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Monday, February 10, 2014

Good Management Keeps Troy Strong

Troy's budget season is fast approaching, which means that like Canadian Geese returning from southern climes, Troy's Tea Party will soon return to honk at City Council meetings. We expect them to start shrieking about Troy's Unassigned Fund Balance and how poor city policies are destroying Troy.

So before the disinformation campaign begins, let's review Troy's bond rating, it's relationship to the Troy's unassigned fund balance, and how management policies can effect Troy's bond rating and economic prospects.

What is a Bond Rating?

At the February 03, 2014, City Council Study Session, Bobby Bendzinski of Bendzinski & Co. gave a presentation about Troy's bond rating. Troy was awarded a AAA bond rating from three independent rating agencies. (Fitch currently rates Troy as AA+.) Essentially, a bond rating determines how safe a bond issuer is for investing. The higher the bond rating, the safer the investment, because it helps investors know about your ability to pay and how well your city can handle any emergencies that may arise. Mr. Bendzinski noted that Troy currently has a higher bond rating than the United States of America, making Troy the “best of the best,” in the company of the only other Michigan cities to possess a AAA bond rating, Bloomfield Hills and Birmingham.

What about Troy's unassigned fund balance?

In a memo dated August 26, 2013, Troy City Manager Brian Kischnick explained that a fund balance is, by definition, “the difference between the entity’s assets and liabilities.” From a financial standpoint, a healthy fund balance is a “good indication of financial strength.”

In the same memo, Mr. Kischnick explained that unassigned Fund Balance is approximately $23,454,866, making the unassigned Fund Balance 43.5% of the total budget. (The Fund Balance is “unassigned” because it's money not yet been assigned to important projects, like alleviating debt or investing in infrastructure.)

Troy has a sizable unassigned Fund Balance because there have been a reduction in General Fund Expenditures. The reduction in those expenditures have come primarily from “employee concessions, layoffs and early retirements.” In other words, Troy has a large savings account because we have lost a great deal of our workforce. We've lost police officers, entire departments, and lots of other employees.

How do management policies affect Troy's AAA bond rating?

So when Troy's management adopted a policy of cutting staff and departments to the bone, it resulted in a sizable unassigned fund balance. And as you can probably guess, a healthy fund balance is one important factor in obtaining an excellent bond rating. Other major factors in ensuring an excellent bond rate can be summed up in one word: Flexibility. The more flexiblity in management polices, the higher the bond rate. Other policies that contribute to the economic health of Troy include the three-year budget plan, maintaining a healthy fund balance, carefully investing a percentage of the unassigned fund balance, and using millages to support city assets.

So to summarize Mr. Bendzinski's advice, he recommended several policies to keep Troy strong. First, keep the unassigned fund balance at 20% of the total budget, miminum. Keeping it closer to 30% would be ideal. Next, carefully invest a percentage of the unassigned fund balance in projects that bring revenue into the general fund. Finally, ensure the library continues to be funded through it's own millage. According to Mr. Bendzinski, if Troy were to end the library millage, it would not only hurt Troy's bond rating, it would be the equivalent to “not charging for water and would be a very bad thing.”

Good management practices have helped Troy maintain a AAA bond rating. Remember that when Troy's Tea Party appears before council and starts making unsubstantiated accusations.

Cross posted at Troy Patch.

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