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San dist trying to sort out funds
6/22/2007 By: Carole McWilliams
Sometimes segregation is good.
Bayfield town and sewer district manager Justin Clifton wants to change the sewer district’s lack of segregation of operating and capital construction funds for the Bayfield and Gem Village budgets, and those two systems accounted separate from each other.
District critics have noted the lack of fund segregation for several years.
“We need a very thorough (sewer district) financial audit,” Clifton told the town board on May 15. “I’m not satisfied with the way the district has kept their records. They haven’t strictly segregated Gem Village and Bayfield, and operations versus capital.”
He continued, “We’ll do a supplemental budget that will be four funds. We’ll have to break the aggregate reserve into those categories based on the information we have.”
In addition, he advised, “We’ll have to look at whether user fees in Bayfield were covering maintenance. It looks like they weren’t.”
Back in 2002, some business people complained about the tap fees they had to pay. They believed their tap fees were being used for what should have been maintenance of the existing system, paid by user fees, instead of saving for growth-related expansion.
Clifton noted the financial report presented to the sewer board on May 9.
At that meeting CPA Sidny Zink told the sewer board, “The operating account hasn’t been kept discrete. An auditor would probably have a hard time putting their name on this. There are assumptions being made here that these designations are reliable regarding what is Gem Village and what is Bayfield.”
She said, “I would want to go back a number of years to assure that designations are appropriate. That would be a huge undertaking.”
Sewer district attorney Bud Smith, who managed the district until Clifton was designated for that earlier this year, said, “The Gem Village and Bayfield allocation of capital reserves is pretty clean. Gem Village is so small that it didn’t generate capital reserves until the last few years,” reflecting taps in the Homestead subdivision.
“The harder ones are the operating accounts,” Smith said. He feels there is “high confidence of the assets,” but he added, “not enough to satisfy an auditor.”
Clifton asked Smith, “Why did we not draw a line in years past? To keep separate accounts with segregated year-end balances.”
Smith responded, “We could tell if they were operating at a loss or generating income.”
Financial statements presented at the May 9 meeting showed the Bayfield system had an operating loss in 2000, 2001, 2002, 2003, and 2006 with an accumulated total of $120,462. The Gem village system had operating losses in all those years except 2005, with an accumulated total of $43,927.
Clifton asserted that capital improvements money can’t be spent for operating expenses.
“There’s a management decision to classify an expense as capital or operating,” Smith said, such as projects to reduce groundwater infiltration into the system. But that was one of the things business owners complained their tap fees were being used for in 2002.
Clifton noted the Bayfield system had an operating deficit in 2006. “I’m trying to reconcile that with a year starting balance,” he said.
Sewer board members voted to “accept” the financial report. Board chairman Ed Morlan commented, “That’s different from approving it.”
Zink said, “We went back to the beginning of 2000. That’s before we started doing (district financial reports). … We can identify the operating activity and see if it’s funding itself or not, whether we’ve had to tap into capital funds to cover operations.”
Sewer board member Brad Elder said, “We’ve been classifying expenses as capital.”
Clifton added, “There seems to be an aggregate reserve. There aren’t separate reserves.”
Zink advised, “In 2000 you had $1,415,000 total assets. It’s $37,000 at the end of 2006. That raises questions for me. Why were you so profitable before?”
Elder muttered, “Because we weren’t spending anything.”
Smith agreed, “Spending increased substantially in the last several years.”
Zink said, “This demonstrates you have eaten away your accumulated earnings down to $37,000.” About $1 million of that is depreciation of assets, she said.
Morlan said the district hasn’t been under state financial scrutiny because it doesn’t levy taxes.
Clifton showed how the town segregates water system operating and capital funds, and how percentage of budgeted revenue and spending for the year are tracked. Without that tracking, he said he is having trouble seeing if there is a problem with the sewer district budget.
Elder suggested making Jan. 1, 2000 the baseline for sorting out district finances. Morlan suggested using the 2006 audit.
Smith objected, “The state audit model doesn’t present a very realistic picture.”
Morlan added that depreciation on paper may not have much connection with reality. He said he would draft a letter to the auditor.
Clifton told the Times the 2006 audit is now being done.