MINUTES OF THE METRO COUNCIL BUDGET COMMITTEE MEETING

Wednesday, March 11, 1998

Council Annex

Chair McCaig called the meeting to order at 3:45 PM.

Chair McCaig said Councilor Washington is in Washington, DC conducting business of the agency, and therefore excused from today’s meeting.

1.  CONSIDERATION OF MINUTES OF MARCH 4, 1998

2.  ORDINANCE NO. 98-724, FOR THE PURPOSE OF ADOPTING THE ANNUAL BUDGET FOR FISCAL YEAR 1998-99, MAKING APPROPRIATIONS, CREATING FUNDS, LEVYING AD VALOREM TAXES, AUTHORIZING INTERFUND LOANS, AND DECLARING AN EMERGENCY

Administrative Services Department Budget

Jennifer Sims, Director of Administrative Services, reviewed the Administrative Services Department budget. Ms. Sims’ comments were based on the department overview, copies of which were distributed to councilors. Also distributed were copies of two memoranda from John Houser, Senior Council Analyst, to Chair McCaig regarding “Questions/Issues Related to the Proposed Administrative Services Department Budget” and “Analysis and Recommendations Related to the Proposed FY 98-99 Budget for the Administrative Services and Human Resources Departments.” Copies of the aforementioned documents are included as part of the meeting record.

Councilor McFarland asked if the Administrative Services Department and the Human Resources Department are actually separate departments. Ms. Sims said they had been separate departments at one time, then were combined under Doug Butler, former Director of Administrative Services; and since Mr. Butler’s departure, have been separated again.

Councilor McFarland asked why Metro’s health costs have increased. Ms. Sims said when the contract for employee benefits was put out to bid, bidders responded with increased dollar amounts over the previous contract. She said costs are usually based on a combination of market factors and Metro’s claim history. Metro can work with the vendors to re-craft the benefit package, however, this would need to be negotiated in the labor contracts.

Ms. Sims said Metro has continued its contract with MERC to provide Support Services. This assumes continuation of a $200,000 General Fund subsidy, a $175,000 contribution from Risk Reserves, and a $75,000 credit that will come from assumed under spending of the budget. These negotiated subsidies bring MERC’s total contracted costs for services down from approximately $1.4 million to $940,000.

Councilor McLain asked how the $75,000 reduction to MERC will affect Metro’s efficiencies and needs, and where the money can be found in the proposed budget. Ms. Sims said the money is not in the budget, but is slated come from anticipated under spending in Support Services. She then reviewed the method for allocating Support Services costs to Metro departments. Because Metro never spends the total amount budgeted annually for Support Services, at the end of the year each department is charged a little less than was estimated. Savings occur primarily in Personal Services line items, due to staff turnover.

Councilor McLain said it does not make sense for this reduction to be credited back only to MERC. Ms. Sims said that out of the $12.1 million budgeted in the Building Management, Risk Management, and Support Services funds, under spending in the amount of $300,000 is anticipated. Chair McCaig said if this level of under spending does not occur, the $75,000 MERC subsidy will negatively impact all other divisions and departments within Metro. She said the result of the proposed action is that MERC will receive double the $75,000 benefit.

Councilor McFarland asked Chair McCaig to explain why the amount would be doubled. Chair McCaig said at the end of every fiscal year, any unspent moneys are distributed fairly throughout the government; however, under the proposal, not only will the $75,000 not go back to the departments, it will go to MERC.

Chair McCaig displayed the following table showing how internal service charges affect MERC.

Chair McCaig said MERC maintains that the $1.5 million internal service charge is too expensive. Last year, Metro cut a two-year deal with MERC to offset internal service charges with $200,000 from the General Fund and $175,000 from the Risk Management Fund. This deal will carry over to the proposed budget unless Council changes it. According to MERC, the results of an outside study they commissioned show they could save $177,000 by contracting accounting services out; therefore, they said they will not enter into an agreement unless Metro agrees to even more reductions.

