When the City Council cut $1.4 million from the current operating budget last March, Mayor Bob Scales said it was necessary to be able to accrue $1 million in working capital by the end of 2010.

The idea was to enter 2011 with enough cash so the financially troubled city wouldn’t have to borrow money again from the water utility fund to pay its bills as it has during the last two years. It didn’t happen.

Instead, Finance Director Elray Konkel offered a financial report during the city staff’s mid-year presentation on Wednesday that projected only $78,499 in tax-supported funds would be available as working capital at the beginning of next year.

Fireworks followed as council members Scales, Bill Knobloch, Kim Brackett and Kirsten Hytopoulos could barely contain their disappointment in Konkel and the administration in general.

“We cut more than a million dollars so we could have a million in working capital but now we only have $78,000. And we’re told that everything came in as expected,” Scales said during Konkel’s report. “So where did that million go?”

To pay the bills, Konkel said.

Scales said Thursday that he was particularly upset by the fact council had no warning about the report’s findings and that staff characterized the situation as a breakdown “in definition” regarding working capital.

“We were very clear,” said Scales, who spent some time looking at the video of the meeting when the decision was made to cut staff and services.

“We had a cost-cutting exercise in March for the purpose of not getting into the position of having to borrow from utilities to pay for expenses. Staff said we needed to cut so much from the budget to come up with $1 million at the beginning of 2011. So we did that. Now they come back and say we’ll only have $78,000 or so.”

Scales said he didn’t understand how the message got misconstrued.

“We would liked to have had him (Konkel) come to us and say, ‘Hey, we’re in trouble, it’s not happening, and we have a proposal on how to get there.’ Instead, nothing was said until now. It makes us look bad when we established policy and then it wasn’t followed by staff.”

Konkel addressed the fact that the “the goal of reaching” $1 million in working capital and another $500,000 for reserves (from sale of surplus property, which hasn’t happened yet) hadn’t been accomplished. But he pointed out during the presentation that the city had been able to pay its bills during the first six months of 2010 and should be able to do so during the last half of the year.

“The initial goal of cutting $1.4 million was to pay the bills as they came forward and that’s what we got for all those cuts,” Konkel said. “Again, I’ll take the blame if I presented it ($1.4 million working capital) as cash net of accrued liabilities.”

Konkel’s financial review characterized the projected $78,499 as the city’s estimated city unrestricted and unencumbered cash balances for Dec. 31, 2010, along with a total of $2,118.406 in utility funds. The city already owes the water fund utility $3 million, an amount that was borrowed during the past year and a half and hasn’t been repaid because the city only has enough money to pay its bills.

Scales said the council’s policy to have year-end 2011 emergency ($1 million), working capital ($1.5 million) and contingency ($500,000) funds in place hasn’t changed. But he’s unsure now how the city will accomplish the savings.

He said the council will have to have a discussion about more budget cuts and probably borrowing more money from the water utility fund.

He suggested Wednesday that the council may have to cut $900,000 out of the new budget next March.

“We need a sustainable budget (2011-12 biennium) so we don’t have to make these drastic cuts just to keep going,” Scales said Thursday morning. “We need them (staff) to be our guide through the muddy water. ”

The city has cut more than 30 city employees (from 152 down to 121) during the last two years as its tax-supported revenue has continued to decrease.

Some council members think the city will be forced soon to lay off more staff.

The city is considering several other ways of cost cutting, including: transferring its water and sewer utilities to other public entities in the county; and regional sharing of facilities and services, such as municipal court, public works services and equipment.

Councilor Bill Knobloch said the council needs to continue being pro-active in cutting costs because more needs to be done to assure the city’s viability. In short, he said, the city’s expenditures and basic needs continue to demand more revenue than the city and the community are capable of producing.

“Yes, sustainability involves paying our bills,” he said. “But it also has to do with meeting all of the responsibilities of running our government. That includes core services, many that we are not meeting right now, like our roads and other infrastructures.”

Knobloch said the administration has to face reality, too.

“Right now, we don’t have enough cash to fix our roads unless we go to the voters with a bond. We’re going to need more cuts in the upcoming budget just to take care of the basics. Let’s just hope we don’t have a major storm before that because we don’t have any cushion.”

Scales said he suspects it will be left up to the council again to make sure the 2011-12 budget is sustainable.