TRANSCRIPTION:
Regarding Improper Repayment Schedule and Insufficiency of Payments
for the City of
Excerpt from State Auditor’s Feb. 25, 2004 presentation re City’s interfund loan
Excerpts from 11/10/05 Council Budget Workshop
Excerpt from 11/16/05 Council Budget Workshop
Excerpt from Nov. 10, 2005 Council Budget Workshop: Comments Re State Auditor’s Review of City’s Interfund Loan payments
AUDIO OF THIS EXCERPT (1.9 mb, approx. 5 min.)
Tolson I want to let you know up front that we do have, with the financial situation with the city, we had interviews with the state auditors today, preliminary interviews before the exit audit, which will be coming [unintelligible]. And in light of that report, I felt that we needed to take immediate measures to address our spending levels, and I’ve issued an absolute mandatory spending freeze on non-essential items in the General Fund. Departments who are self-supporting, i.e., water, sewer and those areas –
Connie Dunn Garbage.
Tolson -- garbage – those that provide their own funding, they have monies coming in, at this particular point of time, until we get a complete and accurate picture of where we are at and the activity that we have to take in order to deal with some financial issues, we’re not spending anything.
Boyd Okay. I have to ask. Why do we not know where we’re at? Last night we were at $31,000 to the good [referring to the financial and budget report/status given by L. Koenig during 11/09/05 Council meeting]?
Tolson Well, this is in regards to—I’ll just, I’ll just pull the cat out of the bag. In 2003, the $300,000 loans that were taken by the, the council from other departments, we stipulated that they would be repaid. And according to the documents with, uh, that were with the Auditor, that they would be repaid in 2004. I don’t know about you, but we didn’t have an extra $300,000 sitting around in 2004. So we have to, we have to address that as, as a council, make, make changes and get a plan to the State. As long (sic – “along”) with a number of other things as well.
[pause]
Boyd How did we not remember that? I mean, how did –
Tolson It’s not an issue of remembering. It was an issue….from….you –
Boyd Bruce?
Tolson Hi, Bruce [laughs]! Do you remember the stipulation of the repayment on that loan – on that $300,000 worth of loans?
Champeaux [sounds like he said, “We’re paying it off.”]
Boyd That’s what I thought.
Tolson Well, according to the Auditors, it was to be repaid in 2004.
Koenig See, two of them, it was two of them.
Boyd Well the last discussion –
Champeaux We had a $200,000 loan to start with we borrowed from Connie’s department as a ten-year loan, correct? And then it was – we borrowed another hundred thousand. Right?
Koenig According to the promissory note it was a two-year loan.
Tolson Well it was specifically said in the council [unintelligible] --
Champeaux [talking over; first few words lost] making sure that we were [unintelligible] making $20,000 a year --
[simultaneous comments]
Tolson But we took out another $100,000 right there before the end of the year, to make it $300,000 total. I remember the $200,000. Then when I came, came in, I missed the last council session before the end of year, and I took office and, “Oh, by the way, we took out another $100,000 loan.” It was 300 -- $300,000, and I went [chuckling] --- “Oh, by the way!” So we have to address that in rather a speedy manner and it will impact our budget.
Koenig I pulled both resolutions. I’m not sure if we changed it when we did the second loan. But I think the ones she [referring to the auditor?] has says two years.
Boyd Well, specifically when I joined the council, listening to Bruce bring up that $200,000 that nobody had written down -- Bruce remembered it -- and it said, and it was 10-year loan we had to pay back. And Bruce – [simultaneous comments, Boyd and Champeaux] set aside $20,000 a year for it.
Champeaux Did we – when we rolled it to a $300,000 loan, did we [unintelligible] –
[simultaneous comments]
Tolson I don’t know.
Koenig I’ll check the doc--I’ll check the document.
Tolson I think we made, what? $60—$60,000 in payments on that? Which would be the equivalent of $30,000 a year? Which is, which is fine with that (sic), but we don’t have in, have in place within the parameters. And the Auditors are... to put it mildly…concerned. So… And with that, until we get this all squared around, we’re not spending anything. So! Let’s jump into the fun aspect of looking at our budget for 2006.
LATER EXCERPT IN THE NOV. 10th WORKSHOP….
AUDIO OF THIS EXCERPT (1.4 mb, approx. 4 ½ min.)