Chair McCaig said Ms. Sims was directed to come back to committee with a deal MERC would agree to, which resulted in the $75,000 under spending recommendation. She said in struggling to find the additional $75,000, Ms. Sims has been placed in the unusual position of trying to anticipate under spending, which is not a normal budget procedure.

Chair McCaig commented negatively on MERC’s actions, stating MERC is essentially demanding additional offsets by threatening to walk away at any time if it thinks any of Metro’s charges are too high. She said Metro feels compelled to agree to these demands at a time when the $200,000 could be spent by Metro in other areas. If Metro anticipates under spending of $75,000, Chair McCaig said that amount should be used to reduce the $200,000 General Fund offset to MERC.

Chair McCaig said $75,000 is the tip of the iceberg; the broader question is, what will the relationship be between MERC and Metro regarding the provision of services. She said she believes MERC is organizing and preparing to set Metro adrift at some point. Whether it is this year or four years from now, this is the current direction the MERC board is going. At some point, MERC will leave, which will result in people at Metro being laid off.

Chair McCaig said if Council agrees to this negotiation, MERC will receive subsidies of nearly $500,000. Councilor McFarland said she believes Metro receives about $1 million from MERC in excise tax each year; and that MERC considers this contribution when negotiating with Metro.

Chair McCaig said MERC can get out of their contract with Metro at any time, pending a 90-day notice, even though they will receive all of Metro’s money up front. MERC has established an agreement that is very good for them, and not very good for Metro. Councilor Naito expressed concern about the 90-day provision, because it means that even once Metro and MERC have reached an agreement, Metro is always only 90 days away from risk. She says this situation is untenable because people’s livelihoods are at stake.

According to Mr. Houser, Metro estimates MERC will pay almost $300,000 for accounting services in the next fiscal year; so the $177,000 that MERC believes they can save constitutes savings in excess of 50%. With regard to the two subsidies in the amount of $200,000 and $175,000, Mr. Houser reported that in FY 99-00, the General Fund is projected to have a deficit of $700,000, and in FY 01-02, any excess Risk Management funds will be exhausted. Therefore, the source of funding for the subsidies will probably expire within the next one to three years.

Councilor Naito said MERC appears to be cherry picking the services they want to receive from Metro. Ms. Sims reported MERC is satisfied with how much Metro is charging for risk management, legal counsel, and human resources; it is only Metro’s charges for accounting services that MERC finds too costly. Councilor McFarland said conversations she has had with MERC representatives confirm Ms. Sims’ findings. She said she does not believe MERC intends to act in an underhanded manner in the future. Councilor Naito said Metro should offer MERC one package deal that includes all the services Metro provides. Chair McCaig said Metro does not have that negotiating chip at this time. Ms. Sims said the ordinance that gives MERC the authority to find their own services, gives them the right to cherry pick; however, they are required to use Metro’s legal services.

Councilor Naito said she did not recall discussing the cherry picking issue when the ordinance came before the Council. She said this places Metro in an inferior negotiating position because it is bound by certain things and MERC is not. She said this situation is unfair and merits Council review. She said Council should consider changes to improve its position; and since MERC seems to be heading towards autonomy anyway, Metro not subsidize the process that allows them to essentially cherry pick their way out of its contract. Councilor Kvistad said Council put Metro in a position where it gave MERC the maximum degree of flexibility, and now Council has to deal with the ramifications of that.

Ms. Sims read the portion of the agreement pertaining to the 90-day clause. It reads, “The commission shall provide Metro with ninety (90) days written notice of its intent to purchase any service outside of Metro which was previously provided by Metro.” Councilor Naito said she thought this meant 90 days before the budget is approved. She said the discussion in committee had been that MERC has 90 days before the budget cycle for the year in which they intend to purchase services. Ms. Sims said Mr. Williams has interpreted the language to mean that they can give Metro 90 days notice and be gone. Councilor McFarland said language elsewhere provides that Metro will contract with MERC on an annual basis. Ms. Sims said the contract is on an annual basis, with a 90-day clause.

