Committee Minutes

Minutes/Finance-Development Standby Committee
Thursday, July 20, 2006 - 4:00 p.m.______________

The Finance/Development Standby Committee met on Thursday, July 20, 2006 at 4:00 p.m. in Room A101 in City Hall with Committee Chair Christensen presiding. Present at roll call were Christensen, Glassheim, Brooks.

Also present were John Schmisek, Saroj Jerath, Candi Stjern, Joe Martin and Janelle Mulroy of Brady Martz & Associates, P.C.

2.1 Matter of review of 2005 audit report.
Joe Martin , Brady Martz Associates, reported there were three things to review: Comprehensive Annual Financial Report, CAFR, a Management Report which has some management comments and the Single Audit Report

CAFR - He stated the CAFR is laid out with the summaries in the front and detailed schedules in the back behind the Notes to the financial statements. The Introductory section is a letter of transmittal from the auditor and deputy auditor to the Mayor and members of the City Council talking about some of the things that have happened in the past year and future outlook. The next section gets into the financials, and this is their opinion of the financial statements, their job as auditors is to come in and express opinion on the financial statements, to state whether or not they are presented fairly in accordance with General Accepted Accounting Principles and their unqualified opinion, a clean opinion, that means that they are stating that these financial statements are presented fairly in accordance with General Accepted Accounting Principles. It is management's responsibility to prepare the financial statement and their job as auditors to come in and express that opinion. He stated they affected their audit in accordance with Government Auditing Standards which means they tested for compliance with laws, regulations, contracts, agreements which they will talk about in the Single Audit Section.

Following the opinion on pages 3 thru 18, is management's discussion and analysis and will give you a good summary of what is going on in the various funds and is designed to hit on major funds (General Fund and other major funds, utility funds) and summarizing how you did compared to where you thought would end up.

He reported that the Basic Financial Statements, pages 19 through 36 - that he won't go through in detail as did a couple years ago when adopted the GSBY 34, but on government wide financial statements and the only time you will see this is in the CAFR, what you see more on the day to day operations is the fund balances and fund operation looking at current resources where see where you are at if you bring in all of your capital assets, fixed assets and bring in your debt; and that shows where you're at if you have everything in there, total assets, total liabilities and see the net assets of the City's governmental activities at the end of the year, about $139 million, business type activities of about $237 million. Compared to the previous year, your governmental activities went up about $3.3 million, business-type activities, which there is no change in the business-type activates from the regular reporting because those are enterprise funds and all of those together went up 4.1 million so the total net assets went up about 7.3 million. He stated what they are probably more interested in the fund balances and revenues, expenditures on the fund level and this is broke down to show you what your large funds are, can see the General Fund, Debt Service and Special Assessment Fund and Capital Projects, permanent flood protection Fund, and other Governmental funds and summarized it in detail in the back; and General Fund went back about $1.6 million, Special Assessments went up $1.2, Permanent Flood Protection about $5.8 million and other governmental funds about $48,000, and overall total governmental funds, beginning at the year about $48 million and end of the year, $42 million.

He reported the remaining statements, give you budget actuals in the General Fund and this is the business-type activities or Enterprise Funds, the balance sheets showing the larger enterprise funds with the smaller ones moved together and can see how they did from one year to the next. That you can see that Sanitation went up $1 million, Sewer about $900,000, Storm Sewer went back $78,000, Waterworks went up $890,000 and Alerus Center went up $1 million , and the other funds and the total got about $4 million increase in business-type activities.

At the request of Christensen he reviewed the Waterworks Fund, Operating Revenues, $7.8 million operating revenues, with operating expenses of $4.8 million and from operations without any depreciation Waterworks made $3 million. He reported $3 million from Operating Activities and what happened to it - The next session, advances to Other Funds, $3.6 million went to other funds and $400,000 came back from other Funds repaying Advances, $200,000 came back from Transfers from Other Funds, and transferred $163,000 to Other Funds, and the interfund activity made $3 million in cash but transferred out about the same amount to other funds and that is where most of the cash went, and now have to pay off our bonds, about $2.7 million was the net payment because you have some other things coming in to help cover the debt that's not from Operations, Expenses or Capital Contributions and the Air Base is paying some of the debt. The net debt number cash flow is going out fro debt purposes, $2.7 million.

