Editor’s note: the following is a presentation to the Brainerd City Council in response to Alderman Bob Olson’s comments regarding the city’s finances.
A special council meeting was called Aug. 7, for Alderman Olson to present his review of the 2011 audit. As suggested by several council members, below is our response to a few of the items.
Mr. Olson stated that the accounts receivable information provided to the auditor regarding the construction fund was understated by $491,367. As stated previously at the formal audit presentation by CliftonLarsonAllen, we agree that this is true and stated in regards to the material weakness reported, we have acknowledged this error and have changed the process. College Drive is a multi-million dollar, multi-year project, with multiple revenue sources. We have since changed our process in identifying receivables for such a project.
As the auditor discussed during the audit presentation, and as detailed out on page 35 of the audit in the second paragraph: “Revenues are recognized as soon as they are both measurable and available. The city considers revenues to be available if they are collected within 60 days after the end of the current period.” None of the additional $491,367 booked as a receivable was received by the end of March.
So, to book the additional $491,367 we increased revenue and booked the receivable. However, to correctly report under the modified accrual basis of accounting, since none of this was received within 60 days, we had to reduce revenue and book a liability by the same amount. So the change in fund balance and to cash is zero. The net change to the Statement of Revenues, Expenditures and Changes in Fund Balance is also zero.
We would also like to mention that of the $550,000 of accounts receivable at Dec. 31, 2011 for the College Drive Project, over $130,000 is related to engineering costs. We do not know how much engineering costs will actually be reimbursed as it is based on a percentage of total construction costs. So this is our estimate of what we expect to get reimbursed for but it is not a certainty.
Mr. Olson states that the Finance Department recommended borrowing $1,795,000 to pay for street improvement projects and how he saved the tax payers $900,000 because he was able to reduce this borrowing to $1,000,000 by using excess construction funds and other city funds. The true savings is the interest expense that would have been due on the higher bond issue. He is correct — it was a recommendation (which is our role) based upon discussions with the engineering department and our financial advisors at Springsted as the best way to finance the construction projects by taking advantage of the then-current economic (borrowing) climate which could have enabled us to not have to issue bonds again this fall, thus saving bond issuance costs and keeping City fund levels more viable.
Recording the sale of bonds is different for each issue. In regard to the 2011A sale, the $980,000 bonds were actually purchased for $995,979.80 yielding a premium of $15,980. This is what the finance department booked. In discussion with the auditor, the premium and the underwriter’s discount (an expense) is not always detailed out. When it is, we should separate them out and we will do so in the future. The actual premium was $23,330 and the underwriter’s discount was $7,350. So, for audit presentation, the premium was increased by $7,350 and the issuance costs were also increased by additional $7,350. The net effect on cash and fund balance is zero.
We complied with Mr. Olson’s data request and provided copies of revenue and expenditure reports for all G.O. bonds issued from 2000 thru 2011. We did not know that Mr. Olson’s intent was to prepare his own audit of the past 10 years.
As mentioned in a previous memo to council, we reuse the bond fund numbers. We do this so that we do not run out of bond fund numbers and once the fund is set up, it is set up. We keep a detailed record of the year the bond was issued, and the fund number used. We would not want to “delete” the information as suggested by Mr. Olson before it is reused as we would lose the detail from the previous issue.
The reason for the negative adjustments in 2008 is that in previous years too much was recorded to assessment principal revenue and not enough to assessment interest revenue or vice versa. The tax collection statements from the county are very complex and we worked very closely with the
county in attempt to reconcile our balances with their records.
If you look at the funds in Mr. Olson’s (report) those that have a negative county assessment for that year, you should notice a higher interest amount for that year than in previous years. The ones that show a negative interest amount, you will see a larger assessment amount than in previous years. Also, for audit presentation as shown on Mr. Olson’s (report), all revenue from special assessments, principal and interest, are grouped together and presented as one number in the audit. The $573,778 which is made up of principal and interest agrees to Special Assessment Revenue listed on page 27 of the audit. Even though too much principal and not enough interest or vice versa, was recorded in previous years, the effect on cash is zero.
