February 10, 2014 Mike: This is in follow-up to our recent e-mail exchange regarding one of your articles, YOUR

MONEY, NOT AT WORK: Boone County slush Fund hits $47 million, which contains several errors and mischaracterizations. I was hoping for an opportunity to discuss these with you in person as this would allow for back-andforth questions and discussion. Since it appears that is not possible, I am providing the following written comments which I hope will be helpful. After youve read this, perhaps we could visit by phone or meet briefly. You have my e-mail and my phone number. Lets begin with the headline which references a county slush fund, a reference that is (intentionally?) erroneous and misleading. What, exactly, is a slush fund? How would the term slush fund be understood by the average reader? Is it a truthful statement to say that the County has such a fund and that it has $47 million in it? Websters dictionary defines slush fund as an amount of money that is kept secretly for illegal or dishonest purposes; a fund for bribing public officials or carrying on corruptive propaganda; an unregulated fund often used for illicit purposes. The Oxford dictionary provides a similar definition: a reserve of money used for illicit purposes, especially political bribery. Investopedia.com defines it as money earmarked for a loosely defined, but legitimate, purpose that is instead surreptitiously used for an illegitimate purpose (i.e., using charitable donations to pay for personal expenses). Businessdictionary.com defines slush fund as a secret reserve of cash held in an organization, generally by the top management, for which the executives administering it have informal discretion and are not made fully accountable over its use (such as in payment of bribes). The definitions vary slightly, but the basic meaning is the same: slush funds are hidden or concealed, outside the scope of public accountability and scrutiny, and used for illegal and illegitimate purposes. To say that the County has $47 million in slush funds is grossly misleading and simply not true. The article incorrectly uses the terms fund balance and cash interchangeably, as if the two were the same thing. They are not the same thing; in fact, they are quite different. Fund balance is the difference between the assets and liabilities of a specific fund and a sizable portion of fund balance consists of receivable balances (sales tax receivable, property tax receivable, federal and state grant reimbursement receivables, etc) This is one of the reasons County officials adopted a policy to require a minimum fund balance for the major operating funds so as to ensure adequate cash flow. The article incorrectly states that having a net fund balance in the General Fund in excess of the minimum fund balance violates County policy. This is a false statement and very misleading. The Countys Fiscal and Budget Policies are presented in the budget document, within the General Information tab section (page 74 of the proposed budget document you referenced in your article) and states:

Fund Balancemajor operating funds: In preparing and adopting the annual budget, the County will calculate and maintain a projected net fund balance equal to at least two months operating expenditures, which is approximately 17%. In the event that fund balance is projected to fall below the minimum amount, the County will develop a plan for restoring the minimum fund balance. [bold and italics added] As noted above, the Countys policy imposes a minimum fund balance requirement. The purpose of the policy is to ensure that the fund has at least the specified minimum fund balance. There is no violation of County policy if the fund balances exceeds the minimum and to make such a statement is false and misleading. A primary focal point of your article appears to be the significant increase in projected net fund balance at the end of FY 2014 as compared to the previous year, something which is specifically discussed on page 33 of the Budget Message. The table and discussion presented on page 33 illustrate that net fund balance is projected to decline in all governmental funds except the two new funds, Community Childrens Services Fund and the 911/OEM Fund. The discussion presented on page 33 provides the reader with an explanation of why the various net fund balances are expected to increase or decrease. But as to your focal point of the increase in overall net fund balances: two new voter-approved sales taxes became effective in 2013 (childrens services on April 1st and 911/OEM on October 1st ). As explained in the Budget Message, the Commission-appointed governing board for childrens services is gathering community input and developing funding policies reflective of evidence-based approaches with an emphasis on outcomes measurement. These efforts must be completed in order for an annual spending plan to be developed. Likewise, for 911/OEM, operations cannot be expanded until the new facility is constructed, at which time the annual operating budget will be increased as planned. The unspent monies that accumulate in the 911/OEM fund can only be used for 911/OEM purposes and will be available to cover some of the capital-related costs, thereby reducing the amount to be borrowed, which in turn will reduce future principle and interest costs. In the foregoing discussion, I have made several references to funds and I want to make sure that this concept is correctly understood. If I may, I would like to highlight the basic differences between fund accounting used by governments and the financial accounting model used by the private-sector. Understanding these differences is essential to understanding a governments financial budgeting and reporting activities. I have attached information from Governmental Accounting, Auditing, and Financial Reporting, an authoritative guide for governmental entities, which provides helpful information and I encourage you to read it. The primary focus for a governments budgeting and financial reporting is stewardship and accountability whereas for the private sector the primary focus is profitability and return on investment. As a result, governments use Fund Accounting: an accounting system emphasizing accountability rather than profitability whereby separate and distinct funds are

