Flaws in Councilman Pitts Analysis of GUS Financials

The analysis by Councilman Pitts presented in a previous blog post is a classic example of "look here - not over there". Lumping all the cash elements into a single analysis obscures the fact that the City was losing money in the purchase power budget line item every year since 2014.

The cash flow analysis hides the losses in the purchase power budget line. An analogy to ones personal budget would be as long as there is sufficient money in one line item, say savings, to cover losses in another line item, everything is just fine and you are not suffering any losses. Well, yes you are suffering losses, you no longer are saving money for the future!

This is from Councilman Pitts analysis.

"Three observations in regards to the actual fiscal year end numbers: 

1.  Our fund balance started at almost $12 million in 2014, and was just below $2 million at year-end 2018.
2.  The electric fund had an operating profit (a term I added for my analysis) in 2014-2017 and a $3.2 million operating loss in 2018. The fund had not lost money outside of 2018 as was my previous impression.
3.  The Purchased Power* line item increased substantially from 2016-2018."

And here are his conclusions.

"After this review and analysis what are the answers to the initial questions?

1.   What happened? - The city electric fund was reduced by roughly $10 million from 2014-2018.
2.   Why did it happen? - It appears we cash funded our capital improvements at too high of a rate because we assumed our operations would be a source of $37.8 million in cash rather than the $15.1 million that was actually generated. The primary cause for missing the projected operating performance was poor forecasting of our purchase power costs."

One of Councilman Pitts conclusions is that "the capital improvements were cash funded at too high of a rate". Lets examine that more closely.

Here is a chart for capital expenditures from the data that Councilman Pitts used.

Click to enlarge

What is this? Capital improvements are decreasing. That says the capital $ are being used to cover the purchased power costs! Clearly the capital improvements are not being funded at a constant or rising rate by cash.

Click to enlarge

At the same time that capital improvements are decreasing, the cost of capital debt is increasing! It appears that perhaps interest rates are increasing as new debt is issued, but, that has not been verified.

Also, the cash flow analysis hides the fact that approximately $5M/yr was siphoned off to the General Fund. Why weren't those $s used to cover the excess purchase power costs?

The cash flow analysis also does not address changes in the contingency budget item.

The cash flow analysis does not explicitly identify the impact of 20/25 year fixed price contracts or the purchase of 50% more electricity than currently needed.

So overall, a cash flow analysis is insufficient to identify budget issues or corrective actions!