Christensen asked how they get detail on this and perhaps collecting more money than we need. The city auditor stated to keep in mind that is $3 million on the Operating side with Operating expenses and Operating Revenue but we budget that Revenue to pay the debt down here so have to take that off the $3.1 net; and also acquisition and construction of capital parts of assets, He asked what we bought for $8 million in the water fund, $1.6 million was purchase of investment (US Treasury) of Capital Assets. He noted this was great for accountants, etc. but for people who are trying to figure out how much money is being made on the fees we are charging, and how much did that increase by cash. Mr. Martin stated on page 29 and overall the total of everything is $890,000, on page 31 that is unrestricted amount - and that tells you you are making a lot of money in that fund and in the budget process and what do with the $1 million or $890,000 and build cash up and building up $890,000/year - Glassheim stated they raised the rates to cover future construction, deliberately raised the rates to gather month to pay for the new water plant in about 10 years. Christensen asked how are we doing on these rates and how much do you take today to pay for tomorrow for those here to use that as will be selling a bond; and stated this kind of cash flow will pay $10 million bond - Glassheim stated we have $7 million and about 12% unspent after and is gain in cash and $890,000 and about 12% of revenue. Christensen asked if they can compare the activates from one year to the other to see the cash flow

The city auditor stated they can give committee quarterly the budget performance report and those have the past year columns of activity so show you your revenue to revenue and expense to expense for prior years and should have an annual one for 2005 and can get that back out to you. He stated that when want to see year to year that whenever they do a bond issue, the official statement has a 3-year history of all of the major funds.

Brooks stated that when everything has been met, they are still sitting with $900,000 in the Water Fund and if follow through the accounting process, that amount is a fund balance that would go into unrestricted fund balance. Mr. Martin stated that is not cash and if look in the water fund, the actual cash went down $144,000, and have investments also and if look at last year's CAFR the actual cash and investments for Water was $341,000 of cash and last year the investments were roughly $2.8 million and this year $3.4 and investments went up $600,000, cash down about $144,000. That in that fund advanced money to other funds.

The city auditor stated that you did establish a policy in the five-year study of all the utilities that you were going to have a 25% cash balance in that fund, and talked about the extra money in the Waterworks and discussion and would have to look back to see if there was an actual motion but discussion was that money would be restricted and held for future construction because know you have the water plant coming, and that can certainly be revisited every year and probably should be and what they take from that generally is that if there is cash over and above the 25% in the Waterworks Fund, then move any difference of that into the Reserve for Construction to help offset what we know is a large expenditure coming and restrict it for that.

Glassheim stated we have another meeting in about 28 minutes and his understanding is to receive the report and to talk about the management rather than to go over individual funds; and asked whose responsibility is it to give us the information requested, should there be a meeting of a committee with a focus and ask the department to give us whatever it is that we want or to be in some form that you want in the audit, and that this discussion is really not appropriate for this meeting.

Christensen stated we could tell them how we would like them to do it in addition to how they do it. Glassheim questioned if audit firm should do that or if staff should do it. Christensen stated that fund balance accounting is pretty complicated, that we can have our meeting and tell them what we want and if they come back and say there is additional cost, we will decide. The city auditor stated that we hire them to do the audit and if want them to do our job and provide some of the detailed information for you, can pay them to do it but we are getting paid to do that already; and with computer system can provide reports (summary report, budget report and performance report) they would want.

Mr. Martin stated the remainder of the report and the next section is the Notes to Financial Statements which gives good details on your debt issues, pension plan footnotes and won't get into the pension plan because you will be getting into that in great detail in the next meeting.

