City Finance Committee reviews audit findings, discusses pension plan
Late Friday morning, the City of Dyersburg Finance Committee convened at City Hall in the upstairs conference room to discuss the audit for fiscal year ending in June 30, 2017. Kevin Howe, CPA with Alexander Thompson Arnold, also met with the committee to discuss the audit findings.
Findings included those from City of Dyersburg General Government, Dyersburg City Schools, and Dyersburg Electric System.
• City of Dyersburg General Government
- Authorization for Issuance of Debt: ATA noted that the City has an outstanding interfund liability due from the School Capital Project Fund to the Debt Service Fund in the amount of $500,000. The balance was a result of funds disbursed from the City of Dyersburg to the school system for a baseball/softball building on the DHS campus. The funds are scheduled to be repaid by the school system over a 10-year period.
“There is a TCA [Tennessee Code Annotated] (Code 9-21-601) that requires that to be authorized by the Comptroller’s Office, and the authorization did not take place,” said Howe. “So, we do have a finding in the report on that.
“One of the things from a response standpoint that would be considered would be just to basically show that as a transfer and not show it as a loan,” added Howe. “That has to be budgeted and things, but that would take care of this loan issue between the two entities. That’s not what you have to do, but that is one option.”
Dyersburg Mayor John Holden addressed the finding and stated, “I think you were aware of it, Mr. Kirk, and I think Mr. Glover was aware of it too. I think I talked to some of you about this. I did it.”
“Well, I thought it was the appropriate thing to do,” added Alderman and Finance Committee member Bob Kirk.
“I did, too,” said Mayor Holden. “There is a local bank here that was wanting to assist the school system in building that facility and was going to give them a no-interest loan of $500,000. Obviously, the City School System is not a taxing entity so they can’t do that. So, they came to me wanting us to do that, and obviously we would have to bid it out, go through all of the processes with the attorneys, bond fund, bond council, and all of that good stuff. So, I contacted Steve Anderson [City Treasurer], there’s a line item there for transfer, and there wasn’t enough in that line item to transfer $500,000.
“I then asked Steve to look to see what had been done in the past with the City, and I got a list here, and shared that with Kevin, that a portion of sales taxes in that fund in that line item are designated for school systems, capital projects when the funds are available. Steve was comfortable with the amount in the fund balance. The School System was willing to pay us pack over 10 years, $50,000 a year.”
According to the mayor, since 1993 almost $6.6 million has been transferred to the school system in the line item.
“I did contact the state to get their opinion if I could do that,” added Mayor Holden. “I was given the go-ahead to do that through the state, and I did it.”
“So, basically, that was the school’s money anyway?” asked Alderman Mike Morgan.
“Right. It’s the only thing it could be used for,” said Anderson. “If we don’t give it to the school, then it just sits in that account and builds up. It’s designated for the schools.”
“Could that be considered when you’re working on the budget for the school system?” asked Kirk.
“It can,” responded Anderson.
“So, Kevin, if that is going to be a finding every year because the way it was done, is it your recommendation that we can forgive that debt?” asked Mayor Holden.
“I think that’s an option,” responded Howe. “It would show as a transfer, like you described those transfers in the past.”
Mayor Holden asked if it would need to be shown at the end of the current budget year, to which Howe said it would be the City’s decision.
“If we were to do that, forgive the debt this budget year, that wouldn’t be a finding next year, correct?” asked the mayor.
“Correct,” stated Howe.
Mayor Holden then made a motion to forgive the debt on the current budget year with a second from Kirk. The committee approved the motion.
When asked if this needed to be voted upon by the full board, Anderson said, “I don’t know if you want to take it to the full board now or not, but what we’ll have to do in June every year we usually have a few budgets we’ll have to amend for different things that have happened throughout the year, and what we’ll have to do is amend the School Debt Service Budget and add this $500,000 as a transfer in the line item.”
Findings from Dyersburg City Schools and Dyersburg Electric System were listed as the following:
• Dyersburg City Schools
- Purchase Orders: Dyersburg City Schools did not consistently follow proper purchasing procedures regarding purchase orders. Expenditures were noted that exceeded purchase order limits.
- Segregation of Duties: Dyersburg City Schools has inadequate segregation of duties in the record keeping function.
The school system’s response noted that they agreed with the purchase order finding; however, their response for the segregation of duties stated, “Our organization is too small to justify hiring additional personnel. We realize a weakness exists, but it is not cost effective for us to hire additional staff.”
• Dyersburg Electric System
- Dual Signatures: ATA noted two bank accounts, petty cash and payroll, that are impress in nature with minimal or zero carrying balances, in which the check from the accounts only require one signature. ATA recommended that all checks issued require two signatures.
In a response, DES stated, “Management is of the learned opinion that there are more than adequate controls currently in place to mitigate and risk associated with this finding.”
“…These procedures have been in place for many years and prior financial audits have deemed this arrangement a non-issue.”
During the meeting, Howe and the committee touched on the City of Dyersburg Pension Plan.
