Auditors find $1 million discrepancy in city finances

Thursday, July 6, 2006

By Ralph Pokorny

Nevada Daily Mail

Tuesday night the Nevada City Council received notice that the city has about $1 million less than the budget reflected, due to bookkeeping errors, according to a report from auditors recently charged with reviewing the books.

"The money is not missing," Terence Sercer, a C.P.A. with Diehl, Banwart & Bolton, told the council Tuesday night during a presentation of his findings in an audit of the city's finances.

It was used to pay off the city's 1993 combined waterworks and sewage system revenue bonds in March 2004 as it was intended to do; however, a bookkeeping error that was not caught until the finance director revised the 2006 budget on June 6, left that money in the budget, he said.

"The money was taken off the city's books, but not the budget," he said.

"And everyone works from the budget," councilman Dick Meyers said.

Sercer told the council that when the city set up the revenue bonds it put $600,000 in a trust that was in an account separate from the rest of the city's funds. Over the 20 years it accumulated interest and that money was used to make the $1,060,000 final payment on the bonds in 2004.

Although the money was kept in a separate account, it was included in the city's water and sewer fund cash in the 2004 budget, he said.

Usually, when a municipality pays a bill a check is written for that amount. This time there was no check written -- the final payment came from that money held in trust, he told the council.

"That's why it never got to the books. The money went directly from the trust to pay the bill," Sercer said.

It was a simple error, he told the council.

"That was the biggest thing we found," he said.

However, this finding will make preparing a budget for 2007 much more difficult, since in 2004 and 2005 the city transferred about $1 million each year from the water and sewer fund to the general fund to make the budget balance, he said.

"Without that $1 million the city cannot make a $1 million transfer," he said.

Sercer was hired by the city council in May to look for "apparent financial discrepancies between the numbers in the budget and the accounting records of the city; notify the Council of any apparent technical errors in the budget such as using money designated for a specific purpose but budgeted for an unauthorized purpose" and bring any budget items that may lead to future problems to the council's attention.

In addition to the $1 million discrepancy, Sercer's audit report also shows several other possible problems with the budget.

According to the report, the city will end 2006 with a negative balance of $100,390 in the general fund and a negative balance of $84,545 in the water and sewer fund.

Since the city cannot have a projected negative budget, the 2006 budget will have to be revised to account for these shortfalls, he said.

Since this report was issued June 16, Sercer said that the city manager and city staff have worked to overcome these shortfalls.

City manager Harlan Moore said that on the day the city received the report, he met with department heads and they made a number of cuts to address these problems.

Sercer told the council that although the city will need to revise its budget as soon as possible to account for what he found, 2006 will be OK.

According to his report, there are about $230,000 in capital lease payments due in 2006, and he could not specifically identify them in the budget at the time.

However, he noted that since the report was written he has found out that these payments are apparently in the 2006 budget; however, the budget needs to be revised to specifically identify those payments in the budget.

Sercer said that when he wrote the report there was a question about whether the sales tax collected for sewer improvements and related capital improvements was used in the year it was collected. Since then, he said, he has learned that a lot of the work was done by city employees rather than by outside contractors, which is fine.

"It appears that is OK too, but I am still waiting to get the exact numbers," he said.

Ninety-five percent of the total cost of the airport runway improvements is being paid for by grants; however, that still leaves the 5-percent match for the city to come up with, he said.

Since the report was written, he said that he has learned that there is a loan program at a very good interest rate that can be used to pay the match.

"You need to revise the budget to show that," he said.

"That loan is not a done deal," Meyers told him.

"If you want to do the project you will have to come up with the match from somewhere -- or you can let the grants go," Sercer said.

He told the council that when he wrote the report he understood there was an ordinance requiring the city to have a $200,000 reserve fund to cover replacement of the permeators at the water treatment plant; however, since then he has found that there does not appear to be an ordinance requiring this.

"That being the case, you don't have to keep $200,000 in reserve," he said.

However, "you will have to add to the projected cash balance to include the utility deposits," he said.

Sercer said that there are two other issues that should be addressed.

Over the past two years, more than 20 percent of the general fund budget has been funded with water and sewer utility revenues.

"The water and sewer fund no longer has the money to do this, so you will need to look at making budget cuts in the future or raising water or sewer rates to cover the expenditures," he said.

The other issue that the council should address is a $420,000 loan from the water and sewer fund to the general fund in 2000 or 2001, which was used to help fund the transition from the city's collecting and receiving property taxes in December to having the townships collect the property tax and the city receiving the taxes in January.

"At this time it does not look like the city will be able to repay the loan," he said.

"There is nothing illegal about transferring money from the water and sewer fund to the general fund, but if it's not going to be paid back, call it a transfer, so it doesn't have to be paid back," Sercer told the council.

Sercer told the council that he has included some days in July that he can spend in Nevada, to help the city resolve these problems.

In other business the council:

* Passed on first reading a special ordinance approving a supplemental accounting agreement with Diehl, Banwart & Bolton, P.C. to provide consultation on various accounting issues, including assisting the city in finding a solution to its budget problems.

* Voted 4-1, with Dick Meyers voting no, to table consideration of an agreement to hire the Robert J. Saunders Organization to recruit a new city treasurer.

* Voted to table the second reading of a general ordinance to add a local vendor preference section to the city code until the council members have time to examine proposed changes to the ordinance under consideration.

* Passed on second reading a general ordinance correcting a typographical error in Section 3-27c of the city code. The error in the code prevented restaurants located on the city Square from getting a license to sell liquor.

* Gave final approval to a general ordinance amending Chapter 19 of the city code to prohibit the use of engine braking by trucks except in an emergency.

* Passed on second reading a special ordinance authorizing a governmental cooperative contract with the Vernon County Ambulance District to run fiber optic cable to the ambulance district. The city is currently running a fiber optic cable from the water treatment plant to the water tower on Tower Street to enhance the monitoring of the water level in the wells as well as to provide a secure link between the Nevada police and fire departments and the Vernon County Sheriff's Office.

The connection to the Vernon County Ambulance District will improve the communications between the city emergency operations command center at the police department and the back-up EOC at the Ambulance District. The Ambulance District will pay for necessary fiber cable and associated equipment.

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