In this section, Mr. Olson questions the assessment receivable amount reported in the 2011 audit and the differences in prepaid assessments. To address these questions, it would be helpful to explain how the assessment receivable is defined and then pick a fund that Mr. Olson suggests there is a difference, and reconcile the balance we reported.
The assessment receivable at Dec. 31, 2011 is the total amount assessed on a project less any principal collections received from the county before year end, and less any principal collections received by the city before year end.
We chose Fund 309 to reconcile. The assessment was certified in 2010. Mr. Olson computes an assessment receivable for fund 309 at Dec. 31 of $454,300 from information gathered and the balance presented in the audit is $434,885, a difference of $19,415.
Per Mr. Olson’s information used to compute his receivable, the total assessment for bond fund 309 was $746,010. The actual total assessments were $743,036. This is because the information provided to Mr. Olson by the engineering office had a duplicate assessment that was later discovered. The difference in total assessments is $2,974, which would reduce Mr. Olson’s computed receivable amount, so the difference is now $16,441 ($454,300 - $2,974 = $451,326 - $434,885 = $16,441).
Mr. Olson used the assessment revenue amount as the amount received in 2011 from the county. This amount included an adjustment for the amount received in January 2012. Since it was received after year end it is still receivable at Dec. 31. The assessment principal collections from the county for bond issue 309 in 2011 was $0 with the January 2011 settlement, $24,607.33 with the July 2011 and $26,739.39 with the Dec. 2011, for a total of $51,347, not $44,575 used by Mr. Olson. This is a difference of $6,772 and would lower Mr. Olson’s computed receivable. Therefore, the difference is now $9,669 ($451,326 - $6,772 = $444,554 - $434,885 = $9,669).
The amount of collections by the city in 2010 was $248,640, not $233,331 used in Mr. Olson’s computation. Additional assessments were received and corrections were made when our receipt records were reconciled with engineering department’s records. This lowers Mr. Olson’s computed receivable by $15,309. Mr. Olson also did not take into account the $8,165 received by the city in 2011. This also lowers Mr. Olson’s computed receivable. So now the difference is -$13,805 ($444,554 - $15,309 - $8,165 = $421,080 - $434,885 = -$13,805).
Mr. Olson did not include the $13,804 of deferred assessments. We believe we will eventually receive the deferred amount therefore it is receivable at Dec. 31, 2011. This amount would increase Mr. Olson’s computed receivable, and now it agrees with the balance in the audit — ($421,080 + $13,804 = $434,884 -$434,885 = -$1 – due to rounding).
So as defined above, the assessment receivable at Dec. 31, 2011 for bond fund 309 is that total assessments for the project ($743,036) less any collections received from the county before
year end ($51,347), less any collections received by the city before year end ($256,805 ($248,640 + $8,165)), which equals $434,885 as reported in the audit.
Fund 301 is the 2002 Airport Improvement Bonds issued by Crow Wing County, in which the city is responsible for one-half of the principal and interest payments because of the joint ownership of the airport. At the end of 2010 the county refunded those bonds which resulted in an additional $20,000 liability for the city. Per the county — the increase in principal amount was due to the rolling of bond issuance costs into the issuance. The City’s share of the outstanding balance at Dec. 31, 2011 is $885,000 as listed in the audit on page 59 and as you can see on that page, the total outstanding indebtedness of the city at Dec. 31, 2011 is truly $18,050,000.
We levy according to county schedule and any funds received through current and delinquent taxes and the market value credit is remitted directly back to the county as they administer the bond. During 2011, the amount submitted to the county ($92,518) and was recorded all as interest with an adjustment to be made at the end of the year to reconcile with the county. Per the county, there were no principal payments due in 2011 due to the refunding.
Upon further analysis and discussion with the county, the amount that we remit with the December settlement is actually for the February 2012 payment. Per the schedule, the Feb. 2, 2012 payment totals $164,396.25, thus making the city’s responsibility 50 percent of it or $82,198. Since we have paid this before year end but it is not due until the following year, we adjusted interest expense by $82,198 and recorded a prepayment (an asset) of the same amount as shown on page 24 of the audit. The remainder $92,518 – 82,198 = $10,320 presented as interest expense.
