Planning for the Inevitable

Due Diligence Eases Financial Burden as Harvey Strikes

by Julie Anderson, Editor

Coastal counties are known for both their beauty and bounty, and Orange County, bordered by the Sabine River, Sabine Lake and Neches River, is no different. As a bonus, the area’s navigable waterways have lured petrochemical companies, manufacturers and shipbuilders, making Orange County a business portal into the Lone Star State.

However, when it comes to a coastal location, the glowing side of the proverbial coin is matched by a dimmer side, one that warns of the dangers of wind and water, ever-present possibilities that can now be summed up in one word: Harvey.

Not ‘If’ but ‘When’

Orange County Judge Stephen Carlton and Orange County Commissioner Barry Burton took office on Jan. 1, 2015. As part of their new officials’ training, Carlton and Burton learned that counties should keep a “rainy day fund” for emergencies, and the amount of the fund should equal 25 percent of the county’s operating budget.

“As a coastal county, we knew that was a very important number for us, and it was something we needed to work toward sooner than later,” Burton shared. “That was one of our first goals, to get that safety net built into the county finances.”

Members of Commissioners Court were informed by the county auditor that they had met this financial goal in July 2017, less than three years after setting it, and none too soon. The “if” became “when” on Aug. 25, 2017, when Hurricane Harvey made landfall just up the coast from Orange County.

Harvey devastated the area. Thousands of residents were evacuated from their homes by high-profile vehicles, boats and helicopters. There were more than 28,000 FEMA registrations with approximately 26,000 out of 40,000 homes receiving some level of damage. Businesses were closed for days, weeks or permanently. Orange County residents were approved for $100 million from FEMA and an additional $242 million from the U.S. Small Business Administration, as of press time.

The courthouse, jail, and other county buildings received various wind, rain or flood damage. The courthouse was closed for two months. Some area schools received significant damage with entire campuses closed for weeks. The debris from gutted homes and businesses was everywhere. When all was said and done, about 650,000 cubic yards of debris was collected by county, city, and state contractors in Orange County for disposal. Sadly, 11 fatalities occurred during the storm with four of those ruled storm-related and one determination still pending further toxicology testing.

Orange County officials were left to wonder exactly how much rain fell in their area after their rain gauge was disabled due to a power outage – but not before filling up to 60 inches. To put this in perspective, the National Weather Service confirmed in September 2017 that a record 64.58 inches of rain fell in the neighboring city of Nederland near Beaumont during the storm’s five-day onslaught. The city’s record rainfall is the heaviest ever logged in the United States during a tropical storm, breaking Hawaii’s 1950 record of 52 inches. So, suffice it to say, Orange County – Nederland’s neighbor – was fully saturated.

Recovery and resolve to rebuild were on the forefront of everyone’s mind, and the Orange County Commissioners Court was also tasked with the finances.

“You have to have the money upfront to pay these recovery expenses, and then you receive reimbursements,” Carlton emphasized. Reimbursement rates fluctuate from 75 percent to 90 percent; on some occasions another entity will take care of the remaining 10 percent. Regardless, the county must make the initial outlay.

“We have been able to use our own money and pull from that fund balance and keep our cash flow positive,” Carlton confirmed.

Had the money not been available, Orange County would be borrowing money to assist with the recovery, Burton explained, and while reimbursements would apply, the county would have to pay interest on the borrowed funds.

“We’re saving the taxpayers money by not having to issue debt,” Burton specified. However, had Harvey struck three years ago, the story would be quite different.

Set a Concrete Goal

Orange County’s budget fluctuates between $46 million and $50 million, reported Carlton. This means the magic number – an amount equal to 25 percent of the operating budget – is about $12 million. Officials refer to this as an “ending fund balance,” often synonymous with the terms rainy day fund or contingency fund.

The ending fund balance following fiscal year 2014-15 was projected to be $392,000, Burton noted. The previous administration had taken the projected ending fund balance from $6.3 million in fiscal year 2011-2012 down to negative $3 million for fiscal year 2013-2014. While the previous Court had taken measures to get the fund balance back into the black for fiscal year 2014-2015, Carlton and Burton felt the serious nature of a 25 percent fund balance required a more aggressive approach and set a goal to raise that amount to $12 million within four years. The county hit their mark with the 2017-18 budget.

