BY MARK J. CRAWFORD
Telegraph Editor
Overall, auditors found no deteriorating conditions as they examined Starke’s accounting for FY 2022, although city commissioners were warned about a “substantial issue” with the general fund.
Caleb Perla, a partner and Powell and Jones CPA, presented the report earlier this month. This is the first year the firm has audited the city of Starke, and the year in review was Fiscal Year 2022, which ended Sept. 30, 2022.
Perla provided an overview of the financial statements in the audit report, including the status of the city’s governmental funds.
The general fund’s ending fund balance, or net worth, at the end of FY 2022 was around $898,000, but only $408,000 of that money was unassigned and available to cover monthly operating expenses. That amount would have covered slightly less than two months of expenditures, which is the minimum recommended by the Government Finance Officers Association.
“So, you’re actually just below that required or recommended minimum by the organization. So, just something to keep in mind there. You want to definitely try to increase that over time to make sure you have enough reserves to meet ongoing obligations,” Perla told the commission.
The general fund balance was down from $1.36 in FY 2020 and $1.15 million in FY 2021 — a downward trend Perla also noted.
“Over time those fund balances have been dwindling, which is creating a potentially dangerous situation,” he said.
Spending from the general fund outpaced new revenue, resulting in a $396,000 reduction in the fund balance. Ideally, Perla said, the city should be breaking even. Without a transfer of $602,000 from the city’s utility enterprise fund, the general fund would have reflected a nearly $1 million loss, he said.
“The general fund is running a large deficit this year. And it’s not just this year. It’s been doing that for several years, and it’s definitely a concerning situation,” he said.
Measuring operating income or loss as a percentage of revenues, Perla noted a 24% loss.
“Just operating your general fund without extra investment is costing you 25 cents on the dollar, basically more than what you are making. So, for every dollar that comes in, you have to put an additional 25 cents to keep the thing going,” he said.
Keep in mind this is a historic look. A full year — FY 2023 — separates this report and the current fiscal year. For FY 2024, the commission has made targeted cuts in the general fund to liberate its reliance on utility fund transfers.
Starke’s other governmental fund is the transportation fund, which is primarily funded by gas tax revenue and is restricted to expenditures on transportation infrastructure. There was a $2.6 million fund balance at the end of FY 2022. Revenues were over expenditures by $186,000 for the year, and the operating income as a percentage of revenues was 52%. By saving 52 cents on the dollar, Perla said the city is building up reserves for future capital improvements.
City’s business was booming
Moving on to the city’s proprietary fund — the utility enterprise fund — the fund is intended to fully operate from customer charges for water, sewer, electricity and gas, Perla said. The accounting is different for this business fund, measuring total assets and deferred outflows ($32.5 million) to total liabilities and deferred inflows ($4.98 million). The result is a net position of $27.57 million. The city could have operated its utilities for nearly seven months without any additional revenue coming in.
“The proprietary funds are in a much better financial position,” Perla said.
Unlike the general fund, the financial position of the utility fund has been improving. Since FY 2019, when the net position was $20.8 million, the figure has grown by millions of dollars every year. Looking at revenue and expenditures for FY 2022, the city had $13.98 million in utility revenue and just over $12 million in expenses. After some nonoperating revenue and expenditures, capital grants of $875,000 and that transfer of $602,000 to the general fund, the utility fund had a $2.58 million positive change in net position.
Pension liability continued to drop for the fourth time since FY 2019 to a low of $1.19 million, down from more than $4 million. The pensions for general employees and firefighters were 92% funded, while the pension for police exceeded 104%. These numbers fluctuate based on stock market investments, so it is likely the city will see the percentages drop when the FY 2023 audit report is issued, according to Perla.
Improvements over 2021
Auditors found three material weaknesses or significant deficiencies in FY 2022, which was down from nine findings the prior year. Auditors also made three recommendations, down from four for 2021. There were no comments about compliance in 2022.
Auditors also audited the use of federal American Rescue Plan Act funds and found the city in compliance.
One repeat material weakness was an incomplete schedule of expenditures of federal awards. Some grant amounts were excluded, which required a revision of the schedule. This was attributed to ineffective controls on the review of the schedule. They recommended city staff themselves with the requirements and perform a secondary review before submitting the schedule to auditors.
The city implemented new enterprise software in FY 2023 to assist with better financial reporting.
A second repeat material weakness involved tracking and review of capital assets. According to the report, “the listing of assets included several old assets that were no longer in service, dispositions of capital assets were not being properly documented, and there were numerous older assets that were fully depreciated which require review to determine whether they are still in service.”
The new software will also assist with asset tracking. A policy adopted in 2021 set the path for more accurate reporting, according to the city. It began cleaning up old asset records in FY 2022 with a completion goal of FY 2023.
A new significant deficiency was noted because employee retirement contributions were not properly coded in payroll software as pretax deductions. The city says this has been resolved and the deficiency should disappear in the 2023 audit report.
Auditors again recommended the city adopt a pooled cash system instead of writing all checks out of the utility fund and recording expenditures related to other funds separately. The city agrees but could not begin the process until the new enterprise software implementation was completed.
Auditors had to make an end-of-year adjustment because inventory was not being routinely reconciled to the accounting records. They recommended monthly reconciliations of the inventory and accounting software systems. The new software system is expected to fulfill this recommendation.
Finally, auditors recommended the city adopt a policy specifying what the unassigned balance of each fund should be to help monitor the sufficiency of these unassigned funds. This is the money not committed to any other purpose that the city can use for operations. A minimum of two months is recommended.
The city adopted a fund balance policy in 2021 that needed updates because it did not cover the general fund. While it didn’t have a policy that covers every fund in place, budgetary changes made for FY 2023 and FY 2024 were meant to ensure adequate reserves in every fund, according to the city.
“We do a financial condition assessment which we determine that there were no deteriorating financial conditions, but I will note that condition assessment is looking at this the government as a whole, which is kind of in balance, but there is still substantial issue that needs to be looked at with the general fund,” Perla said.
Substantial improvement
But Perla also said there was substantial improvement comparing the audit for FY 2022 to the year before. This being Powell and Jones first audit for Starke, he said they considered the city’s history before taking the engagement.
“We talked with city staff and were impressed with the attitude and outlook towards those issues,” Perla said, commending City Clerk Jimmy Crosby for selecting an “excellent” finance team that is both willing and able to take on the work.
“I believe that with their current level of effort and their trajectory, and where they’re taking things, that all those issues are going to be resolved in the next year or two,” Perla said.
Crosby thanked Finance Director James Hughes, consultant Jim Farrell and senior accountant Latia Davis for all of their extra work. He also thanked commissioners for making tough decisions about the budget that will be reflected in future audits.
