June 9, 2011 by wcobserver
By Susan McCarthy
Bond Fund Depleted, Public Hearing Scheduled
WEST FORK- Expenses have outpaced revenue and will require a 14-percent rate increase to keep the city’s Water and Wastewater Utility out of red ink, according to its financial auditor who met with city officials recently in a special city council meeting. The utility will also need to replace $40,000 in reserve funds for two bonds that the auditor suspects were used to pay expenses when money ran short.
On May 18, the Water and Sewer Commission brought a 14-percent rate increase to the City Council for approval in a special meeting, but council members asked for more financial information before taking a vote.
Jim Kennedy, Manager, J. Timothy Fulmer, told the council May 25 that his CPA firm had calculated the city’s water and sewer department lost about $26,000 in 2010 which translated into a $21,000 cash deficit. He said a 14-percent rate increase would generate a $55,000 cash surplus if expenses and the city’s water losses remained at 2010 levels. The city’s water losses averaged 30.5 percent in 2010, he said. Water losses have averaged 37 percent through April 2011.
The water and sewer department’s most recent audit was completed last fall for the 2009 fiscal year. Kennedy said his report Wednesday night was based on a financial analysis of 2010 and the numbers were unaudited.
Kennedy said a 14-percent rate increase and reducing the city’s water loss would have a tremendous effect on cash available. He said if the city were able to get its water losses to 15 percent, it would add an additional $23,000 to its bottom line.
In his report, Kennedy also said two of the city’s bond funds were currently in non-compliance because they lacked a total of $40,000 that is required for reserves by the bond’s covenant. One fund is used as a reserve in case the bond can’t be paid and the other is a depreciation fund to help offset major repairs, Kennedy told the council.
“I suspected it had been used for operations, you know, the money, because they were running short on money and I wrote it up in each audit report that those funds were not in compliance with the bond covenant and need to be caught up,” he said.
He said he’d reported this several years in a row in the audits his firm had performed, and that the money would need to be replaced right away.
Council Member Charlie Rossetti asked if the reserves could be rebuilt with monthly payments over time and Kennedy said that while it would be up to the bond holders, it might be possible.
West Fork water customers will have the opportunity to get more information and ask questions at a public hearing on Tuesday, June 14, 6:30 p.m. at the West Fork Community Center. The public hearing will be held ahead of a city council meeting that will immediately follow in which council members are expected to decide about the rate increase.
The last water-rate increase went into effect in 2008 and raised rates 9 percent, according to Michael “Butch” Bartholomew, West Fork’s Utilities Superintendent. Mayor Frances Hime said water and sewer employees, including Bartholomew were given a six-percent salary increase the same year.
She said Bartholomew is paid $85,000 per year, a salary closer to what a city with 10,000 residents might pay someone in that position. Kennedy said water and sewer salaries were equal to 45 percent of the utility’s revenue and recommended council members compare that percentage with other towns with similar revenue.
Ongoing Problems Went Unreported
Hime told council members that the Water and Sewer Department’s cash flow has decreased steadily since 2006. She said a rate increase in 2008 helped the department break even, but said she doesn’t understand what happened, beginning in 2009 and is still looking for answers. She said she’s heard a lot of reasons for the decline, but hasn’t seen documentation that supports those reasons.
“We have never received reports. We were led to believe that it [the Water and Sewer Department]was a separate entity and had no affect on the city and now we know that is absolutely not the case,” said Hime.
Hime told the council she has asked the water commission to present a plan to the city council in June.
“I don’t support 14 percent, no more than I support two people writing checks to transfer money when they come up in arrears and we still don’t have an answer to that how that happened,” Hime said, referring to the transfer of $10,000 from the city’s general fund to the water and sewer department on May 13 without the council or mayor’s approval.
“So my confidence is shaken and that’s why I’m putting the pressure on the Water and Sewer Commission; that’s their responsibility.”
“Folks, you are asking the water and sewer commission to do something and I agree something probably needs to be done, but as we implement whatever, that’s not going to be done in a day. It will take a year,” said Virgil Blackmon, who along with Mike Mitchell and Greg Tabor serve on the city’s Water and Sewer Commission.
Blackmon was appointed to the commission last month and previously served as mayor of West Fork.
Blackmon said he made the recommendation at the May 18 Water and Sewer Commission meeting for a rate increase and believes it’s necessary. He also said he’s looked into water rates statewide and West Fork is “nowhere near the top.”
Auditor Says Policies Needed
During the meeting, Kennedy also recommended that the city council develop policies and procedures. He said written policies would help define segregation of duties and provide internal control. Small cities, in general, have a hard time segregating duties due to their small staff sizes, said Kennedy, but policies would help put more structure into place and allow the council to better monitor what’s going on.
Kennedy said he had seen no indication of fraud and that cash in and cash out have reconciled.
“If you spend more than you take in, one day you going to run out of cash. It’s as simple as that.”