Boyd And this $300,000 loan, that’s just…. I cannot – that just amazes me. That should have been flagged somehow. Laura, I can’t believe that you don’t set – I can’t believe you don’t tell us that. Who’s supposed to tell us? I don’t know.
Koenig [talking over] I, I have – I have talked to you about the loan. I –
Boyd How come all the rest of you [unintelligible] the 10-year loan?
Koenig You know, the auditors [unintelligible] told me. It says two years. I agree with Bruce. I thought it was along the line, because we had allocated it all in our budget about whether or not to [unintelligible] -- [simultaneous comments]
Boyd They probably don’t make mistakes like that, do they?
Koenig I haven’t [unintelligible] --
Tolson Auditors are human beings.
Koenig I would like to pull that, uh, the, the council minutes. But I’m sure that it wasn’t [unintelligible] when we did the additional loan.
[simultaneous comments]
Tolson I’m sure it wasn’t spite, but we – [laughs]. And I think, you know, a typo of “ten” to “two” is a realistic thought. So…
Koenig And, see, you have to remember when we did these two that it could be typographic[al] [error] because we literally, in one resolution, there’s like three different interfund loans…that are all in the same resolution.
Tolson Well, one way or the other we have to address it. And we get to be the ones to do that. And we’re [unintelligible] 10-year. I don’t – you know, to me, operating with that knowledge is, is, is doable. But when we’re told that we’re going to have to get this thing taken care of in, in, in the short term, you know, the next year, there’s….
Koenig Well, actually what they’re saying is –
Boyd We’re in trouble.
Koenig -- what, what – and I talked to Tom about this, too, and I’ve talked to the auditor, you’re not tied into doing it, you’re tied into correcting it.
Boyd Um-hm.
Koenig Which means correcting the promissory note to be what , you’re not tied into doing it, you’re tied into correcting it.
Boyd Um-hm.
Koenig Which means correcting the promissory note to be what you – you know, if it says “two years” then we could bring it back and we change that promissory note, so [unintelligible].
Boyd [talking over, unintelligible few words]
Tolson Are there penalties involved with that?
Koenig No.
Boyd Wouldn’t the ordinance state what it was supposed to be, Laura? I mean, in the original ordinance?
Koenig Yeah. And that’s what I need to pull, is the original documents. I don’t have them in front of me tonight, so…
Tolson That’s, that’s just the beginning right there –
Koenig [talking over] I’m, I’m just going to –
Tolson I mean the comments from the auditor is, is it’s – their concern is our financial feasibility. Not just that issue, but there are others. So that’s, that’s not the only one that’s [unintelligible].
Boyd No, I’ve just been saying that… I guess… the formal information I see in front of us, I don’t see how it would be – I mean, I know this is [unintelligible] of all the department heads, I don’t see how we can sit there and justify hiring anybody at this time. And that’s…
Tolson Well, it comes back to, and in looking at it from that perspective of what funds will be paying the bills.
Boyd But you almost can’t hire anybody, even if it’s 100% and doesn’t affect the General Fund.
Tolson Correct. And that’s, that’s what we have to look at. That’s what we’ve got, we’ve got to figure out all the percentages on this. And we get the formula from Prothman to help us with that. But as soon as we get that, which we should have in the next week or two, uh….
Voice [unintelligible, mumbling]
Tolson And that will give us – help us to identify how our expenditures are, even from a city hall level, as to delegating those dollars out. And we’ll give that to you as soon as we get it.
Boyd And that, that stormwater fund [unintelligible] to be one big issue. That’s money [sounds like he says either “found” or “fund”] right there.
Tolson Well, it’s – it – but yet those dollars are also going to be tied to…
Voices Stormwater.
Tolson It’s not going to be something that’s going to be spread out –
Connie Dunn [talking over] It’s not a general – it won’t be a general fund.
Tolson -- it’s not going to be a general fund. It’s going to be tied to this –
Boyd [talking over] It’s something we can pay – it’ll pay –
[simultaneous comments]
Tolson All these dollars are going to be tied to taking care of stormwater. It’s not going to –
Boyd I understand that.
Tolson -- take care of any other problem. So.
