Commonwealth Journal

March 13, 2014

Auditors: City needs more help closing its books

Overall financial health good

by Heather Tomlinson
Commonwealth Journal

Somerset —

The City of Somerset’s 2012-2013 fiscal year audit was a relatively clean one. 
But auditors had a few concerns, requesting that more employees be hired to help close the books annually for the city, which has nearly $145 million in assets, and that city officials take into consideration their share of the state’s in-the-red pension fund. 
Jerry Hensley, with Ray, Foley, Hensley & Company, PLLC, presented the 58-page audit report to Somerset City Council during Monday’s meeting. Hensley led councilors and Somerset Mayor Eddie Girdler through a short summary of the report, which featured detailed analyses of the city’s numerous funds — both business and governmental — and a report of the city’s overall financial health. 
Hensley said the city ended Fiscal Year 2013 (which was from July 2012 to June 2013) with $143,045,713 in total assets. That is an increase from its assets measured in the 2011-2012 fiscal year, at just a little over $130 million.
“That’s a pretty good-sized number, ya’ll,” Hensley told the council. 
Hensley noted that, for the third year in a row, his firm has recommended that the city hire more employees to help close the books at the end of every fiscal year. The city now hires an outside firm to help gather its financial information for the annual audits. 
“(This is) why we’re standing here in March instead of November,” Hensley told city councilors. “... Because of the size and complexity of what you do as a city, you can’t get your books closed out quick enough so we can get to do what we need to do and get it done in a timely fashion.”
Hensley said his firm would be able to present its report before the end of the calendar year — and not several months after that — if the city hires more people to deal with the complex budget. 
“It’s my opinion you need to use more resources to staffing,” Hensley said. “... Get some more people, because that’s what it takes. It takes a lot of people to make sure those numbers are put together the way they need to be done.” 
The city came out of Fiscal Year 2013 carrying $41.69 million in long-term debt, compared to $28.96 million it carried during the 2011-2012 fiscal year. Much of that debt can be attributed to the city’s ongoing construction projects, including the completion of the city’s Pitman Creek wastewater treatment plant, with a total cost of around $16 million. The plant was completed and dedicated in 2012. 
The new treatment plant was financed with more than $6 million in EPA (Environmental Protection Agency) grants and an $8.4 million loan from the Kentucky Infrastructure Authority.
And nearing completion is the city’s new water treatment plant, located off Waitsboro Road. That project, last estimated to cost around $25 million, is around 80 percent complete and will increase Somerset Water Service’s treatment capacity from 10 million to 16 million gallons of water a day. 
Financing of the new water treatment facility is with a $6 million grant, $14 million in low-interest loans from United States Department of Agriculture, and $5 million in city money.
The city’s upcoming project, a proposed energy center, has yet to be bid out, and the city only this week obtained approval from the federal government for an $8.5 million loan. That project’s cost has yet to be included in the city’s financial transactions because it is still in its preliminary stages. 
Also pointed out as a contributor to the debt is the city’s insurance and retirement contribution costs. 
“Insurance costs and retirement contribution percentages continue to have a major impact on the current and all future budgets,” states the audit report. “The city is continuing to pay for the employees’ health coverage and plans are to continue this practice until it becomes unaffordable for the city.
“The retirement percentages are a major concern for all cities and all cities are lobbying the state for legislation to help in this area,” the report continues. 
The report points out that, as of a 2011 actuarial analysis — predictions of the future cost of the pension plan to the city based on employee statistics — the City of Somerset’s unfunded pension liability stands at around $30 million. 
That number, Hensley cautioned, could change by the time the next analysis is released. 
Hensley said a “perfect storm” led to issues for the state’s retirement system. The 2008 recession, along with an aging population, have combined to create a huge shortfall in the pension pool that the state’s thousands of entities, including cities, counties, and schools, pull from.
“If the pension system is so under-funded, how much belongs to each and every one of those thousands of entities with hundreds and hundreds of employees each?” Hensley asked. 
Hensley said city officials need to look at making incremental changes to its retirement contributions to ensure that, eventually, the city can cover that unfunded liability. 
“Everybody’s faced with this,” said Hensley. “You’re not alone.”
According to the audit report, the city’s total revenues (or profit) for its governmental funds, which include the city’s general fund, EMS fund, and parks and recreation and cemetery funds, came out to $11,647,526. Its expenditures totaled $18,862,188, leaving a difference of $7,214,662. 
But the city also supplemented its governmental funds with revenue from its proprietary, or business, funds, which included its gas, water, wastewater and sanitation departments. 
The city transferred into its governmental funds $7,583,774 from its business funds — with $2,391,011 of that going back out to other funds. After adding in other financing sources, the city’s governmental fund ended the fiscal year with a balance of $3,406,055. 
The city’s business funds — so named because they’re expected to bring an entity revenue, or profit — had total operating revenues of $24,511,126 for the 2012-2013 fiscal year. Total operating expenses amounted to $19,683,813. 
The city’s SomerSplash Waterpark is included in its proprietary funds, but Hensley suggested that city officials move the water park fund into its governmental activities because the water park isn’t bringing money into the city’s general fund. 
“Having looked at it over the last four years, it’s just been continuous,” said Hensley. “This can’t possibly be a business enterprise. The expectation is the charge for the use (of the service) will pay the cost of operating it. That’s why you call it a business enterprise. Well it’s not anywhere meeting that.” 
The park, what Girdler during the meeting called a “community” benefit, brought in $911,662 in revenue for the 2012-2013 fiscal year. It’s operating expenses, however, topped out at just over $2 million. 
The audit is available in its entirety at www.cityofsomerset.com under “Audit/Financial Report.”