Audit: City in good financial shape

A Princeton city audit report last week could lead to a more favorable city tax levy in 2013.

That’s based on a conversation that Mayor Jeremy Riddle, treasurer Steve Jackson and City Administrator Mark Karnowski had after last Thursday’s city council meeting when an audit report had been given on the city’s finances in 2011.

Riddle said that because of the favorable financial situation that the audit showed, the council might not have to levy quite as much as it might otherwise when its sets the 2013 levy.

Riddle was reacting to the audit showing that the 2011 general fund revenue of $3,026,596 was $107,431 over the council’s revenue budget of $2,919,165. Riddle was also pointing to the general fund expenditures of $2,798,345 in 2011 were $164,440 under the general fund expenditure budget of $2,798,345.

General fund expenditures were above the budget in some categories, such as public safety where the budget was $1,307,815 and the actual spent was $1,312,134. Public works was also over, coming in at $552,631 in expenditures compared to the budgeted $543,565 and parks and recreation had $267,004 in expenditures compared to the budget of $227,720.

But general government/economic development expenditures were at $591,604, significantly less than the $772,380 budgeted. Also, capital outlay had $74,972 in expenditures compared to its budget of $111,305.


Revenue side

The largest situation of general fund revenue exceeding budget in 2011 was in the property tax and license/permits categories. The city budgeted $1,727,075 for property tax revenue, but took in $1,781,205. Meanwhile, the licenses/permits budget was $142,395 while actual revenue was $166,046.

The accounting firm, KDV, performed the city’s audit and KDV’s Jackie Knowles gave the report to the city council.


Favorable trend

Knowles pointed to a favorable trend in the city’s general fund balance during years 2007-11. The fund has steadily risen in that period, going from $1,682,777 in 2007 to $2,010,518 in 2011, an increase of $327,741, or 19.5 percent.

The audit also shows how the general fund balance relates to the city’s expenditures in each of the years 2007-11. As a fraction of the expenditures, the fund balance was at its lowest in 2008, equal to 58.2 percent of expenditures.


Fund balance policy 

The city’s policy is to have 30-50 percent of the subsequent year’s budgeted expenditures as unassigned fund balance. The city exceeded its policy on Dec. 31,2011 by having $1,945,103 in unassigned fund balance, which is 59.6 percent of 2012’s expenditure budget of $3,263,420.

Governmental units, including school districts have general fund balances to provide cash flow between revenue collections.

“Our experience,” the KDV audit report states, “indicates a fund balance of approximately six months of operating expenditures to be adequate for most cities.” The city’s fund balance was just over eight months of expenditures on Dec. 31, 2011.


Tax capacity

The audit also points out how the city’s tax capacity, or tax base, declined between 2009 and the end of 2011, Knowles said that this trend is common in cities because of the market values having declined in recent years. At the same time, Princeton city’s tax levy rate increased, because the city had less of a base to spread out the tax burden. The actual tax levy did increase between 2009 and into 2011 but did not rise as much as the tax rate, according to a graph in the audit.

Here are some figures illustrating the above: The tax capacity in 2009 was at $3,396,786, dropping to  $3,340,162 in 2010 and $3,009,781 in 2011. The city tax rate was 62.37, 65.37 and 72.54 in those same years respectively.

The certified tax levy in the same years was $2,117,086, $2,184,179 and $2,183,355, showing that it rose between 2009 and ‘10 and then dropped some in 2011.


Where the money goes

As in past years, public safety accounts for the largest fraction of the city’s expenditures. It was 46.9 percent of the 2011 budget, compared to 20.4 percent for general government, 19.7 percent for public works, 9.6 percent for parks and recreation, 2.7 percent for capital outlay, 1 percent for cemetery, and .7 percent for economic development.


Increased liquor sales

Princeton’s off sale liquor store (Princeton Wine & Spirits) is bucking a trend found in a lot of cities. Whereas alcohol sales have decreased during the recession in many places, Princeton’s off-sale liquor store has had an increase in sales, auditor Knowles told the council.

Council discussions about the liquor operation have shown, however, that customers are generally going to less expensive alcoholic beverages at the city’s off-sale store.

The liquor store had $2,579,259 in sales in 2011, compared to $2,535,980 in 2010. Operating income was $177,147 in 2011 after subtracting $1,960,744 in cost of sales and $441,774 in operating expenses.

The store’s gross profit percentage decreased slightly in 2011 from its peak in 2010, but this is a “significant improvement from the gross profit percentage in 2008,” the audit report states. The gross profit percentage in 2011 was 23.98 percent, while in 2008 it was 20.53 percent.