used to segregate and account for resources dedicated/restricted for specific purposes and/or subject to special restrictions and limitations. Although the annual budget for the countys numerous funds are presented together on a single two-page schedule with a grand total column (this is the schedule from which you lifted the amounts referenced in your article), it is inappropriate to treat the grand total as if it represents a single budget consisting of fungible resources. Rather, the reader should understand that each individual fund has a legally-adopted and legally-enforceable budget. It is impossible for the County to present each individual fund on this two-page schedule because the number of funds is too great; however, a Fund Statement is presented for each individual fund within the Fund Statement tab section of the budget document so that this information is available to the reader. Knowing this, the Countys two-page budget summary is better understood as a presentation of discrete individual budgets. While it may be helpful to compare the aggregate total budget of Boone County to that of another governmental entity for purposes of gaining a sense of comparative size and complexity of the two governments or to compare the aggregate total budget of the County between years to note trends and changes, it is a serious error to read, interpret, and report on the total budget in a way that implies or suggests that the aggregate resources are fungible and available for appropriation to any of the Countys various governmental purposes. This is simply not true. The resources within the Countys special revenue funds, debt service funds, internal service funds, and trust funds are restricted as to use; this is the very reason they are accounted for in a fund other than the General Fund. I make a point to emphasize this each year during my presentation of the budget to the Commission and in public hearings pertaining to the annual budget and this basic understanding runs throughout the Budget Message and other sections of the Budget document. Readers can learn more about the purpose and restrictions applicable to each fund by referencing the General Information tab section of the budget document, specifically the Overview and Description of Special Revenue and Other Funds. This section provides a listing of each individual fund, the purpose of the fund, applicable state statute, and the fund number for easy reference to the Fund Statement. Fund Statements are presented for each individual fund; these are located in the Fund Statement tab section of the budget document. As explained within the General Information tab section (the Description of the Accounting and Budgeting System), the Countys operations and activities fall into three broad categories: (1) governmental activities, (2) internal service activities, and (3) fiduciary activities. Governmental activities are accounted for within the General Fund, major special revenue funds, non-major special revenue funds, and debt service funds. Internal service activities (such as facilities maintenance, capital repair and replacement, self-insured health/dental, etc) are accounted for within Internal Service Funds, and fiduciary activities are accounted for within trust and agency funds. The two-page budget schedule, Budget Summary by Fund Type, presents information in accordance with these three broad categories:

Governmental Activities: Major funds are presented in their own column. All nonmajor funds are combined into a single column and then a grand total for all governmental funds combined is presented. As previously noted, individual Fund Statements are presented for each individual fund in the Fund Statement tab section. Internal Service Activities: the various funds internal service funds are combined into a single column. Individual Fund Statements are presented for each individual fund in the Fund Statement tab section. Fiduciary Activities: most of the Countys fiduciary activities (such as property tax collection and distribution) are excluded from the annual budget, because the monies dont belong to the County and consequently there are no resources to subject to an annual appropriation process. However, the County has been named as trustee for several trust funds (cemetery and educational trust funds) and these few funds are subject to an annual budgeting process and are therefore included in the Countys overall budget document. Individual Fund Statements are presented for each individual fund in the Fund Statement tab section.

