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State won't let county borrow money for ambulance, rescue squad truck

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Cannon County has been denied it's request to issue capital outlay notes for the purpose of purchasing an ambulance and paying off a loan obtained by the Cannon County Rescue Squad for a truck.

The Tennessee Comptroller of the Treasury informed the county of the denial of permission to borrow money for those expenditures in a letter sent to local officials on Wednesday (Jan. 31).

At its January meeting, the Cannon County Board of Commissioners voted to approve issuing the two notes. However, the county needed the approval of the Comptroller's Office before doing so.

The ambulance note would have been for up to $120,000, while the capital outlay for paying off the rescue squad truck note was for $75,000.

Both were denied in part because the state has determined the county does not have what it considers to be adequate reserves in both the General or Debt Service funds. The Comptroller's Office is also questioning whether it is legal for the county to borrow money to pay the note for the truck since it has already been purchased.

The county commission depleted its General Fund reserves by over $1 million from the end of the 2009 fiscal year to the close of the 2016 fiscal year.

The state wants the county to maintain a General Fund reserve of 25 percent of its total yearly expenditures, which during the current fiscal year is projected to be close to $5.2 million.

In addition, the state wants the county to maintain a fund balance of 50 percent in Debt Service.

A year ago (Feb. 2, 2017) the county commission established a fiscal management plan (Resolution 2017-2) to "avoid future tax increases and to restore an adequate cash reserve on at least one million dollars." The resolution calls for that amount to be reached in five years, or by FY 2021.

In denying the two capital outlay notes, the Comptroller's Office is indicating the county commission has not made enough progress toward the goal.

The state also wants the county to stop borrowing funds from Debt Service to pay General Fund expenses during times when the General Fund is low.

Cannon County's current property tax rate is $2.89 on each $100 of taxable property. To reach a General Fund reserve of $1 million by 2021 the county will either have to raise the property tax rate by a dollar, cut $1 million in expenditures over the next three years, or do a combination of both.

Following are portions of the two letters sent to local officials from Sandra Thompson, Director of State and Local Finance, of the Comptroller's Office:

AMBULANCE SERVICE CAPITAL OUTLAY NOTES:

"This office received a request from Cannon County (the "County") on January 23, 2018, for approval to issue three-year capital outlay notes in an amount not to exceed $120,000 to be known as the "Ambulance Service Capital Outlay Notes, Series 2018" (the "Notes").

Included with the request was a copy of Resolution No. 2018-1 adopted on January 13, 2018, authorizing the issuance of the Notes to finance the acquisition of a new ambulance for the County (the "Project"). The proposed note form was included with the resolution.

Concerns Regarding Issuance of Capital Outlay Notes

As you are aware, on February 2, 2017, in response to Comptroller Wilson's letter to the County dated October 7, 2016, the County adopted three policies to address its financial management issues:

1. Budget Policy. This policy acknowledges that the County has recurring revenue limitations and that it needs to take steps to meet the requirements of its fund balance policy that may include reducing expenditures, increasing revenues or both. The budget policy contains a commitment from the County that it will eliminate any negative unassigned fund balance. As of the June 30, 2016, audited financial statements, the unassigned fund balance in the General Fund was ($154,313). This is an indication that restricted monies have been expended for purposes other than the restricted use.

2. Cash Management Policy. The goal of this policy is to establish optimal cash balances to allow for the efficient operation of each of the County's funds and to eliminate the use of Tax and Revenue Anticipation Notes (TRANs) for operations. The policy requires monthly cash flow statements be prepared that present actual and projected cash flow information for the entire fiscal year. Projected amounts are revised each month as actual amounts become available. The December year-to-date cash flow statement for the General Fund indicates that the projected year-end cash balance will be $222,151. This represents only two weeks of the County's spending. Budgeted total expenditures for the General Fund fiscal year 2018 are $5,170,587.

3. Fund Balance Policy. This policy's stated goal is similar to the Cash Management Policy in that it speaks to eliminating the issuance of TRANs to provide for cash flow needs. To achieve this goal in five years, the County established a target for the fund balance of the General Fund to equal at least 25% of annual expenditures. Based upon FY2018 budgeted expenditures, the target fund balance should be approximately $1.3 million. By the end of fiscal year 2018, the County should have 40% of the $1.3 million target fund balance (approximately $520,000) to meet its stated goal to achieve that target by the end of fiscal year 2021. The County's other operating funds also have fund balance targeted at 25% of annual planned spending, except for its debt service funds which will be 50%. The County's Ambulance Service Fund and Solid Waste Fund (two funds which currently rely on funding from the issuance of TRANs every year) are projected to have fund balances of $136,104 and $18,893, respectively, by the end of FY2018. Those balances are 13.6% and 3.7% of annual budgeted expenditures.

Considering the County has not met its stated financial goals as described above, we believe it is in the County's best interest not to issue additional debt at this time.

The Commission should continue to focus its efforts on controlling the County's spending and improving its overall financial condition in order to meet the stated objectives of its policies adopted by the Commission last year."

EQUIPMENT ACQUISITION CAPITAL OUTLAY NOTES

"This office received a request from Cannon County (the "County") on January 23, 2018, for approval to issue three-year capital outlay notes in an amount not to exceed $75,000 to be known as the "Equipment Acquisition Capital Outlay Notes, Series 2018" (the ''Notes").

Included with the request was a copy of Resolution No. 2018-2 adopted on January 13, 2018, authorizing the issuance of the Notes to finance the acquisition of a truck for the Rescue Squad of the County (the "Project"). The proposed note form was included with the resolution. The proceeds from the notes will be used by the County to repay the outstanding balance of a loan obligation of another entity, the Cannon County Rescue Squad (the "Rescue Squad").

Concerns Regarding Issuance of Capital Outlay Notes

The County intends to use borrowed funds to pay off a USDA loan executed by the Rescue Squad for the purchase of a truck used by the Rescue Squad. Counties are authorized to issue capital outlay notes pursuant to Tennessee Code Annotated Title 9 Chapter 21 for public works projects as defined in TCA § 9-21-105(21 ).

County officials should seek the opinion of its attorney as to the legality of the proposed debt issue. Until the legal authority to issue the capital outlay notes is determined, we are unable to consider your request.

Before submitting future requests to our office for approval to issue debt, County officials should ensure it can demonstrate that it has taken steps to control its cash flows and improve its overall financial condition in compliance with its policies adopted on February 2, 2017."

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