Audit Report Raises Questions About City Finances
Findings in an audit report released in January are raising questions about the city of Glenwood’s financial practices.
The audit, conducted by Hamilton Associates P.C., a tax and accounting firm in Council Bluffs, revealed a deficit of $296,967 in the city’s general fund balance for the fiscal year ending June 30, 2014, and also identified several shortcomings in the city’s financial reporting, documentation and cash reconciliation processes. Many of the “material weaknesses” and “significant deficiencies” were repeat findings identified in a previous city audit for the 2012-2013 fiscal year, also conducted by Hamilton Associates P.C.
According to reports filed with the Iowa State Auditor’s office and multiple sources with knowledge of the city of Glenwood’s financial history, the 2014 fiscal year marks the first time the city has found itself with a general fund deficit in at least five decades . . . maybe longer . . . maybe ever.
A review of city audit reports from the past 10 years, showed from 2007-2011, Glenwood’s general fund consistently had a balance of more than $600,000. However, from June 30, 2011 – June 30, 2014, the fund’s balance dipped by over $900,000 and into the red.
Lyle Mayberry, who served as a Glenwood city councilman and mayor from 1977-1997, said the rule of thumb during his time in office was that the city would always maintain a minimum reserve of $300,000 in the general fund account.
“I never felt the city should have an excess in savings, no bigger than the average citizen would expect, but you need to have a place to go in an emergency,” Mayberry said. “We didn’t commit to anything unless we had the money to pay for it.
“When I left office, we were in the top 5-10 percent for financial stability for cities our size in the United States.”
City administrator Brian Kissel, who was initially hired as the city’s finance director in 2011, said out-of-the-ordinary expenses over the past three years have contributed to the liquidation of the general fund, including a roof replacement at the Glenwood Public Library, engineering fees associated with the proposed Vine Street and Railroad Ave. reconstruction projects and costs associated with the relocation of City Hall and the Glenwood Police Station into one building.
“The reason the general fund started taking a hit about three or four years ago was because of the renovation here at City Hall. The city paid about $800,000 - $900,000 to have City Hall renovated,” Kissel said. “The city council made the decision not to go out for a loan because we had a positive balance in the general fund. They wanted to reinvest that money into a new City Hall.”
Replacing the library roof cost the city $217,000, Kissel said, noting special precautions were taken and engineering work required because of the building’s historic significance.
The $800,000 - $900,000 price tag Kissel cited for the purchase and renovation of the new City Hall and police station is substantially higher than figures the city shared when the project was completed in 2012. At that time, the city reported the purchase of the building and renovation costs totaled $537,000, an amount that raised concern at the time because total project costs were projected to be around $200,000 when the project was proposed in 2011.
When asked to clarify the discrepancy between the City Hall renovation costs presented by the city in 2012 to the new numbers, Kissel said engineering fees of around $200,000 and the purchase of a generator were added after project completion.
After the new City Hall and police station opened, the city did take in over $450,000 for the sale of its old City Hall and police station and a piece of land on 11th Street to help offset the renovation costs.
City council member Craig Florian, who until January served as chair of the city council budget and finance committee, mentioned library and City Hall renovation costs as contributing factors to the deficit, but said he’s of the understanding that as much as $600,000 was removed from the general fund and earmarked specifically for the aquatic center project.
“That local option sales tax was never siphoned off into a specific pool fund, it was put directly into the general fund (when it came in),” Florian said. “All that local option sales tax went directly into the general fund. I’m not aware that we should be doing it that way, but maybe that’s a state mandate. I don’t know.”
Kissel said Florian’s statement was incorrect - funds were not removed from the general fund for the aquatic center. Kissel said the city does have two separate accounts for the aquatic center, each containing about $600,000. The funds set aside for the aquatic center are in the city’s community recreation center fund, Kissel said.
As for the general fund deficit, “We spent more than we took in. That’s true,” Florian said. “I agree we hadn’t had an operating deficit, but for the things we had to buy and the things we felt we needed to pay for, yeah, for a year or two, we probably did operate in the negative, but I really think we’re done with that.”
