Staff CLC- CVEC Cape Cod

Mr. Ronald Bergstrom
Speaker

All Delegates
Barnstable County Assembly of Delegates
Barnstable, MA

May 9, 2014

Re: Determination of Current Allocation of Barnstable County Financial Resources to Support the Operations of the Cape Light Compact and the Cape & Vineyard Electric Cooperative

Dear Speaker Bergstrom and Assembly Delegates,

Although I was unable to attend in person, I watched the video recording of the recent meeting on May 7, 2014 of the Barnstable County Assembly of Delegates with great interest.

As all know by now, Barnstable County has provided, and continues to provide, the Cape Light Compact and the Cape & Vineyard Electric Cooperative with very substantial resources to subsidize the cost of their operations.
Pursuant to the terms of Administrative Services Agreements with CLC and CVEC, respectively, and in accordance with the terms of the CLC Intergovernmental Agreement and the CLC Municipal Aggregation Plan, Barnstable County is the Administrative and Fiscal Agent to both CLC and CVEC. 

In this capacity, in addition to keeping the books and records for both entities, and, ostensibly, providing some degree of financial oversight and supervision over their activities (which the County Commissioners have manifestly neglected to do, in practice), Barnstable County provides the office space, phones, information technology and personnel to administer many of the administrative and financial functions of these quasi-public organizations.

As has become apparent in recent years, the financial cost to the County of all of these subsidies is substantial. 

Notwithstanding the growing awareness of the significant financial burden that these subsidies have imposed upon the County, the County Treasurer does not provide -- and has never provided -- the County Commissioners, the Assembly of Delegates or the General Public with any detailed cost accounting of these costs.  

In fact, to my knowledge, the County Treasurer has never even attempted to track these expenses, notwithstanding his responsibilities  as County Treasurer, as Fiscal Agent to both CLC and CVEC, as the Treasurer of CVEC to keep and maintain accurate accounts and to provide all of these constituents with coherent reports on the costs of their operations.

Over time, the County Treasurer and County Commissioners have fallen into the practice of drawing up an Annual Budget that completely ignores these substantial costs to the Barnstable County taxpayers.  The Assembly of Delegates, for its part, has approved these Budgets, in the form in which they are provided -- which is to say without having the slightest understanding of the size of the financial subsidies to the Cape Light Compact, CVEC, or other agencies, that are embedded within the Budget.

In my opinion, the Assembly is to be commended on its recent refusal on May 7th to approve the County Budget that was forwarded by the County Commissioners.  To do otherwise would be to approve the Budget in the face of the Delegates' growing collective awareness that they really have no idea how the money will actually be spent!

As Delegate McCutcheon eloquently asked -- and numerous other Delegates agreed -- how can the Assembly approve a 2 1/2% tax increase on residents and approve an overall budget when it essentially has no idea how much of the money will be used to subsidize the operations of two "public bodies" that insist that they are entirely independent of the County and over which the Assembly has no jurisdiction and can claim no legitimate interest?

As another Delegate noted, such blind approval of these unquantified and unknown subsidies is all the more inappropriate in the face of the repeated refusals of the Cape Light Compact and the Cape & Vineyard Electric Cooperative to provide the sort of routine financial transparency and public accountability that the Assembly and many members of the public sought for over three years, or to address the concerns of the Assembly and the public about myriad conflicts of interest.

As some Delegates already know, the County Treasurer made some alarming admissions to the County Commissioners in his discussion of the County's finances at the Commissioners' meeting on January 8, 2014 (see video record of the meeting here:  mailto:http://www.barnstablecounty.org/county-commissioner-videos/ ). 

Here are some excerpted comments that Mr. Zielinski offered to the Commissioners to explain the County's expenses:

Zielinski:  "The volume, especially on AP [accounts payable], is up because we’re paying more bills especially for two things.  Our two biggest, sort of, “customers,” in terms of invoices are the Cape Light Compact and the Energy Efficiency Program – by far, those are the two biggest."

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* * *

Flynn:  So when you include…..Somewhere in here are the……Where are the costs to actually provide the administrative services for the Compact?  And, say, for CVEC?  The financial costs?

 

Zielinski: We’re doing that with existing staff.  So they’re all covered with existing staff.  

Doherty: No

 

Zielinski: Yes.

 

Flynn: We’re talking about the personnel….they’re all blended into the personnel costs.