Excerpt from the Nov. 16, 2005 Council Budget Workshop: An explanation by City Clerk Laura Koenig regarding the problem and the fix
Koenig Okay, well I’m going to tell you what I have [unintelligible]. A lot of other people have had the paperwork, too. I’m going to answer a couple questions from the last meeting. General Fund loans, there’s a little sheet here on [unintelligible; someone coughs] fund loans. There was a question – in 2002 we made a $200,000 loan. The original resolution, that called for a two-year replacement sched—repayment schedule. In 2003 we took out $95,000, which changed that to a $3,500 payment. It was the intent of that second resolution that those two loans be combined to make one payment of $3,500 a month. The verbiage in it is not correct to do that, which is why there’s confusion, because there are two different resolutions. Right now we’ve paid $21,000 of payments. So the balance of the combined loans is $274,000. In December, as part of our close-out, we’ll make this year’s payment of $43,000, which will leave a balance of $232,000. And what we’re recommending is that we revise that resolution to clarify what the payment schedule is supposed to be.
Boyd And you [unintelligible] revised to anything? Change it to a 10-year repayment [simultaneous comments]?
Koenig We can change it to whatever funds you guys want to put into it?
Boyd Is the auditors going to come back and say [unintelligible] --
Tolson They’re still [sounds like either, “buying this” or “bind us”] because it’s an existing problem.
Koenig What they –[ what they –
Boyd But they’ll accept this as a solution to, to –
Tolson In the future, yes. Sure.
Koenig Yeah, it’s – they’re [unintelligible] what they want us to do is to fix it to make it what we actually thought the payment schedule was supposed to me.
Boyd Not that it matters. I’m sure they don’t care. Does anybody -- ? I mean, all of us here thought it was a ten-year loan.
Koenig Well –
Boyd Exactly –
Koenig -- based on, based on the second resolution, it should have been a 10-year loan. The second, the second resolution is not clear on that.
Boyd Oh.
Koenig So it says “thirty-five hundred dollars” but [unintelligible] specified the 10-year pierod.
Tolson Okay…
Koenig But if you had calculated it out, that’s how long it would have run.
Champeaux I don’t remember thirty-five hundred [unintelligible].
Tolson But that’s…
Champeaux All [unintelligible] repayment.
Koenig Yeah.
[pause]
Koenig You read in the minutes, our [unintelligible] on with what we discussed?
Tolson I, I’ve, I’ve seen them, yeah. And that’s…. I’m just [unintelligible] my slideshow.
[simultaneous comments]
Tolson That’s my screen-saver. No, the, uh – That – what was, what was emailed to you is the minutes that is consistent with that. But, yeah, moving onto that is what we need to do. And we’ll get that included on the, the agenda for next –
Koenig Yes.
Tolson -- session?
Koenig Yeah. So anyway, we’re going to [unintelligible] that resolution. But that’s kind of [unintelligible; someone coughs] anything else you wanted to know what was going on [unintelligible].
Boyd So if we change – if we’re changing it back, are we A-OK on our payments? Have we made all our payments accordingly?
Koenig Yeah. We need to have money to make your payments. But this year you will pay catch-up. Last year we made half of the payments, which should have been the first year of the revised loan. And this year you’ll make the [unintelligible] payment.
Boyd Will we catch up [sounds like, “our rear stuff”] or not? Or we don’t know that?
Koenig Well, that kind of depends. We’re going to go through three different scenarios for next year’s budget.
Boyd Okay.
Koenig That’s really going to be dependent on where our revenues end up at the end of the year, or our reserve ends up at the end of the year. And as [unintelligible] we just keep payment off what we owe. So in the reserve, you guys can change that payment schedule. [simultaneous comments] If, if, if, if he says to chain (sic) your loan, you can pay it off in one year.
Boyd I understand that.
Koenig So whatever extra monies you have would be [unintelligible] to pay.
Boyd We have two contradicting payments here, haven’t we?
Koenig That’s why we’re fixing it. We’re going to clarify that and make it back to the intent of the second resolution [which] was to combine the two into one and have one payment schedule.
Blair I’m sorry. Could you answer the one question? Are we going to make up what we didn’t pay in ’04 on this resolution?
Boyd We don’t know yet.
Blair [unintelligible].
Koenig We will make this year’s payment. We probably will not make up the $21,000 that we didn’t pay last year.
Blair Okay.
Koenig But it will be incorporated into the new payment schedule. Okay. We’re going to do – the next one here, there’s a couple of charts here –
Boyd One more thing, Laura. Can – will this new software, when it comes in, will it be able to flag something like this?