Christensen stated they have an unfunded liability pension plan. Mr. Martin stated on page 74 is where the schedule of NPO (Net Pension Obligation) and actually booked on government wide financial statements and one of these items that doesn't show up on your fund statements because its not a liability that is going to be paid out of your current resources, a long term liability, and is on page 23 and comes in as a reconciling item from a fund statement to the government wide statements and is a liability on the government wide statements, and on page 23 these are the reconciling items that are coming in and in middle of the page, liabilities, net pension obligation, $3,879,000 and that some detail on page 74. He stated on page 74 and on page 78, the way the pension works is that the actuary goes through and says here is your unfunded actuarial approved liability and this is what you are going to have to pay all of these people for retirement benefits over their retirement, and then take that number and take what you have invested, and difference that we have to make up, how are we going to make that up, then go into some assumptions and say that assuming that we earn this rate of interest and have salary increases of this much and this is how much you have to put in a year to cover that liability and how much you put in a year is your net pension obligation, that is what obligated to put in every year to cover that liability that is out there and if you don't put in the whole amount then that carries over to the next year so have a new amount plus what you didn't pay from the previous year. The summary of that is on page 78, and can see from 1994 to 2004 what you were required to put in, your annual required contribution and what you actually put in and the difference is added onto your net pension obligation so your NPO is the difference between what you were required to put in and what you actually put in, and you can see that most of the years it was under funded, a couple years 1999 and 2000 was over and 2002 right on, and you can see why that number continues to grow. If you go back to page 74 and the 1997 the balance was $3 million and now it is $3.79 and has grown $800,000 and that means that over that time you're short on making your contributions by $800,000 and now to get that to where it should be is $3.8 million. He stated there is an amortization period that you have set and have said we're going to fund this over 28 years so the actuary is saying, this $3.8 million is going to get amortized over 28 years plus what your next year's contribution is so they can figure out years by annual contribution for next year. He stated the $14 million is what they have to pay everybody and if retired for 30 years you would get so much per year for every year for 30 years and all those people that's how much you're going to have to pay everybody, but don't have to have that all funded now. Mr. Martin stated the $3.8 million is what you are short in all your annual required contributions. Glassheim stated if we paid $3.8 million today and kept up with our 1.9 then we'd be cool. Mr. Martin stated if paid the $3.8 million and the $1.9 would get reduced because that has a component of that is the amortization of the NPO. Christensen stated that in this report they are suggesting that the $3.8 million be funded over 30 years. Mr. Martin stated that is what they did and there are 29 years left. Christensen asked what the interest factor is on that, Mr. Martin stated 8.25% . They are assuming 8.25% interest and are not unless risky corporate and if that changes could be higher, the city auditor stated it would be higher and to keep in mind that the 8.25% is a long term number and looking at the market you will have downturns as we did in 1993, made some changes in 1996, came back over 100% funded in 2000 and market bit us for 3 years and can look again or changing the interest rate and that will increase the amount.

Mr. Martin touched base on the Single Audit, didn't have any findings, tested federal programs to make sure they were in compliance with all the rules and regulations and grants, no instances of non-compliance.

Management Report: He stated they have four (4) observations that they came up with, on page 2 - 2 at the Alerus Center and 2 at Municipal Court. (1) At the Alerus Center is a segregation, that the same employees ordering food and beverage items also receives items from vendors and recommended that they separate that so better control of the inventory. (2) The second one was a reconciling issue, getting the city finance office information on a monthly basis so they can act as a control to make sure that the Alerus Center is meeting all their accounts reconcilable on monthly basis and recommend that they get everything reconciled and sent to City Hall.
(3) The third one is controls at Municipal Court, there is a dual signature on the checks but the stamp and signature of one person controls both the line signature and the stamp. (4) The fourth one at Municipal Court that recommend that they try to come up with way of keeping track of their numerical sequence of the parking tickets and citations so they know which books are checked out and keep track of that.

