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Audit reveals Two Harbors’ state of financial health

The results of the City of Two Harbors annual audit were presented to the mayor and city councilors Monday evening by Matt Mayer of Kern DeWenter Viere, a Twin Cities- based accounting and consulting firm.

The report noted just two findings that required the City’s attention, firstthe lack of segregation of accounting duties to ensure that there are checks and balances in the way money is handled and the City’s books are kept. Second, but less critical is the need for a capital asset policy and an updated means to track capital assets and their depreciation. Mayer acknowledged that a solution to the first finding is more difficult for small cities with fewer staff.

“It’s probably going to be out there for a while,” he said of the lack of segregated duties,” when I evaluate your internal controls it’s at a very ideal level and it’s very difficult on a cost/benefit basis to satisfy my threshold when it comes to that.” The City has promised to try to find more ways to segregate duties in the future.

Mayer mentioned that computer programs exist to make it easier to track capital assets and their depreciation.

“That would be a very easy fix,” he said,” it’s a module that just bolts on to your accounting software.”

Next, he clarified the City’s overall financial picture starting with the fund balance in the general fund—the amount of money kept in reserve for emergencies, disasters and unplanned expenses. Mayer said that the City’s policy may be too conservative and could result in cash flow problems in the months before Local Government Aid is distributed to cities or property tax payments roll in.

Below is an overview of the facts and figures Mayer presented to the council.

General Fund

• Revenues exceeded its expenditures by $118, 991, according to the audit report. Revenues from intergovernmental revenue accounted for 47 percent of the City’s revenue, with property taxes accounted for 35 percent.

• Expenditures dropped $610,060 from 2012. Public safety was the City’s greatest expense at $1,106,554. Health and welfare was its smallest at $78,393.

• The general fund balance rose from $1,036,104 in 2012 to $1,043,000 in 2013, an increase of $6,896.

Water Fund

• Revenues exceeded expenditures by $31,990.

• Revenues increased by $85,227 over 2012, mostly due to rate increases.

• Expenditures decreased by $34,125.

• Factoring in non-operating expenses of $90,298, the water fund experienced a net loss of $58,308.

Sewer Fund

• Expenses exceeded revenues. This has been the case for at least the past five years.

• 2012 losses amounted to $193,259, 2013 losses were $202,503.

A big factor in these losses was the cost of equipment depreciation — $362,412. Without this non-cash expense, the sewer fund showed an operating income of $159,909.

Electric Fund

• Expenses exceeded revenues for the first time in at least five years.

• 2012 operating income amounted to $301,243. In 2013 losses totaled $15,445.

• Again, depreciation accounted for a large non-cash expense. Without factoring in for depreciation, the electric fund showed an operating income of $130,603.

Gas Fund

• Expenses exceeded revenues, although sales were up by $500,000 and operating expenses decreased by almost $50,000.

• Factoring for depreciation, losses amounted to $129,088. Without depreciation expenses factored in, losses were $30,568.

Liquor Fund

• Profits exceeded operating expenses overall with gross profits amounting to $438,801 and operating expenses at $327,447.

• Operating expenses increased by $6, 877 in 2013 over the previous year.

Golf Fund

• Operating revenues totaled $184,301 with expenses totaling $296,976.

• The Golf Fund has received subsidies of $939,240 from the City’s general and liquor funds since 2009. Despite these subsidies, the Golf Fund has a deficit balance of $880,212.

• According to the auditor’s report, the golf fund “continues to significantly impact the financial health of the City…for the year ended December 31, 2012, the City of Two Harbors had the eighth worst financial health percentage in Minnesota of the 500 cities ranked as a result of the significant deficit in the golf fund.”