The Free Press, Mankato, MN

July 2, 2013

North Mankato audit generally positive

Sewer rates likely to increase in '14

By Dan Linehan
Free Press Staff Writer

NORTH MANKATO — North Mankato added a healthy $650,000, or 31 per­cent, to its general fund bal­ance in 2012 and its utility funds had a good year.

However, the general fund balance — sort of like a city's checking account, used for both regular payments and unforeseen expenses — isn't all usable. That's because the debt service fund owes $1.7 million to the general fund to help pay back old special assessments.

“Once debt service becomes flush and you have this fund balance you’re where you’ll need to be,” said Kyle Meyers, govern­ment partner at Abdo, Eick and Meyers. The accounting firm went over the city’s 2012 annual report Monday evening, and Meyers’ report was generally positive.

“As a whole, they’re prob­ably OK,” Meyers said after the meeting.

Getting the debt service fund “flush,” as Meyers put it, was not a topic of Monday’s meeting. Those unpaid assessments were discussed during a June meeting, which will be fol­lowed up by a work session later this month. Instead, Meyers went on a fund-by­fund account of the city’s financial position.

Having a healthy general fund — which supports services like streets, parks and public safety — is important for several rea­sons. For example, it gives a city flexibility to handle emergency expenses and unexpected reductions in state aid.

Measuring the fund bal­ance as a percentage of annual spending, a common measure, North Mankato’s general fund balance rose to 46.2 percent, up from 33.2 percent in 2008. Though an improvement, similar-size cities had a higher average general fund balance of 76 percent of their annual spending in 2011. 

The utility funds had a good year in that all of their operational revenues exceeded their expenses. However, fund transfers from utility funds to pay for those previously mentioned unpaid special assessments set them back some. 

For example, the drinking water fund had an operational surplus of about $340,000. And even after interest payments and fund transfers, it ended up about $126,000 in the black. However, the fund owes about $1 million to those debt service funds, presenting a long-term problem. 

The utility fund in the worst shape is the sewer fund, which had an operational surplus of about $50,000 but lost about $77,000 after fund transfers, the third year in a row of losses.
Meyers suggested the city raise sewer rates, and City Administrator John Harrenstein said he’s recommending increases in residents’ sewer bills for his 2014 budget. 

The city’s per- capita debt was $2,052 in 2012, a 2.6 percent decrease. It’s lower than other Minnesota cities of similar size, which had an average debt per capita of $2,253 in 2011, the most recent year for which data were available. 

But another measure of debt was higher than those similar cities, defined as cities with a population of between 10,000 and 20,000. 

That’s the debt-to-assets ratio, which is a percentage of what a city owes compared to what it owns. A higher ratio means a city has more debt in relation to its assets. 

North Mankato’s ratio of 44 percent actually dropped a percent from 2011, but it remains high in comparisons to the average similar-size city, which had a ratio of 32 percent in 2011. 

Meyers didn’t mention that figure in his presentation, though Councilman Bob Freyberg pointed it out. 

“ We are 30 percent higher than the peer group,” he said. “I just thought it was important to point that out.” 

Asked how a city could have average debt per capita but a higher debt-to-assets ratio, Meyers had some technical explanations but said he was planning on looking into it more. 

The accounting firm found one “significant deficiency” in North Mankato’s books, essentially that the city had to rely on the audit firm to prepare its financial statements. But Meyers said more than 90 percent of his firm’s clients don’t have the expertise to prepare those statements, so this is a common finding. 

A deficiency relating to a lack of financial policies and procedures disappeared from the audit in 2012 after five consecutive years as a deficiency. The city is taking steps this summer to shore up its economic development policies. 
This story was edited to reflect the following correction:

A story on page A1 Tuesday, "Debt load shadows N. Mankato audit," contained an error. The story said the general fund owed the debt service fund $1.7 million. Actually, the debt service fund owes the general fund $1.7 million.
In addition, an earlier headline suggested the sewer rates would be raised to help the general fund. Sewer rates are being raised to add money to the operating fund and for capital upgrades.