State: Trinity audit showed “signs of financial weakness”
The Trinity City Council took action on Tuesday aimed at addressing concerns of state officials about Trinity’s financial condition.
The council unanimously approved a budget amendment that forgives $3.025 million that was loaned from the city’s general fund to its sewer fund to pay for sewer projects going back several years.
Past transfers between the two funds caught the attention of the N.C. Local Government Commission, which approves all public debt and monitors the fiscal health of cities and counties.
In a letter to Mayor Carlton Boyles April 3, Sharon Edmundson, director of the LGC’s fiscal management section, wrote that an examination of the city’s 2012 fiscal year audit showed “signs of financial weakness” in its sewer fund, which indicated that “the sewer system may not be sustainable in its current form.”
The fund reported a net loss, with insufficient assets to meet its obligations, the letter stated. The LGC also admonished the city for the fund transfers, because each fund is supposed to be self-supporting, according to Edmundson.
The letter also chided the city for turning in its audited financial statements to the LGC three months after the due date and flagged a weakness in its internal financial control system having to do with monthly bank and account reconciliations not being done on a timely basis.
LGC spokesman Schorr Johnson said Wednesday that state officials believe Trinity is “taking the appropriate steps to address the issues identified” in the letter, and that LGC staff will continue to monitor the city’s progress as it implements changes.
Tuesday’s adoption of the budget amendments was the council’s second attempt to make the accounting fix.
A special called council meeting for June 28 to try to enact the amendments never occurred because only three of the eight council members showed up, which prevented a vote from being taken.
The lack of a quorum sparked concern that council inaction could cause more problems for the city with the LGC. The budget amendment raised eyebrows among council members at the time, given the amount of money involved. Trinity’s overall budget is $4.08 million.
City Manager Debbie Hinson said the general fund loans were made because the sewer fund does not generate enough revenue on its own to pay for projects. The fund has enough in it to make sewer debt payments, she added.
“In speaking with LGC — and I did so this week — they understand that it is normal procedure for the general fund to loan to the sewer fund, because we are not Charlotte or a large county that has an up-front cash amount in our sewer fund,” she said. “The city of Trinity’s (overall) budget is not out of balance, as was stated.”
The LGC letter stated that current liabilities exceeded liquid assets in the sewer fund and that cash flow from operations was negative.
“The Board must evaluate the performance of this fund and make the changes necessary to improve financial operations and sustainability,” Edmundson wrote.
She noted that the city made transfers to the sewer fund in 2011 and 2012 totalling $2.5 million.
“Each fund should be self-supporting; therefore, the financial condition of (Trinity’s) General Fund should not be compromised in order to support the operations of another fund,” she wrote.
“Because utility customers and property taxpayers are not necessarily the same groups of people, it is important for equity reasons to ensure that the General Fund and the utility enterprise funds are self-supporting,” the letter read. “This means that the utility customers should not subsidize general government operations and property taxpayers should not subsidize utility services.”
The LGC asked the city to take “prompt corrective action” to address “the declining financial condition of the Sewer Fund” that will “return the Fund to fiscal health and begin repaying the General Fund what is owed.”