Serving Northern St. Louis County, Minnesota

Cash crunch

Audit: Surpluses spent to cover project deficits

Marshall Helmberger
Posted 4/10/19

TOWER— The city of Tower is facing a significant cash flow crunch that won’t be easy to repair. That was the upshot of the city’s audit report presented by representatives of Walker, Giroux, …

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Cash crunch

Audit: Surpluses spent to cover project deficits

Posted

TOWER— The city of Tower is facing a significant cash flow crunch that won’t be easy to repair. That was the upshot of the city’s audit report presented by representatives of Walker, Giroux, and Hahne before a large crowd at the Herbert Lamppa Civic Center on Monday.

While the city’s financial status appears relatively strong on paper, most of the city’s cash surpluses have been spent to cover operating deficits in a number of project accounts, according to Devin Cegler, who presented the city’s audit for 2018.

City officials have managed to keep the bills paid mostly by tapping the city’s ambulance account, which had built up a nearly $900,000 surplus over the past several years. On paper, the city shows a $1.1 million balance in its general fund, according to the audit, with $883,000 of that sitting in the ambulance account.

The city’s ambulance service had historically generated large profits of about $100,000 annually, which helped to provide a cash cushion for the city. Yet the cash in the ambulance fund has mostly been spent for various projects, according to Ceglar, leaving a total of $238,000 in actual cash.

Adding to the cash concern is the previous council’s decision, last December, to order a fourth ambulance, at a total cost of $250,000. The city currently has three ambulances, only two of which are maintained in operation.

Ceglar noted that the city’s audit reports have raised concerns about the sizable project deficits for several years. Yet previous councils asked few, if any, questions about the auditor’s concerns. This was the first time that the auditors addressed the city’s actual cash balances. Audit manager Greg Knutson noted that a number of city projects, including street repairs, airport projects, and the harbor renaissance, have all generated sizable deficits that have been covered by borrowing from the city’s general fund, which includes the ambulance account. But that piggy bank, which was comprised primarily of the ambulance fund, is now running dry.

“That’s basically the crux of the problem,” said Knutson.

“What do we need to do to get the cash balances back in order?” asked Mayor Orlyn Kringstad.

“That is the million-dollar question,” responded Knutson.

The city would appear to have few options. A suggestion to bond was quickly shot down, as not addressing the problem and possibly worsening the situation. The other primary alternative would be a levy increase, but given the city’s current tax base, the city would need double-digit increases in its levy for a number of years to make a dent in the project fund deficits, which total $665,000. Each one-percent increase in the city’s levy raises only about $3,500.

The city has quietly been selling off land, which has generated about $215,000 in revenue to the general fund over the past four years (see more on this issue in next week’s Timberjay).

The city does have significant remaining land holdings but sales of land can take years to accomplish. In 2018, however, land sales did provide $60,544 in city revenue, offsetting some of the budget problems.

City Clerk-Treasurer Linda Keith argued that she largely inherited the city’s financial situation when she took over as clerk in 2013, saying that the city had about $950,000 in project deficits at the time. She said the city has made some progress toward whittling down that debt since then. “The only one that has been increasing is the harbor project,” she said.

The audit reports that the city also spent more than it took in this year. Total general fund revenues for 2018 were $1.59 million, while expenditures totaled $1.72 million for a deficit of $130,000. At the same time, the city’s general fund balance, on paper, increased from $807,569 in 2017 to $1.135 million in 2018. But that increase reflects $500,000 in revenue received from a bond issuance to pay for a sewer extension to the campground. Without that bonding, the city’s general fund balance would have declined to $635,487.

As part of their annual report, the auditors also provided their management letter, which typically raises issues of concern as well as findings of errors or irregularities and recommendations for improving the city’s financial controls.

This year’s list was longer than most, with a total of 16 separate items listed by the auditors. Among them was a recommendation to establish a special fund outside of the general fund for the ambulance service, in order to improve transparency. That would also likely require council action before money could be transferred from the ambulance fund to cover expenses in other city operations.

Such a change would also likely ease concerns from residents of neighboring townships, who contribute on a per capita basis to the city’s ambulance equipment fund. More than a dozen residents of the townships turned out at Monday’s meeting to express concerns that the funds they contribute could be used for city operational costs. But Ceglar confirmed that those funds are segregated and remained available for ambulance purchases as of the end of last year. As of Dec. 31, 2018, the cash balance in that account totaled $125,990. An updated financial report produced by Keith shows $148,490 in that account as of the end of February. That would leave the city to cover the remaining $101,500 of the ambulance cost.

In other issues, the auditors:

 Noted the discrepancies between the city’s roster of terms for members of committees and commissions and previous minutes and recommended that the council review the changes annually and document any changes.

 Noted a general lack of financial reporting oversight in the city and recommended that the council update its procedures to maintain proper controls. The auditors also recommended that the council look seriously as ways to improve the segregation of financial duties to provide a better check on operations. They also recommended reviewing disbursements, receipts, bank statements, and financial reports on an ongoing basis.

 Noted several relatively minor errors in vouchers or payments to employees or contractors.

 Noted an apparent lack of city council approval for continued interest-only payments on the TEDA loan to the town home project and that the legal paperwork on the transfer of that loan, late in 2018, from Tower Vision 2025 to Tower Harbor Shores was not completed until March of 2019. “We suggest the city contact their attorney to resolve any conflicts related to this matter,” states the report. The auditors also suggested the city, Mayor Kringstad, and the city attorney review agreements related to Kringstad’s divestment from Tower Harbor Shores to ensure that no conflict of interest exists.

 Noted that an invoice submitted for reimbursement for a TEDA loan did not provide sufficient detail to determine if it was an allowable cost and recommended obtaining additional documentation.

 Noted that the water and sewer enterprise funds continue to run deficits, although they are lower than past years. In 2017, the deficits in the funds totaled nearly $50,000, but a rate increase trimmed that amount to $37,000.

 Noted that some storefront loan recipients have not been paying their loans in a timely manner and that the city should be accruing interest and determining a course of action for those delinquent loans.

 Noted that audit adjustments and requested reports were not provided to the auditors in a timely manner and recommended that the city provide information to the auditors promptly.

 Noted that the city transferred funds from an ambulance savings account to checking without city council authorization.

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