Zielinski: Yes.   Like Nancy Cushing, who is our payroll person, she does payroll for the Cape Light Compact, because those people are county employees.  And Kara Mahoney, who does our accounts payable, she cuts the check that I mentioned for all of the [CLC] Energy Efficiency vendors that we have.  So it’s built right in.

* * *

Doherty: Asks about time management systems to measure the time devoted to CLC

 

Zielinski:  As I say, one of the things that we have not done is do any sort of cost recovery.  So for example, say, like I said, the two biggest pieces of Accounts Payable, really by far, are the Energy Efficiency bills that we pay and the Septic Betterment.  Both of those are funded outside of the County’s coffers, basically. 

So say I wanted to charge back part of Kara’s time to the Septic Betterment program, I would look at the total number of invoices she works on over a period of time, pick whatever period you want, and see how many are Septic Betterment.  And let’s say it’s 10% -- 10% of her salary and fringes I would charge back.  That’s what we have to think about.  We’re not doing that now.

* * *

Clearly, County employees whose time and benefits are not reimbursed by the Cape Light Compact are devoting considerable time -- if not the majority of their time -- to the business of the Cape Light Compact and CVEC.

But there is an even bigger, more dangerous, financial burden that has been shifted to the County by the Cape Light Compact as a consequence of the huge growth in the payroll of the Cape Light Compact -- even for those employees the costs of whose salary and benefits are theoretically "reimbursed" to the County by the Cape Light Compact.

The County is already facing a crisis over the size of its unfunded liability for "Other Post Employment Benefits," or OPEB -- i.e. the cost of future retirement benefits for employees.  The County Treasurer and the County Commissioners acknowledge that the County has not set aside enough money to meet these future financial obligations and that the net present value of these future commitments -- the size of the unfunded liability -- is probably on the order of $60 million. 

In other words, that is the amount of money that the County needs to have set aside to pay for this future liability -- but did not. 

Instead, in a short-lived perpetuation of lenient accounting requirements for public bodies, the County continues to set aside "the bare minimum" expense to fund these future obligations.  In other words, the County expenses a minimal amount of money that is required to be set aside but which the Treasurer knows, and the County Commissioners know, to be woefully insufficient.

Here is an excerpt from the Treasurer's discussion -- and functional denial -- of this problem with the County Commissioners on January 8, 2014:

OPEB – Other Post Employment Benefits
(1 hr 15 minutes into the video record)

 

Flynn: Now I’d like to talk a bit about “Other Personnel Employee Benefits”.   What are we doing as a County to do with OPEB?

 

Zielinski: Well we do the bare minimum that we’re supposed to do as a county.

 

Corrected by Zielinski – “Other Post Employment Benefits”

 

Summary of remarks on OPEB – future costs of future health insurance benefits for retirees. 

Have to put aside money now to pay future health costs for retirees.  Pensions are accounted for.  These costs for future health benefits are an unfunded liability – no money has been put aside.

 

The total unfunded liability is about $60 million.  The Annual Retired Contribution (ARC) for the county to meet this future cost is about $4.5 million to $5 million. So if you wanted to fully fund your system for 20 years, you’d have to put aside $4.5 million every year for the next 20 years to fund it, assuming you earn the return of 7 7/8%.

 

[Bibler NOTE: This is a VERY aggressive return assumption since the U.S. Treasury 10 yr note yields about 2.60% and the US Treasury 30 yr bond yields less than 3.50%. !!!  The assumption of a 7 7/8% return on investment on funds set aside for OPEB has no bearing in reality -- which means that the true size of the unfunded liability, base upon a more reasonable assumption, is much greater than $60 million]

 

Flynn:  But you have to start somewhere.  In Falmouth, we set aside $10,000, just to get started.  [All laugh.  Ha ha ha].

The point about Cape Light Compact employees on the County payroll whose costs are theoretically "reimbursed" to the County is that only a portion of these costs are reimbursed. 

Since the County currently ignores the fact that it should set aside at least $4.5 million per year, every year, for the next 20 years to fund this liability (per Mr. Zielinski's overly optimistic assessment), the County is also ignoring this component of the expense for all of those Cape Light Compact employees. 

The County has a massive hole in its balance sheet -- a huge, unfunded liability that is, in fact, much greater than $60 million. 

What is worse is that this unfunded liability is growing exponentially with each year that the County continues to ignore it -- since the County Treasurer and County Commissioners, in drawing up their budget, routinely deny the existence of this financial necessity.