• FY14-15 – $392,000
• FY15-16 – $6.5 million
• FY16-17 – $7.8 million
• FY17-18 – $12 million (budgeted for Hurricane Harvey recovery)

This first step – setting a specific goal – may seem simplistic and obvious, but it is absolutely necessary for a successful outcome, Burton maintained.

“Too often, we state general intentions. It’s very easy to just say, ‘We want to save money,’ ” Carlton elaborated. “However, the goal must be concrete. Ours was 25 percent, or $12 million.”

The county not only set the percent goal and the monetary goal, but officials set a timeline: four years. Thankfully, the goal was met in three, just in time for Harvey.

Examine Expenditures

Once the goal is in place, a plan must be developed, Burton detailed. In Orange County, this started with the expenditures column.

The easiest thing for a county to control is how it spends its money, Carlton stated. However, gaining a full understanding of every dollar spent can be time consuming and tedious. In Orange County, this process involved a line-by-line inspection of the books alongside the county auditor.

This endeavor may not be popular, Burton cautioned, and it’s important to frame the initial conversation. The point is not to find fault, but rather to take a fresh approach in the interest of due diligence and meeting a specific goal – in this case, a $12 million emergency fund.

The County Judge and county auditor began a thorough examination of expenditure records, which yielded surprising results that allowed the county to generate immediate cost savings. For example, research revealed that the county was insuring millions of dollars of property that the county had not owned in years. In addition, the county was paying insurance premiums on some county retirees who had already passed away. In another instance, the county was paying insurance for an incarcerated individual.

“You cannot make assumptions,” Burton emphasized. “Things will never change without a thorough examination.” With that said, the process can be done “without being a destructive force.” Throughout the examination of expenditures, day-to-day county business carried on as usual.

Don’t Be Afraid to Make Difficult Decisions

During the process, the county received $800,000 from the BP gulf oil spill settlement in 2015, which helped. However, in early 2017, the county was forced to pay a $3.2 million wrongful death judgment for a jail inmate death that occurred in 2011. After the expenditures analysis resulted in cost savings, the county still needed to take measures to reach the $12 million goal. To achieve this, the decision was made to reduce capital outlay expenses and talk with department heads to trim in other areas.

For example, in previous years, the county would buy equipment at the beginning of the year. A change was made to purchase equipment at the end of the year to ensure the equipment was still needed and that the funds were available to spend while also ensuring the ending fund balance grew over the years.

When it came to budget requests, i.e., three new employees, Carlton and Burton would ask specific questions such as, “Can you get by with what you have now for this year and maybe one new employee next year instead of three?”

“You have to ask if the request is necessary to provide a service to the taxpayers,” Burton declared. “In many counties you see where Commissioners Court will ask for a ‘wish list’ from each department when formulating a budget. We are not in the business of granting wishes. We are in the business of providing resources to departments to do the jobs they need to do for the public.”

Burton and Carlton encouraged those in the courthouse to communicate with Commissioners Court if funds ran short. Orange County’s fiscal year runs from October to September.

“If you get into July and you need money, then come talk to us,” officials shared with those whose full requests were not granted. “If the request is valid, then we will move money.”

The Commissioners Court also took a hard look at benefits such as health insurance premiums, vacation and retirement eligibility. Some adjustments were made to reduce some benefits while also increasing pay rates. The goal was to bring Orange County more in line with surrounding counties and cities.

“It takes a long time to get into the weeds of it,” Carlton observed. “However, a county cannot just run on automatic.

“Our goal was not to stop county operations,” the Judge continued. “Rather, it was to be more effective and efficient, and be prepared in the case of emergencies.”

“Counties need to look at where they are on their financial standing,” Burton echoed, “and make sure their fund balance is there to address any unforeseen disasters before they come up.”

Growing an emergency fund – or ending fund balance – from $392,000 to $12 million was no easy task, Carlton and Burton confirmed, but considering Harvey’s devastation, the undertaking was well worth the effort.