The foregoing discussion is necessary background for an informed discussion of the Countys revenues, expenses, and net fund balances. Based on the information presented above, it should be clear that referencing the grand total net fund balance has limited usefulness and actually can be misleading in that it leads the reader to an erroneous understanding that the net fund balance amounts are fungible and can be re-directed to other purposes. Rather, one must unpack this grand total into its individual fund components. So, for instance, of the projected grand total $47 M net fund balance at 12/31/2014 which you label as a slush fund: $72,000 belongs to trust funds; restricted as to use. This is not a slush fund. $3.6 M belongs to internal service funds of which more than $2 M is intended for facility-related maintenance and major repairs and the rest belongs to the funds that account for self-insured health, dental, and workers comp. These resources are restricted to these purposes. In order to demonstrate county officials stewardship in maintaining county facilities, the county systematically sets monies aside each year in order to provide resources in future years for significant capital repairs (roofs, HVAC, parking lot resurfacing, carpet replacement, etc). Therefore, net fund balance will increase in the years of accumulation and decline in years where planned expenditures occur. This is not a slush fund. $8.17 M belongs to the new 911/OEM Fund. As I point out in the Budget Message discussion of fund balances on page 33: The 911/Emergency Management Fund is a new fund, resulting from a voter approved permanent 3/8th cent sales tax. The tax

became effective October 1, 2013. As previously noted, the tax revenues will be used to construct a new facility and expand operations and the planning and design processes are underway. The net fund balance is expected to increase during this transitional period. Note: by using fund accounting, these resources are legally segregated and accounted for within a special revenue fund and cannot be used for purposes other than 911 and Emergency Management. As noted above, the operations cannot be expanded until the new facility is constructed; the resources that accumulate in the fund between now and then will be available to pay for capital-related costs, thereby reducing the amount of debt incurred. Going forward, the resources in this fund will be used to cover the annual operating budget of the expanded 911/OEM center, debt service (principle and interest) associated with the new facility, and on-going future equipment replacement. This is not a slush fund. $11.19 M belongs to the new Community Childrens Services Fund. Budget Message, page 4: The County Commission appointed the nine-member voluntary board, the Boone County Childrens Services Board (BCCSB) in April 2013, and the Board has been meeting regularly since then. The board is responsible for establishing by-laws, policies, and spending allocations. In addition to gathering community input, the BCCSB is developing funding polices reflective of evidence-based approaches with an emphasis on outcomes measurement. At the conclusion of the policy-setting process, the board BCCSB will establish appropriations for services. Therefore at this time the FY 2014 budget includes appropriations for professional and administrative support only and the employees to be part of the newly formed Community Services Department. Later in the Budget Message discussion of projected net fund balance at 12/31/14 (page 33), the reader is advised that the net fund balance is expected to increase during the policy development phase. Again, by using fund accounting, these resources are legally segregated and accounted for within a special revenue fund and cannot be used for purposes other than Community Childrens Services. Once the board completes its initial work, these resources will be appropriated by the board. This is not a slush fund. $6.7 M belongs to a myriad of special revenue funds where the use of the resources is restricted for specific allowable purposes. Individual Fund Statements are presented for each and every one of these funds and the General Information tab section of the Budget document includes a section, Overview and Description of Special Revenue and Other Funds, where the reader can educate him/herself as to the purpose of each fund and the fund number is provided to allow the reader to cross-reference to the Fund Statement. These special revenue funds are not slush funds. $.88 M belongs to the Law Enforcement Services Fund (Prop L Fund) and $5.6 M belongs to the Road and Bridge Fund, both of which are legally restricted funds. These two funds are not slush funds.

$10 M belongs to the General Fund. The General Fund provides funding for the general functions of the County including: public safety (Sheriff, Corrections, Prosecution, Court, Juvenile Court, Public Administrator, Medical Examiner); public health; and general government operations (Auditor, Commission, Recorder of Deeds, Collector of Revenue, County Clerk, Voter Registration and Election, Treasurer, Human Resources, Purchasing, County Counselor, Information Technology, property & casualty insurance, etc..). The General Fund is not a slush fund.

I hope the foregoing helps you understand my concerns regarding the errors and mischaracterizations included in your article. I would be more than happy to meet with you so that I can better understand your concerns. Sincerely, June Pitchford