Mayor Kim Clark said the general fund deficit was somewhat expected because of the library roof and engineering expenses. Clark said the city had considered selling the library annex property to help pay for the roof repairs, but held off because the library board of directors indicated interest in expanding the library on the annex property. She said some of the engineering fees for Vine Street and Railroad Ave. will be collected back when federal dollars come in for the road projects.
Clark stressed she wants to see the general fund replenished and once again serve as a backstop for the city.
“I am concerned about the deficit,” Clark said. “That’s not how I like to operate - in the red like this.”
Kissel said he’d like to see a positive general fund balance of at least $100,000 when the city’s audit report is released for 2015, but stopped short of making any promises.
“We’re trying to control our spending, but you never know when you’re going to have a problem like the library roof,” Kissel said. “We’re going to have added expenses with the pool and we have a police car that needs to be replaced.
“For me to say we’re going to be at a positive general fund balance next year, I hope so.”
Because the city is restricted in how much it can levy for the general fund ($8.10 per $1,000 taxable valuation), Kissel said he has sought direction from private financial advisors to assist in devising a plan to replenish dollars to the general fund account. Kissel said a major concern with having a general fund deficit at the present time is the impact it could have on interest rates for financing of the outdoor aquatic center being proposed by the city.
“Our financiers are concerned if we go out to bond for the pool, the lending agents are going to look at that (general fund deficit) and say, ‘Hmmm, why didn’t they address that?’ It could affect our interest rate,” Kissel said.
Kissel said the general fund replenishment plan he’s presenting to the city council calls for general obligation bonds to be issued as a debt service levy. Those dollars would reimburse the general fund for the library roof and road reconstruction engineering fees. Also wrapped into the debt service levy would be the purchase of two new vehicles for the public works department and a backhoe for the Glenwood Cemetery.
If the general fund deficit isn’t concerning enough, Kissel now finds himself having to ask the city council to approve “up to” $385,000 in additional debt service general obligation funding to cover an unexpected increase in the cost of the Vine Street – Railroad Ave. project. Kissel said he learned last week that contractor bids for the project came in higher than had been estimated last year by engineering consultant Steve Perry.
The roads project, initially estimated to carry a price tag of $1.1 million, will now cost $1.3 - $1.4 million, Kissel said, because of a rise in concrete and construction costs. Eighty percent of the funding for the project is supposed to come from federal tax dollars with property owners along the two roadways being assessed for most of the remaining costs. Kissel said the additional $385,000 is a “worst-case” scenario because he’s hopeful at least another $100,000 in federal funding will be secured for the project.
If approved, the debt service levy obligation bonds will result in a tax increase for Glenwood property owners next year. At a city council budget and finance subcommittee meeting Feb. 10, Kissel said the city’s mill levy was projected to go down in the 2015-2016 budget from the current rate of 13.27 (per $1,000 taxable valuation) to 13.24. However, the new plan to issue debt service levy general obligation bonds to replenish the general fund and cover the additional road reconstruction costs will actually increase the mill levy to 13.70.
Kissel stated that despite the deficit in the general fund, the city does have cash balances in other accounts. With the general fund deficit taken into account, the 2014 audit reflects a total cash balance for all accounts at $1,862,855, a figure also about $900,000 lower than the $2,751,519 the city had in cash balances on the 2011 audit report.
Of the $1,862,855 the city had in cash balances at the end of the 2014 fiscal year, $1,496,382 was in the community recreation center fund, meaning the dollars (generated primarily through Local Option Sales Tax) can only be used for YMCA or future aquatic center expenses. The road use account had a balance $131,055. The employee benefits fund had a balance of $269,870, the debt service fund was at $70,000 and non-major funds carried balances totaling $192,515.
Statement of Findings
In addition to the general fund deficit, auditor’s identified the following three material weaknesses (areas of major concern) in their statement of findings for the city’s 2014 fiscal year:
Financial reporting – auditors identified a material amount of receipts that were directly deposited into the bank and not recorded in the books, including $399,015 in Local Option Sales Tax from the state and $2,789 in interest income.