It was moved by Glassheim and Brooks to accept the report, submit it to the state auditor's office and make final payment to the audit firm upon acceptance of the audit by the state auditor. Motion carried.

Christensen stated that they are $3.8 short and that we have money in our funds, some unrestricted, and planning for the future and we need $3.8 million. The city auditor stated to keep in mind that the $3.8 million is only the amount that we have shorted the required funding contribution over past years, that is not what the fund is short, the fund is short $16 or $17 million. He stated what is happening is that is an amount that is part of billing our unfunded liability and that is what have said in the next budget, we're trying to get to funding what they tell us to fund because all we are doing is not funding parts of it and just keep adding onto it. Christensen stated it is getting worse but the bottom line is can't expect 8.25% in the market, that it's 6%; and that we wouldn't have that shortfall if the actuaries would have said, let's just put in here 9.5% and would have been a lot less so the higher the rate they put in the better it looks but if you get yourself down to a 6% rate, it is even worse than $15 million so have some choices: end it, broke a covenant, probably won't do it but it is a choice and a big choice and getting worse because the interest rate assumption is not achievable. He stated you might achieve 7.5% but the banks will be charging 12% and drive you into recession and as soon as that happens the market goes down. We have to ask ourselves some fundamental questions when we get into that discussion and if that is a realistic achievable rate, 2) and do we really want to pay $30,000 a month for someone to manage funds, Candi and Saroj are managing $42 million of our cash, but we have big problem coming; and what is going to happen is we are taking money out of our General Fund and Capital, and are going to have to raise taxes or how are we going to pay for these going forward. The city auditor stated going back to 1993 when we had to hold the same kind of discussions and is time because of what has happened in the market to say, are all the assumptions right or wrong and what happens if we change them, and if we lower the interest assumptions, the cost and unfunded will go up; that we did in the early '80's and if want to take a long term approach on this, the stock market has out performed over time the 8.25% and if it is going to do it in the short term, maybe over next 5 to 10 years, doubts it and will it come back, who knows, and that is why they took all new employees in 1996 and moved them to a DC Plan, because that was just another function of this that every employee you added had all that uncertainty of assumption and at some point had to change that. Christensen stated we shoot ourselves in the foot when we give people raises because adding more to the cost of the unfunded liability indirectly, and can built a spread sheet to see what happens when add $350,000 to payroll.

Glassheim asked what are they guaranteeing to employees for retirement and how figure out liabilities. It was noted that if age 55 employee in the plan get 2.3% per year of service and that will be determined on the average of your last 7 years of salary; that if a 30 year employee and either 62 or 65 get 2% per year and 60% basically of your salary 4 years ago because it is the average of your last 7 approximately, and there is no escalator, frozen at the time of retirement. Glassheim asked as people retire and die and fewer people being covered, will we make up any of the money, that if the same amount is coming in and less being drawn out, how do we put it in. The city auditor stated that the what the actuary does is they start on what the accrued benefits are to date and if killed the plan today, how much do you have to have in there to pay everybody and they do projections looking ahead but have this many years left to service and what is future liability, and then they tell you that is what you need to contribute over the next 29 years to cover what gets drawn out, and at some point in time everybody will die off and won't have any pension obligation. Glassheim asked if we could at some point borrow money, that we are putting in $2 million/year now, and at some point that $2 million will be more than we need to cover because there will be declining -- because if you borrowed $15 million in order to pay and continued 20 years after the plan is dead to pay off some of what you borrowed--. Schmisek stated that is made up of principal and interest that you have to pay until the end of time and then borrow principal and interest to pay interest on principal and interest. Schmisek stated he has evened out the payment but that is assuming that you will earn 8.25% interest, pay raised will only be 3%, etc., but keep in mind that until 2 years ago we wee assuming 5+ some percent wage increases and told them they had to reduce that. It is a sad thing that what will benefit the plan, but the life span is getting longer.

The meeting adjourned at 5:00 p.m.