“There has been some discussion on how much the liability is,” said Howe. “This is June 30, 2016 information, and you can see the liability [$34,427,086], and net position [$3,267,837]. The net pension liability [$31,159,249], [and] I think the June 30, 2017 report is $31.3 million, so it’s consistent.
“You can see where we were in 2014 and in 2016. These numbers have moved some. You can see that your net pension liability has moved from $34.3 million in 2014, $37.5 million in 2015, then went down to $31.1 million in 2016, and a lot of that is because some of the changes that were made within the plan that obviously sort of helped out in some ways,” added Howe. “You can see the different fluctuations and even going forward, as you guys know, it’s based on experience, investment return, the life expectancy of individuals, some people retire early – so a lot of different things go into these numbers.”
When asked by Morgan is the pension plan is based on individuals retiring at the same time, Anderson stated, “It’s based on everybody working until their full retirement and drawing out their full benefit.”
“Nothing in this report is connected with the Plan of Correction that was submitted to the state because that was done June 30 of last year, right?” asked Kirk. “The numbers ought to be a player in this thing.”
“They are,” responded Anderson. “The changes, from the $37.5 [million] to the $31[.1] [million] from 2015 to 2016, that was because of the changes.
“We’re following the certain percentage that we have to go up each year [in the Plan of Correction],” added Anderson.
“So, by 2020 you’re going to reach that threshold that’s mandated by the state?” asked Kirk.
“Yep,” said Anderson.
“As you put more and more in, that obviously affects the projections going forward,” said Howe.
The City Board adopted a Plan of Correction on Dec. 7, 2015, along with a Pension Funding Policy, adopt an amended and restated City of Dyersburg Pension Plan as well as adopted a 401k plan as administered by the state. State Treasurer David Lillard, Jr. forwarded the plan of correction to the State Funding Board on December 21, 2015, which was approved on Jan. 6, 2016.
When asked of the current state of the City’s Pension Plan, following Friday’s meeting, Mayor Holden commented to State Gazette saying, “The State of Tennessee approved our Plan of Correction. We’ve made the necessary contributions every year, and everyone that has retired from the City of Dyersburg has gotten every cent of their retirement, which they are entitled to. Everyone that took a monthly distribution continues to get that on a monthly basis. We have never missed a payment to any retiree from the City of Dyersburg.”
Howe also addressed a recommendation letter drafted by ATA listing suggestions for strengthening internal controls, compliance, and operating efficiency.
“This particular letter is drafted up just as recommendations to strengthen some of your processes,” said Howe. “These are not areas that we found significant deficiencies or any issues that we found that needed to be bound in the report, but I think these are things that need to be addressed going forward.”
The recommendation comments in the letter were listed as follows:
“During our current year audit, we noted that the City does not have an adequate back-up system in place to handle payroll procedures and the City should also review all payroll approval processes within each department to verify that all time and vacation time that is charged is valid and authorized for payment. The City should review internal control processes and procedures within the payroll department and make changes as deemed applicable to have an adequate back-up plan for handling payroll functions and to ensure that all payroll is authorized and approved for payment.
“During our current year audit, we also reviewed utility billing procedures and recommend that the City consider adding additional approval processes in connection with utility billing adjustments that are made on a monthly basis. Internal control system should have at least two individuals involved in the process that handles adjustments to utility billings and approval of those adjustments that are made to the customer accounts.”
Kirk also asked if within the agreement with ATA it details when the City would receive the audit?
Howe apologized for not having the audit completed by Dec. 31, but added there was additional correspondence that was received while working on the audit.
Kirk also expressed interest in looking at another firm completing the next City audit.
Mayor Holden mentioned he had received a letter from the State Comptroller in March, which addressed the Municipal Finance Certification Education Act, and added that Anderson was one of the first individuals to go through the course and become a certified officer.
“We are pleased to have Steve on this staff,” said the mayor.
He also spoke on the payment of long-term debt and added, “Since Steve has been here, we’ve reduced our long-term debt from $13.7 million in 2007 to $6.1 for the City of Dyersburg. We have no long-term debt in our solid waste fund. We paid for our last landfill cell with money in that fund and didn’t have to borrow money. He’s just done a good job in managing our debt and our finances. I appreciate him.”
Prior to adjournment, Mayor Holden also spoke on the recently amended proposal from the County Mayors’ Association that was brought before the State House Finance Committee earlier in the week.
The proposal was to amend the online collections tax where 75 percent would go toward counties, while the remainder would go to cities.
According to Mayor Holden, the recent amendment by the County Mayors’ Association to be presented include taking 5 percent of state-shared taxes sent to municipalities starting in 2019, with a 5 percent increase each year for 10 years. He encouraged everyone to contact their state representative and senator about the issue, which will again be presented in the upcoming week.
Kirk also asked the mayor how the sale of the hospital to West Tennessee Health Care would impact the City financially.
“As part of the agreement, I understand they are going to pay the taxes, and I think we’re going to meet with the CEO,” said Mayor Holden. “But it’s a loss of $240,000 in tax revenue for the City.”
With no further business, the meeting was adjourned.