, for instance, a 20% increase in the number of county employees since county government was restructured in the late 1990s, along with wage and salary increases, as key causes of the "disconnect" between revenue and spending.

It was specifically critical of even larger growth -- 25% -- in the Department of Special Services, which it cited as having a significant impact on the gap in the sewer fund. Special Services is the county's public works unit, with responsibilities for sewer service. The report calls for a "top-down job-by-job review of all positions" in the department and a review of its "managerial structure."

Coons recently fired Joseph Freebery, brother of former chief administrative officer Sherry Freebery, who was general manager of that department.

Also critically cited were some past practices reflecting on internal financial controls. The study found a "lack of third-party oversight [which] allowed for [the] possibility of collusion" when a county employee requested a check to pay a bill or make a reimbursement. Also, it found that some workers compensation claims were often "handled outside of established processes" and some indication of there having been duplicate claims processed as a result of limited oversight.

"When claims receive too little scrutiny, future abuse is encouraged," Brownstein said. He added that he was not alleging dishonesty or illegal activity, but noted that "large amounts of money [have been] spent and not receiving any audit."

Singleton said policy has been changed to better control bill paying and the issuance of checks.

In contrast, the report said that the Coons administration "is exercising proper care managing the stewardship of public funds."

Brownstein added that, while conducting the study, his firm found county employees it interviewed to be more cooperative and candid than has been its more common experience during studies of other government and corporate organizations. "When you deal with {New Castle] County employees, you'll get an honest answer even when it might not reflect well on their department," he said.

2005. All rights reserved.

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