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State review reveals ‘serious’ financial issues in East Spencer

By Scott Jenkins
Salisbury Post
EAST SPENCER ó A division of the State Treasurer’s Department says an annual audit shows East Spencer has “serious financial problems” and state officials are demanding that the town submit a plan to correct the issues.
Town leaders say most of the problems outlined in a letter from the Local Government Commission stem from the town’s ongoing problems with its decrepit water system and lack of a large industrial tax base, and they blame some discrepancies on the accounting firm that prepared the audit.
The March 12 letter from Sharon G. Edmundson, director of fiscal management for the Local Government Commission’s Finance Division, says state officials analyzed East Spencer’s audited financial statements for the fiscal year that ended June 30, 2007.
“The town has serious financial problems which the town’s governing board should address immediately,” Edmundson wrote.
Specifically, Edmundson wrote that:
– About two thirds of the town’s $201,717 general fund reserve on June 30 was made up of Powell Bill money, which is restricted by law for use on street construction and maintenance, leaving only around $67,000 “for unforeseen emergencies or opportunities.”
Edmundson warns town officials that the the N.C. Department of Transportation reviews municipal financial statements closely to determine whether any are using Powell Bill money for purposes not allowed by law and suggests East Spencer “strive to improve the overall financial condition” of its general fund.
“The town should review its budget ordinance for the current fiscal year and determine which expenditures can be reduced and/or which revenues can be increased to build general fund unreserved fund balance available for appropriation,” she wrote.
– The percentage of fund balance available for appropriation relative to expenditures in the general fund appears to be much less than in similar-sized towns across the state. East Spencer’s was 14.9 percent, while the statewide average was more than 30 percent, according to the letter. And Edmundson points out that the percentage in East Spencer had decreased for four consecutive years.
– The town made expenditures in excess of those authorized in its general fund and water and sewer budgets, contributing to the fund balance decline.
“North Carolina has very specific guidelines regarding the preparation and adoption of the budget ordinance, and the board should take care to ensure that it complies with these ordinances,” Edmundson wrote. “Expenditures should be controlled or the budget amended before making any unauthorized disbursements.”
– The town’s water and sewer fund operated at a net loss and did not generate enough revenue throughout the 2006-2007 fiscal year to pay its debts for that year. Additionally, the fund had only $57,660 in assets and $298,724 in liabilities during the period audited.
– The water and sewer fund borrowed $35,545 from the general fund during the fiscal year. Edmundson wrote that each fund “should be self supporting; therefore, the financial condition of the town’s general fund should not be compromised in order to support the operations of another fund.”
“Given the … poor financial condition of the town’s general fund, the water and sewer fund cannot continue to borrow general fund reserves.”
– The state review also noted “various weaknesses concerning the town’s internal control system,” according to the letter.
“We are particularly concerned that the auditor noted that the bank accounts were not accurately reconciled with the general ledger and that the town did not receive proper approval from the board before participation as the pass-through agency for the New Beginning for the ARISE program.”
Edmundson also points out that the state received the town’s audited financial statements March 7. The audit was due Oct. 31.
“A report received by the board eight … months after year-end identifies financial and operational problems after it is too late for the board to take any effective action,” she wrote.
But town officials say the audit held few surprises for them. East Spencer has been losing money on its leaky water system for years and is in the midst of a project to replace old pipes, upgrade the system and install better regulatory and billing controls.
“The water system consistently loses money,” said Town Administrator Richard Hunter, who is also the chief finance officer. “That puts a drain on the town’s general fund. It’s all connected, all one problem.”
Hunter called the letter a “Catch-22.” East Spencer must satisfy the Local Government Commission that it has a handle on its finances to proceed with borrowing money to improve the water system, but the town is waiting for the commission’s OK to borrow the money and repair the water system, which would help its financial situation.
“We can’t solve the water fund without improvements to the distribution system,” he said.
In addition to the water system issues, Hunter pointed out that the town’s revenue took a hit last year when Aldi’s distribution center decreased in tax value and that the town has little else in the way of commercial or industrial tax base.
“I don’t think there’s anything the town can do that’s going to change that,” he said.
As for the expenditures not covered in the town budget, Hunter said that should have been cleared up when the board approved a “close-out ordinance” at the end of the fiscal year, as other towns do.
“Evidently, there was something that we did not cover on that close-out ordinance,” he said. “That’s a small technicality. That’s not to say we spent money the board did not know about.”
And Hunter said the town submits monthly statements to the Local Government Commission for each of its bank accounts. He said the issue Edmundson discussed in her letter was based on a concern the town’s auditor raised. “And that is that there was a difference between the bank balance and the book balance. But that was his work. We were waiting on adjustments from him … He had not properly adjusted the book balance from the previous year’s audit.”
The town did take steps in its current budget to improve its fiscal health. Hunter asked the board to allow him to adjust departmental spending downward if revenues came in lower than projected and to shrink general fund expenditures in order to replenish the fund balance.
“It is a concern that we’re taking very seriously,” East Spencer Mayor Erma Jefferies said. “We’re making every effort to cut back on our expenditures.”
Jefferies acknowledged the “error” of not getting approval from the Board of Aldermen for the town’s involvement in the ARISE program, but echoed Hunter in saying that some of the other problems were caused by the “albatross” the water system has become and the lack of a large tax base.
She said the town has prepared a reply to the Local Government Commission’s letter and aldermen will see it at their meeting on Monday.
And, Jefferies said, the town has severed ties with the firm that finished its last audit eight months late, Ty Cox & Co. of Durham, and is seeking proposals for a new one.
The Local Government Commission took control of East Spencer’s finances for 16 months beginning in October 2001, when the town’s general fund and water and sewer fund were running deficits.
Contact Scott Jenkins at 704-797-4248 or sjenkins@salisburypost.com.

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