Chair McCaig said for the fifth year in a row, MERC’s supplemental budget has come in showing that they have more revenue than originally projected in their Fund Balance. This year, revenue projections are exceeded by $1.7 million. This is an ongoing situation that gives them additional flexibility that Metro does not have because of the timing of the budget process.

Councilor McLain and Chair McCaig agreed Metro needs to needs to improve its negotiating position, and should develop a plan to protect its interests. Councilor McLain said since MERC is very satisfied with Metro’s Risk Management services, Metro should use that information as a negotiating tool.

Councilor Kvistad said if MERC decides to walk away, not only Ms. Sims’ department, but the agency as a whole takes the hit. It is a much bigger hit across the board than Council is currently prepared to handle. He said if MERC plans to make the move, they should inform Metro at the earliest opportunity so Metro can plan to adjust its budgeting priorities before the end of this fiscal year. If MERC intends to leave, they should notify Metro before Council adopts the budget.

Councilor McLain said this is a major issue for the agency that should be reviewed either through the budget process or in the Regional Facilities Committee. She said Metro needs to conduct an efficiency analysis in order to determine at which point the agreement is not beneficial to the agency; and to determine how many years Metro will need in order to be able to spread the hit to Support Services throughout the rest of its facilities. Chair McCaig said this is a difficult question because, while she does not think this is the year to pull the plug, if Council does not begin to look at determining the point below which Metro cannot go because it is damaging to the rest of the agency, the situation will never be resolved. She said Metro has alternatives it should consider in future budget planning. Councilor McLain said in addition to planning for the future, Council needs to develop a strategy to deal with the proposed FY 98-99 budget.

Councilor McLain said she had, some time ago, requested a report from Ms. Sims that reviewed the $500,000 subsidy, and set forth how much it would cost each department to assume MERC’s portion of the Support Services pie if Metro’s relationship with MERC were to be severed. Ms. Sims said this review was performed about two and one-half years ago, when it looked like the issue would arise. At that time, it was anticipated Metro would need to lay off about five or six people, and that approximately $500,000 in Support Services charges would need to be spread across the organization to compensate for the loss of MERC’s contribution. She pointed out the report is outdated, and does not take current subsidies into account.

Councilor McLain asked that updated information be provided to councilors. She said she must know how Growth Management and Solid Waste will be affected; she said she does not know how Council negotiated the deal without this information. Councilor Morissette said negotiating on the basis of how Growth Management and Solid Waste will be affected is negotiating for the wrong reasons. Councilor McLain disagreed, pointing out that Metro has more than one responsibility.

Councilor McFarland said MERC believes it can get the same level of service for their accounting needs elsewhere for less money than they are paying Metro. She said that when MERC researches the matter, they may find that our services are the best value for the money, so we should not automatically assume MERC is on its way out the door. Councilor McLain MERC’s contention that accounting services could be obtained for less money was discussed when she was chair of Regional Facilities, and it was determined that the quality of accounting MERC can obtain is questionable. Prior to obtaining these services from Metro, accounting for some Memorial Coliseum events had depended upon pencil and pad. She said if Metro is going to provide risk management and legal services, it needs to be able to verify that MERC’s accounting is correct.

Councilor Kvistad said he is concerned that an adversarial relationship is developing between Metro and a (MERC) board that is subordinate to the Council. He said one problem is that the commission is independently nominated, when its members should be appointed by councilors on a district basis. He has supported some of MERC’s entrepreneurial actions, however, the adversarial approach of some of its members is not beneficial to Metro, and leads him to believe it is MERC’s intent to spin off from Metro. Councilor Kvistad said Metro needs to review MERC’s function and resolve the issues he described. He said he wants to permit them the maximum flexibility in choosing their own services, but there is a bottom line where they have to participate in our services to a certain degree.

