TOWER— As it has for the past few years, the city’s difficult financial condition and budget deficits dominated the discussion during the city’s annual audit report on Monday.
Auditor Devin Ceglar, of Walker, Giroux, and Hahne, noted that the city’s net position and fund balances continued to decline in 2019 and that longstanding deficits in several accounts, raised in the audit for several recent years, have yet to be addressed.
He also noted that the city experienced a budget deficit of just over $1 million, although that primarily reflected the failure of the previous city council to budget for major anticipated expenses, such as construction of the new facility for Lamppa Manufacturing and the purchase of a new ambulance. Most of the cost of the new ambulance will actually be incurred in 2020, although Tower’s clerk-treasurer, Victoria Ranua, included that expense in current budget, so the expense won’t contribute to a deficit when the 2020 audit is completed next year.
The 2019 budget, which was the subject of Monday night’s audit, was approved by the previous administration in December of 2018.
Ceglar noted that the city’s general fund lost ground in 2019, by approximately $78,000. While the city’s year-end general fund balance actually increased, to $349,082, most of that increase was due to a loan the city received from the League of Minnesota Cities to cover expenses on the harbor trail project.
The city’s general fund was also impacted by the city’s decision to establish separate bank accounts for the ambulance and Hoodoo Point Campground. Funds in those accounts had previously been included as part of the general fund.
Efforts to develop the city’s harbor in 2019 added another $92,000 to the ongoing debt in that category of spending. After more than a decade of false starts and delays on potential development, the city has racked up $585,000 in unfunded expenses on the project.
Ceglar noted that the city has also failed to address a longstanding issue of delinquent loans, which has added to the city’s cash flow problem. He said about $7,804 in loans that the city made to property owners to help them pay for sewer repairs has yet to be repaid. About $15,000 in commercial rehabilitation loans are delinquent as well, while an outstanding principal balance of approximately $119,000 for a grant and loan to Tower Harbor Shores also remains.
Ceglar said that a continuing deficit in the city’s utility account will need to be addressed. “Generally, water and sewer activity funds should be self-supporting,” said Ceglar.
The city’s water and sewer fund, by contrast, ran a combined $53,537 in the red. Even excluding depreciation costs, the city’s water account experienced a deficit of approximately $13,500. “That’s when we recommend that cities look at raising rates,” Ceglar said.
Ranua noted that the city would likely need to raise rates by approximately $53 per quarter in order to return the utility accounts to break-even.
The Tower Economic Development Authority’s special fund also showed a deficit of $139,788 last year. Ranua explained that the funding gap is due primarily to the fact that some of the costs associated with the construction of the new manufacturing facility weren’t reimbursed from the IRRR’s loan proceeds until this year. While TEDA is supposed to act as an independent authority, the city council continued to make most decisions for the body in 2019. That’s changed in the new year, as TEDA is now functioning as envisioned in state law and its originating resolutions.
Ceglar’s report, at times, highlighted the disconnect between the accountant’s view of city financial affairs and reality. Ceglar’s report also cited sizable cash balances in several accounts where the funds don’t really exist. His report cites $235,166 in the city’s commercial rehabilitation account, including $60,000 in cash, while the account’s actual bank account shows just $8,192 in actual cash remaining.
On paper, the ambulance account shows a fund balance of $926,151, while the actual cash in the account was far less than that as of the end of 2019. The missing funds reflect the dozens of cash transfers made by the former clerk-treasurer, without council approval, in 2018 and 2019 as she sought to pay the city’s bills by tapping a number of earmarked accounts.
In response to questions from council member Dave Setterberg, Ceglar acknowledged that the project deficits he has cited for several years are on paper only, and that they don’t reflect unpaid bills. He noted that eliminating the deficits will require paper transfers only, which won’t impact the city’s cash position.
Other issues
In his findings, Ceglar again addressed the issue of the city’s limited segregation of duties, which poses an accountability risk. He said that’s a typical shortcoming that auditors cite in most every small city, due to limited resources for staffing.
Ceglar also noted that the city was slow to complete bank reconciliations and other financial accounting this year, which he attributed to the turnover in the clerk’s position. “Any time you have three different people doing things, it muddies the water quite a bit,” he said.
Council member Rachel Beldo commented that she sees the progress that’s been made in the past several months. “I just want to reiterate that Victoria stepped into her new role in October, and had quite the undertaking to get things in order and get things sorted out and just wanted to acknowledge the work that she and Terri have done and work that they’ll continue to do to get things straightened out.”
In other findings, Ceglar cited his belief that city officials in Tower may have run afoul of state law in recent years for accepting personal discounts on propane from the city’s fuel supplier. The discounts had been a longstanding practice in the city but became controversial this year when council member Mary Shedd questioned the propriety of the practice. Ranua also questioned whether the discounts ran afoul of state law and had asked the auditors to look into the issue. Ceglar said it does not appear to be a violation for other city employees to receive the discounts, but that any city official, such as a council member or the clerk-treasurer, involved in the contracting decision should not have a personal financial interest.
In his management letter, Ceglar cited several issues, including:
 Documents on city projects, grants, and bids were not on file at city hall, as required. “Outside third-party engineers and grant consultants were relied upon to present documents that the city should have on file,” noted the letter. Ceglar said the city’s decision to hire Nancy Larson was a big help. “She got a lot of stuff in order,” he added.
 The lack of documentation on the basis for a $245 payment that the Tower-Breitung Wastewater Board makes to the city of Tower and whether the city ever authorized payment of $45 per month in additional compensation to former clerk-treasurer Linda Keith for secretarial services. The deputy clerk, who currently provides those services, is not paid above and beyond her regular wages.
 Many bank balances in various accounts are significantly less than what they should be. “Transfers were made to and from savings accounts that were meant to be set aside money for specific purposes. There was no indication of council approval to transfer the funds…” states the report. The lack of authorization for transfers in the past has been a major concern for Ranua as well and all transfers are now being processed through council action and are subsequently reimbursed. “We’re now following what’s in the charter,” said Ranua.
 Airport operations and maintenance grant submissions had not been made for a significant period of time. According to Ceglar, such submissions are normally done quarterly, and he recommended that the city ensure that it seeks reimbursement for qualified airport expenses. Ranua said most of the backlog had been cleared up by interim clerk-treasurer Ann Lamppa and that she expects to have all the submissions up to date before the end of 2020.
While the management letter included 12 points in 2019, that’s actually a reduction over the 18 points the auditors raised in the 2018 audit.