Portland City Council: Reviews 2017-2018 Audit Report Regarding City Finances

The Portland City Council received and accepted its annual independent financial audit report, for the 2017-2018 fiscal year at its December 3rd Council meeting, from STEVENS, KIRINOVIC & TUCKER, P.C. (SK&T) Certified Public Accountants of East Lansing. SK&T has over 25 years of experience in conducting financial audits for municipalities and non-profit entities. They currently audit about 250 non-profit organizations each year, including 20 to 30 cities, and have been conducting Portland’s annual audit for at least ten years.

SK&T Partner, Steve Kirinovic, CPA, shared with the Beacon during a follow-up phone call following his audit report to the Council that the, “Financial health of Portland’s General Fund is very strong with a good, healthy fund balance”. He also stated that any prognosis of maintaining a strong city fund balance, “depends on what is planned for the future”.

While the Audit was overall positive, including an acknowledgement of a positive experience with the City of Portland’s Administrative Staff, SK&T discovered one issue that required a corrective action response from the City and it has been addressed:

2018-001 EXCESS OF EXPENDITURES OVER BUDGETED AMOUNTS

Condition: During our review of the City’s compliance with the budgeting act, we noted that expenditures had exceeded the amounts appropriated in various functions in the General Fund. In addition, we noted that the City had budgeted for an ending deficit fund balance in the final budget for the Local Street Fund.

Criteria: The Michigan Public Act 621 of 1978, as amended, provides that the City adopt formal budgets for all applicable General and Special Revenue Funds, and shall not incur expenditures in excess of the amounts appropriated. In addition, the combination of beginning fund balance plus current year budgeted revenues must equal or exceed current year budgeted expenditures. Also, the Public Act requires amendments to be performed prior to incurring additional expenditures. The City adopted the budget for the General Fund at the functional level and the Special Revenue funds at the fund level.

Cause: The City did not amend expenditures in relation to budgeted amounts in the areas stated above. It appears year-end audit adjustments were the main cause for the noted overages.

Effect: The City is not in compliance with Public Act 621 of 1978, as amended. Recommendation: We recommend the City monitor expenditures against adopted budgets in all applicable funds and make appropriate budget amendments as needed. We also recommend the City not budget for a fund to end in a deficit situation.

Corrective Action Response: The City had unexpected expenditures at year-end and has corrected the issue. The City will increase emphasis on year-end budget adjustments and monitor budgets prior to adoption to assure we are not budgeting for a deficit.

In the Annual Audit’s Management Discussion and Analysis Letter, that is provided by City Manager Tutt Gorman, the three largest revenue categories of Portland City Revenues. “were charges for services at 27.2%, property taxes at 26.6%, and city income taxes at 23.2%. The City levied a property tax millage for the year ended June 30, 2018, for general government operations at 12.6574 mills, with an additional 1.0000 mills for local streets. Charges for services, which reimburse the City for specific activities, examples include items such as ambulance fees, township fire fees, recreation fees and contributions, administrative charges, permits and motor pool equipment rental. The City income tax is set at 1% for residents and ½% for nonresidents that work in the City. It provided the third largest source of governmental activity revenue.”

City Income Tax Revenue has been steadily increasing from $747,889 in 2014 to $905,237 in 2018. According to City Manager Gorman, “the City Income Tax Fund as of June 30, 2018, reported a fund balance of $1,018,872, an increase of $213,482 from the prior year. The fund balance is committed for street improvements. The City has used the income tax funds exclusively for the improvement of streets, sidewalks, curb, gutter, street lighting, parking areas, associated utilities and their appurtenances.”

Expenses according to Gorman’s Management Discussion and Analysis Letter General government are, “Governmental activity, expending approximately 28.4% of the total and includes general government departments (e.g., council, community promotions, city manager, elections, general administration, assessor, and city hall maintenance). Public safety is the second largest area, expending approximately 22.4% of the governmental activities total on law enforcement, fire protection and code enforcement. Health and welfare is the third largest governmental activity, and expended 19.6% of the governmental activities total.”

In a lengthy discussion with the Portland Beacon following the positive Audit report from SK&T and the identification of the City’s strong financial position, City Manager Gorman stated, “The City has several critical ‘needs’ that are funded by the general fund (i.e., DPW, Police, Parks). One major need has been DPW improvements – a new salt barn, vehicle storage facility and site work. Although not glamorous, the functionality and operation of our DPW is critical to the operations of the City and providing services our residents expect (leaf pick up, snow plowing, street maintenance, etc.). Rather than finance these improvements, the City saved or ‘built up’ a fund balance to pay for these improvements (420k), saving the taxpayers thousands. This brought our fund balance to about 20%, which is lower than what the City usually maintains (around 30% or more), but more than the state recommended levels of 12-15%. For context, a 30% fund balance only allows the general funded services to operate for 110 days in case of an unexpected event. Based on personal experience, the City should be prepared for the unthinkable (economic downturn, state of emergency, tornado, etc.).”

A copy of SK&T’s complete 74-page Portland City Audit 2017-18 can be viewed on-line at www.Portland-michigan.org/DocumentCenter//view/2522/20181203-packet.