Councilor Morissette said when he voted to approve the cherry picking ordinance, he never committed to the amount of subsidy that we are prepared to give. He said committee discussions should be about the whole package, including the subsidies, not just the charges. MERC should be told the negotiation package will include the $200,000, the $175,000 and the $75,000. He said it does not bother him to have Metro do less things, and if it is better for MERC to go elsewhere, they should do so. If Metro is not competitive, it needs to get competitive. He said he believes it is wrong to force MERC to stay with Metro if they believe they can get a better deal elsewhere. He said Metro should call their bluff, and help them move on if that is their decision. However, if they choose to get their services elsewhere, they should know the subsidies will also disappear. Councilor Morissette said in a negotiation, you have a package, and he does not want to see Metro end up in a position where it gives MERC the $375,000, and is stuck in an unfair negotiating position.

Chair McCaig said she disagrees with Councilor Morissette because Metro is a government, not a business. There are actions a government takes that are not simply for the bottom line, and there are benefits that accrue to Metro as a result of the collective organization, which Council must justify and balance out. She said Council should revisit the decision that says MERC does not have to do business with us any more. She said as long as we appoint them, and as long as we have the authority to put their bond measures on the ballot, the price they pay for being part of us is that they do business with us in order to help us pay for all of the other services we provide.

Councilor McLain pointed out MERC facilities are Metro facilities, and Council needs to consider the efficiencies involved with consolidation. She said if Metro has accepted the responsibility and authority of taking MERC’s money issues to the ballot, and the advantage of being involved in the kinds of services MERC provides to regional citizens, then Council needs to weigh those factors against the idea that MERC wants to be creative and competitive. Under the current structure, the Council is ultimately responsible for the overall quality of MERC’s accounting, whether or not MERC realizes that fact.

Ms. Sims pointed out that she has negotiated with Mark Williams, MERC General Manager, to reach the proposed agreement. She said the agreement is founded upon the Council’s approval of the $200,000 and the $175,000, and she expressed concern that Council may now be considering eliminating those subsidies.

Councilor Morissette responded that he does not want to be caught in a position where we give them the money, and then 90 days from now, they walk away with our $375,000 bucks because they can get a better deal elsewhere. He said we need to negotiate before we give the money that we have them or we do not. Councilor Naito asked if we can give them the $375,000 after the end of the budget year, rather than up front.

Chair McCaig said there are a continuum of choices. One is to continue to playing on the playing field that allows MERC to treat us this way. She pointed out Council, in its ordinance gave MERC that authority. In continuing this way, the government is hurt, and Council inaction means we are willing to allow this to happen. She said another choice the committee has is to decide to revisit the ordinance. Chair McCaig said we have gone as far as we can go toward keeping MERC’s business without seeing an increasing burden on Growth Management. Councilor Morissette said he does not believe the public wants all this Growth Management anyway, and said they would not likely support a General Obligation Bond to pay for it. He also remembers why he supported the flexibility for MERC, and now that we don’t maybe like the answer, he doesn’t want to change it. He does not want Growth Management to hold MERC here.

Chair McCaig suggested voting on each subsidy individually. She polled committee members to determine what action they would recommend.

Councilor Morissette reiterated his position, and said the deal breaker for him is the $75,000.

Councilor McLain said Metro can stand the deal for FY 98-99, however, Council needs to determine the long-range implication of what the existing situation with MERC does to other budgets, and, third Council needs to determine its liability if it cuts MERC free, but does not change the government structure.

Chair McCaig said Councilor McLain has elaborated the three issues before the committee in descending order of importance. She said the committee can deal with the immediate situation and the $75,000. It is the long-term impact that Council really cares about. She said if you look at Metro’s long-term needs, we are on a collision course with MERC because we cannot afford the subsidies. She said in looking at MERC’s supplemental budget, which has $1.7 million in additional revenues, it should be noted that MERC has available money and an increasing fund, while Metro does not have available money, and its fund is shrinking.