Cash reconciliation process: auditors said the city isn’t reconciling its accounts to determine that fund balances match up with bank balances.
Clerk’s report and transfers: the city clerk’s monthly report to the city council doesn’t contain all fund balances, but only specifically requested balances, according to the auditors.
Several other significant deficiencies were also identified, but one of the most noticeable aspects of the audit is many of the findings were repeat offenses from 2013, giving the appearance that the city hadn’t followed up on the 2013 recommendations from the auditors. Some of the city’s responses were “cut and pasted” directly from 2013 to the 2014 report.
The city gave this response to the reconciliation issue on both the 2013 and 2014 audit reports:
“Reconciliation has been an ongoing issue with our accounting software; the city has been working with our software provider to ensure a less convoluted way of bank reconciliation will take place in the near future. Modifications to the bank reconciliation portal on our software were introduced a month ago. The city will work with the cemetery department to ensure perpetual care funds are labeled correctly in the depositing process.”
Andy Nielsen, a deputy auditor in the Iowa State Auditor’s Office, said Glenwood isn’t alone in having financial reporting and reconciliation issues, but it’s concerning the matter wasn’t addressed after the 2013 audit.
“The cash reconciliation part of this, they need to get that cleaned up. They need to get the cash reconciliation process done,” Nielsen said. “Municipal bookkeeping is not simple, but it’s up to the city and it’s up to the city management to make sure it’s being done. Those public assets need to be protected.”
Nielsen said once the city gets the reconciliation issue fixed, the financial reporting problem should disappear.
“If they did item ‘B’, item ‘A’ would go away,” Nielsen said.
Clark said the reconciliation matter is being addressed with Kissel.
“We, some of the council members and I, have talked specifically to Brian,” Clark said. “It’s just like doing your checkbook at home every month. You’ve got to balance those accounts and you’ve got to check it off.”
Susan Hirschman, the new chair of the city council’s budget and finance committee, suggested the city’s reconciliation practices (lack of) contributed to the general fund deficit.
“Something is definitely going to be done about it. It can’t go on,” Hirschman said. “It’s got to be reconciled. Anybody knows that if you don’t reconcile your account, eventually it’s going to catch up with you. Obviously, it’s caught up with us.”
Kissel said he and city clerk Angie Winquist are addressing as many of the issues brought up in the audit report as time allows, but staffing issues and time constraints require him to prioritize his tasks.
“When you’ve got grants and all these reports to fill out, you do what you need to do to get the job done,” Kissel said.
“We talked about hiring a new administrative assistant here at City Hall, but at the same time, that eats more money from the budget.
“Angie and I are trying to make do with what we have and try to correct any errors that are in there. We’re gaining ground, but we absolutely feel we’re on top of everything that needs to be covered right now. We have corrected a lot of the issues that are in there. You’ll see that this coming year.”
Nielsen said when a city has repeat findings on its audits, it’s the council’s responsibility to ensure compliance.
“Auditor’s aren’t in the habit of making recommendations for nothing,” Nielsen said. “If we’re making recommendations, it’s because we’re aiming them toward a better business practice.
“It’s not illegal to not take care of an audit finding, but it’s certainly not a good practice.”
Nielsen said training in several areas, including reconciliation, is available for municipal employees and council members through the state auditor’s office.
Kissel said he was forced to basically train himself how to do his job at City Hall after being hired in 2011, but is open to training opportunities.
“Is there extra stuff Angie and I can be trained on? Absolutely,” he said. “We’ve just got to find the time to sit down and be trained on it.”
Hirschman, who has been on the council for five years, said budget workshops and other training can be beneficial to city staff and council members alike. She also believes the council needs to spend more time addressing its budget and finances throughout the year.
“Being a council member is really a difficult thing,” Hirschman said. “It takes several years before you really grasp everything and the budget is the toughest thing to figure out.
“We need to take a lot more time to go through the budget, more than once a year. We need to go through it in the summertime (end/start of new fiscal year) as well as now. We need to spend more time on it.”