KDV recommends that the city continue to review its liquor store markups on all its products to see if it could bring the gross profit percentage up to its target of 25 percent. KDV also suggested continuing the marketing of new products, promotions and displays of higher margin products.

The liquor fund’s net assets in 2011 was at $3,617,309.


The airport

The city airport’s net assets at the end of 2011 was $1,839,050, a decrease of $83,960 from 2010. The audit explained that the decrease came after an operating loss of $169,146, nonoperating grant revenues of $46,567, and transfers in of $38,610.

The airport’s gross profit and operating revenues declined by $5,612 in 2011 due to the cost of sales exceeding sales revenue. KDV recommends the city review its pricing on its aircraft fuel (a self-serve operation) to ensure the cost does not exceed the sale price. The airport’s operating expenses rose by $21,154 between 2010 and ‘11 due to an increase in materials and supplies and depreciation expense on pavement rehab and airport sign projects.


Sanitary sewer

Year 2011 was the second year in a row that the sewer fund had an operating income, though it decreased by $64,961 between 2010 and ‘11. KDV attributes the drop to a decrease in sewer access charge and trunk sewer fees, which were partially offset by an increase in usage fees.

Revenue in the sanitary sewer fund dropped from $642,049 in 2010 to $614,415 in ‘11. KDV noted that the new Sterling Pointe senior citizens apartment building accounted for much of the 2010 revenue because of hooking into the sanitary sewer system.

The sewer rate had its first part of a two-phase hike in 2011, the second phase coming in the spring of 2012. The fund’s operating expenses increased $37,327 in 2011, mainly because of two factors: An increase in utilities costs at the wastewater plant expansion construction site, and more cost in hauling and disposing of biosolids from the plant.


Auditor’s suggestions for improvements

Keeping better track of the liquor inventory, developing a plan for negative fund balances, dealing with unclaimed property and attempting to have a segregation of financial duties make up the list of the auditor’s suggestions for improvement.

The recommendation on segregation of duties in the finance department is one that has been repeated for more than three decades and will likely never be corrected to the ideal because of a small city finance staff.

KDV notes that the city’s finance director has full general ledger access and the ability to write and post journal entries. “While we believe this access is necessary to efficiently perform the financial duties required, this access has the ability to override many of the controls and segregation the city has in place,” the audit states.

KDV acknowledged that the city determining that having a complete segregation of accounting duties is “impractical” because the cost of obtaining desirable segregation “can often exceed the benefits which could be derived.” The finance department consists of the finance officer and a finance clerk.

The city’s response is that it agrees with the auditor and has taken measures to help reduce the exposure by requiring three different people at all times to sign or stamp every check.


Liquor inventory

The audit states that while most of the samples of the city’s liquor inventory reporting were correct, there were some variances. In those cases the amounts listed on the liquor store’s inventory reports differed from actual amounts on hand. Also minimal documentation was available to review periodic adjustments made to inventory balances.

“We recommend the city and the liquor store manager continue to monitor the inventory at the store, reconcile any variances on a regular basis and document adjustments to the inventory system,” KDV wrote.

City’s response: “With the move into the new store (May 2007), the inventory quantity, as well as a number of different products increased significantly. This increase resulted in some difficulty in establishing tight inventory control and counts. As 2012 progresses, spot checks will be increased and finance department personnel will be involved in reviewing the counts.”


Develop plan for

negative balances

The city at the end of 2011 had 15 funds with a deficit fund balance and that eight of the city’s funds had limited or no activity.

“We recommend the city council develop a plan to eliminate negative fund balances in these funds,” the audit states. “In addition, the city should review the process of incurring project development costs for capital projects that may not come to fruition and develop a policy for funding start-up costs. We also recommend the city close funds that have fulfilled its purpose.”


City’s response

“Some of the funds with deficit balances are a timing issue and will correct themselves once all revenue and adjustments are made. In addition, in 2012, the city will work on developing a plan to eliminate fund deficits in other funds.”


Unclaimed property

The auditor also noticed some outstanding checks the city had sent out that hadn’t yet been cashed. City finance director Steve Jackson says there are three or four checks and the total for all of them is under $1,000.

The auditor pointed out that the state requires a city to report and deliver to the state commissioner of commerce any unclaimed or uncashed checks or other intangible property over $100 that has been held for more than three years.

If any of those include payment for personal services or wages, these items are presumed to be abandoned after one year, and not three years, according to KDV.

The city responded that it will submit new checks to the parties if possible, but if not, it will submit uncashed checks to the state commerce commissioner.