Tolson This is – This wouldn’t have been red-flagged because of the way that the – because this is a resolution…
Koenig Um-hm.
Tolson …and it, it’s just something – it would probably red-flag on the standpoint [that] we weren’t making the payment…
Boyd Exactly. We weren’t making the $3,500 a month payment.
Tolson Those, those, those things would be brought out, I’m sure [unintelligible] was. But the issue is, is it can only report back to what it’s been told to report back. You know? I mean, if we – if –
Koenig It’s part of the annual report and it’s part of your budget process. Uh, they, they say, you know, I thought that the resolution was correct and when I read it, I find that it wasn’t. So it’s something you need to fix. And it’s something that’s included in the annual report, so we review it every year. It’s in your budget.
G.R.I.T.’s Transcription of State Auditor’s presentation to Sultan City Council February 25, 2004 Meeting concerning City’s interfund loan situation:
See also: Auditor’s Financial Report for 2001/2002 audit period
J. Broyles And the City's response here is pretty explanatory. Does anybody have any questions on this one? [silence] And at the bottom of the finding, there's the applicable laws regarding the budget for optional code city, which you are. And then the last one in here relates to the financial condition of the city. At the close of business 2002, the current expense fund had a fund balance of only $3,850, and three funds -- the street construction fund, the LID fund and the payroll clearing fund had negative fund balances. The problem is exasperated [sic - exacerbated] by the city council authorizing a loan from the utility to cover general fund expenditures. Without that loan, the general fund would have ended the year about $200,000 in the hole. In addition, another $100,00 was loaned in January of this year to close the year out, I believe, in the black. Is that right, Laura?
Koenig Um-hm.
J. Broyles Haven't seen it yet, so… The deal on -- the basic thing on -- when you make an interfund loan, the concern we had was that the BARS manual requires that the fund making the loan -- the fund receiving the loan has to have a reasonable opportunity repay the loan. There was no -- the original promissory note called for two equal annual installments from the general fund of the utility. Neither one of them happened. And at the point of -- at the end of fill-work, it wasn't likely that it was going to happen in 2002. So if you're going to make an interfund loan, the fund that is giving the loan has to have some sort of capacity to repay it. In addition, there's some issues regarding allocation of overhead, particularly Finance Department overhead to the utility fund. That's certainly something you can do, but there's no….there was no time and effort or any other [sounds like, "study"] to indicate that the city actually examined how much it was costing for Laura to process warrants for the street fund or the utility fund. The numbers seemed arbitrary to us, and we wanted to see some sort of study that shows, you know, Laura spends 40% of her time on the water fund and 10% on sewer, or whatever, so that it supports the amount of money that's being charged to the utilities as overhead.
S. Armijo Are there any questions on that?
J. Broyles This one's [unintelligible -- "fairly"?] complex, so you can feel free to ask a quest--ask questions, you know?
Tolson Was that through a note in here that says, uh…at the bottom of Item two it says that, "however, the amount does not appear to have been repaid." Was that just through this time period? Is that to date, or did you go that far as far as your…?
J. Broyles We left fill work on December 23rd, and at that point it had not been. And I know that in the adopted budget for 2004, there was a payment plan, or $3,800 a month or something for the utility loan…? Laura? Am I right on that?
Koenig Yes.
J. Broyles Okay. And to be fair, we haven't checked to see if that happened in January. It was set up, the new resolution called for monthly payments, and I don't know if that's happened yet. Any other questions on this?
Criswell You say there [are] monthly payments? I thought they were, like, quarterly.
Koenig They were set at --
Criswell Twice a year, or maybe --
[simultaneous comments]
J. Broyles The original terms called for two, two annual payments, but neither one of them happened.
Tolson Two annual lump sum payments to wipe it out in total?
J. Broyles Right. That's what the resolution called for.
Criswell [unintelligible]. That was my question.
Koenig I did…I am just working on the January close-out.
Criswell Oh, okay.
Koenig [unintelligible].
For a deeper understanding of the status of the interfund loans and the State Auditor’s recommendations on improved processes and procedures for the City of Sultan, we highly recommend that taxpayers read the Auditor’s “Report on Financial Statements and Federal Single Audit” for the January 1, 2001 through December 31, 2002 reporting period.