With respect to the raft of Cape Light Compact employees who are actually County employees, this means that the huge head count at CLC (not to mention all of the people in the County treasury and administration who do CLC's accounting and administration for free), are adding a huge amount of unpaid, but rapidly accumulating, unfunded OPEB that one day must eventually be paid.

You don't need to take my word for it.  By Mr. Zielinski's own admission, this size of this crushing, unfunded liability has already reached $60 million.

And, as I noted above, if you use a realistic discount rate to calculate the true size of the unfunded liability -- say, 4% or 5% or 6%, instead of 7 7/8% -- the calculated size of the unfunded liability is truly stupendous.

I am willing to bet, using Mr. Zielinski's low ball estimate of the actual annual cost of funding this OPEB liability of $4.5 million per yer, that at least $1 million per year of that cost is attributable to CLC and CVEC. 

This is in addition to all of the more direct subsidies that are provided by paying County employees to do the work of CLC and by providing office space, phones, computers, and various other forms of administrative support to CLC and CVEC, free of charge.

Please see below the list of Cape Light Compact staff (County employees all) and the lone CVEC staff member officially on the payroll (that I am aware of) that are currently listed on the Compact's website.  Note that CLC also still proudly displays the Barnstable County logo on its website, notwithstanding the fact that CLC officials continue to insist that CLC is completely independent of the County.

Last, but not least, I invite all of the Delegates to review the attached table which shows the amount of money (that we know of and can verify) that the Cape Light Compact has transferred to CVEC, or intends to transfer to CVEC, through FY2015.  

Not including the new loans that CVEC will be requesting from the Compact on May 21, 2014, but including the $100,000 in cash that CLC has on escrow at TD Bank to guarantee certain obligation of CVEC (since Fiscal 2008), this figure is $3,572,877. 

If CVEC requests, and receives, $300,000 in new loans from the Cape Light Compact on that date, as expected, the total amount of financial subsidies to CVEC from CLC will be $3,872,877. 

Additionally, as Ms. Downey, the Compact Administrator has admitted -- and which is readily, if indistinctly, apparent now from the CLC Fund Financials that have recently been provided by the Cape Light Compact in March of this year -- CLC has also paid an indeterminate amount of additional legal and development costs for CVEC, directly out of CLC's accounts.

All told, the financial support by the Cape Light Compact for CVEC is rapidly approaching $4 million.

My questions to every member of County government -- the County Commissioners and the Assembly Delegates alike -- are these:

--Why should Barnstable County continue to provide such lavish financial subsidies to the Cape Light Compact when the Compact has independent revenue of approximately $1 million per year from the mil adder that is imposed on CLC ratepayers.

--Why should the County subsidize the Cape Light Compact when doing so not only dissipates scarce County resources -- taxpayer revenue -- but also accelerates the process of further destroying the County's balance sheet by piling on the unfunded OPEB for all of the CLC employees?

--Why should the County provide such a hefty -- but unknown and unquantified -- stream of taxpayer subsidies to the Cape Light Compact if the Compact chooses to pour the money indiscriminately into the money losing operations of CVEC? 

--And why, indeed, should the Assembly of Delegates approve ANY budget that is proposed by the County Treasurer, and forwarded for approval by the County Commissioners, that is so absurdly lacking in specificity but which absolutely, positively, undeniably -- by the Treasurer's own admission -- includes massive, unquantified, unacknowledged financial subsidies for two organizations who are so happy to take your money -- the taxpayers' money -- but who are so adamant in refusing to explain to anyone what the hell they do with it?

I do hope that you have some success in convincing the County Treasurer and the County Commissioners to provide you with an accurate account of the County budget for FY2015, including the accurate cost allocations for these quasi-public bodies that are free riding on the County budget. 

As you know, I have taken exception in the past to the creative accounting methods employed by the County Treasurer as the Treasurer of CVEC -- which are completely inconsistent with the accounting methods employed by CVEC's own auditors, Sullivan & Rogers, but which Mr. Zielinski continues to employ nonetheless. 

Though I'm not a particular fan of Ronald Reagan, I urge you to heed the former President's advice in obtaining new figures from your Treasurer: "Trust -- but verify." 

If I were the Chair of the Finance Committee of the Assembly, I would ask Sullivan & Rogers to verify the accuracy of any cost allocations and/or projections of OPEB and other expenses that are offered for the Assembly's consideration.

Best of luck.

Sincerely,


Eric Bibler



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Staff

COMPACT ADMINISTRATOR:
Maggie Downey, Compact Administrator
(508) 375-6636
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Briana Kane, Senior Residential Program Coordinator
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