The Finance Department did report the $105,104 — cash with fiscal agent to the auditors under account number 304-10150.
The information in the internal cash and investment report — Mr. Olson’s Item 1, ties to the cash balance in account numbers 10100. The balance in the 10100 (cash) account is money that is not restricted, it is available for use for the specific fund. The $105,104 that Mr. Olson is referring to is externally restricted and, therefore, reported in its own account. This is the difference between column 4 and column 5 on Mr. Olson’s spreadsheet C. Please note, that the $105,104 in Fund #304 (the EDA issued “lease purchase bonds” for the new Street & Sewer Building) is the only amount in any funds that is currently externally restricted.
It is correct that we do not routinely provide the cash and investment report to the auditors as it is not an “audited” report. This is an internally generated spreadsheet report designed to give council better summarized cash information. This report can be modified and/or not created as council so decides. The cash and investment reports ties out to the trial balance — which is given to the auditors. The auditor then uses outside sources, i.e. bank statements, and or confirmations from the various financial institutions to verify the information in the trial balance and that the cash balance is fairly stated.
Mr. Olson states there are three different dollar amounts for the 2011 county assessment revenues that have been provided by the finance department.
Mr. Olson requested certain information prepared for the auditors which we gave to him as of a certain date. Subsequently the information changed. When we did a final review of the information, we discovered an error. We made an adjustment in the amount of $39,409 for the referenced funds, and we provided new information to the auditor but not to Mr. Olson. In all honesty, the thought did not cross our minds that we had given information to Mr. Olson regarding the same issue. As noted by Mr. Olson, this is the amount of the difference.
Column No. 2 is actual cash received in 2011 for special assessments. This is the total of the payments received in January 2011, July 2011 and December 2011. The actual amount of revenue for 2011 is the amount received in July 2011, December 2011, and January 2012. As stated by Mr. Olson the difference between the cash received and the accrual is $10,961. The January 2011 assessment amount received for the referred funds was $8,742, the January 2012 amount received was $19,705, a difference of $10,963 (again the difference is rounding). It is the difference between cash basis and modified accrual accounting. This explains Mr. Olson’s difference.
As noted the difference between column 1 and 2 is $28,447. This is the difference between the above-mentioned error of $39,409 and the January 2011 settlement of $10,961.
Do we make mistakes? Hopefully seldom, but inevitably it can happen. We are human with large workloads and are not infallible. However, we always do our absolute best to provide accurate and timely information to the council.
The city (currently) has 57 individual funds. Comparison has been made by Mr. Olson to the reporting at the Brainerd Public Utilities (BPU). There is no comparison as the BPU has one Enterprise Fund (profit/loss reporting). The city’s funds are all governmental funds which, by definition, are funds whose measurement focus is upon the determination of financial position and changes in financial position, rather than on net income determination. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises.
Mr. Olson continues to state that we have a CPA on staff who only does bi-monthly (it should be bi-weekly) payroll. The PR/Accounting Specialist position was created in 2007 when Kris Schubert was promoted from payroll to the Human Resource Coordinator. At that time it was decided (and council agreed) that the city needed to start training staff to learn the finance director duties in anticipation of retirements in the future. Connie Hillman, who was subsequently hired as the PR/Accounting Specialist, came to us as a CPA and does do accounting (CPA) work, especially in the area of the audit and preparation of budget worksheets, in addition to payroll responsibilities. She is learning the Finance Director duties and responsibilities and is a great asset to the Finance Department.
Minnesota statutes state that staff must honor “data” requests and do not have to provide “explanation” requests. We have provided some explanations in the past, but it takes more staff time to do so and can be confusing to a reader who may not fully understand governmental accounting.
This memo, which is the result of over 20 hours of our time, is a response to some of the claims against the finance department as asserted in Mr. Olson’s report. Thank you for allowing us this opportunity. We are more than willing to discuss with council any questions regarding the information presented in this memo and or any changes they want to see in how financial information is presented.
Theresa Goble Interim City Administrator/Finance Director
Connie Hillman PR/Accounting Specialist