Councilor McFarland again mentioned that Metro is scheduled to receive $1 million in excise taxes. Chair McCaig responded that by consistently underestimating their revenues, the convoluted budget process means Metro does not get the true, higher level of excise tax until Metro has already given the $200,000 General Fund subsidy. We are off a year in the whole process.

Councilor McFarland said she is willing to go along with Ms. Sims’ negotiations for this year. She has heard from MERC representatives that they are ready to purchase Metro’s services for this year, at least.

Councilor McLain said what is really unappealing to her is the 90-day clause. She said this is bad business and does not protect the public. She would go ahead with the contract this year only if we can eliminate its 90-day provision.

Councilor Kvistad said since councilors had generally agreed to change the appointment authority, which will require an ordinance, if we want to change the deal that we have with MERC, this ordinance would be the place to do so. He said he is comfortable with Ms. Sims’ proposal, although he could appreciate Councilor Morissette’s approach. Councilor Morissette said he would not agree to change the appointment authority. He thinks MERC does a great job, and wants to impact them as little as possible.

Chair McCaig said the committee needs to deal with the authority question, including the appointment authority, the cherry picking piece, and the 90-day piece. The committee also needs to determine how to pull together the package on the table, including the $75,000.

Councilor Naito said she felt strongly that Metro must be in a position to project its budget for at least one year out. The 90-day clause is counter to Metro’s operating needs.

Chair McCaig said it is very important for Council to develop a different relationship with MERC. She said no action would be taken at today’s meeting on the Administrative Services budget. She said she will find out about the supplemental budget, and how much the excise tax would have been had they gotten it in time, to see if there is any way to use it to offset some of the costs of the General Fund. She asked Ms. Sims to look into the 90-day provision, as well as to provide information requested by Councilor McLain on the impact to the rest of the agency of the subsidies.

Human Resources Department Budget

Chair McCaig explained that Mike Burton, Executive Officer, has changed the designation of the head of Human Resources (HR) from “division manager” to that of “department director;” however, HR currently remains a division of the Administrative Services Department. She noted Council has the ultimate say over the organizational structure of the HR office, because the department must be created through the budget process. Chair McCaig said she does not understand why the organizational structure is being changed. In ninety percent of the cases she has observed, Human Resources reports to Administrative Services. Judy Gregory, Human Resources Director, said she believes HR is a strategic arm of the Executive. Further, she believes Mr. Burton perceives HR to be different in function than the kinds of services provided by Administrative Services. Following discussion, it was determined that as an organizational matter, Mr. Burton has the authority to structure his staff as he chooses.

Ms. Gregory reported on the Human Resources budget. A copy of the Human Resources Department Budget Overview was distributed to councilors, and a copy is included as part of the meeting record.

Councilor Morissette asked about increases in the HR budget. Ms. Gregory said some of the increase is due to increased turnover and the related costs of advertising and postage. Recruitment activity has increased 21% in February 1998 over the same time period last year. She said the advertising line item has been historically underfunded, and she the proposed budget corrects that. She has requested additional money for professional staff development. With regard to Capital Outlay, Ms. Gregory said the budget is proposed to increase from $2,000 to $7,000 to purchase a laptop computer, to replace a large printer, and to replace computer monitors. Ms. Sims said Metro’s computer replacement strategy is to replace approximately 25% of the agency’s computers each year.

Councilor Morissette expressed concern with the increase in FTE for the MERC-funded position, given that MERC may not be purchasing these kinds of services from Metro in the future. Ms. Gregory responded that position was funded at .75 FTE last year because it could not be filled until October. This year, the position, which has already been filled, is funded at 1.0 FTE.

There being no further business before the committee, Chair McCaig recessed the meeting at 5:05 PM until Wednesday, March 18, 1998 at 3:30 PM.

Prepared by,

Lindsey Ray

Senior Council Assistant

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