City removes McDermont as an asset from the general fund, records advances as inter-fund borrowing that will take 47 years at current projections to repay
By Paul Myers @PaulM_SGN
LINDSAY – Recognizing a problem is the first step in fixing it. And that is what Lindsay’s finance director Bret Harmon and the Lindsay City Council did early last month. During their Oct. 10 meeting, the Council passed two resolutions intended to put the City on a more fiscally sustainable path.
Resolution 17-43 forgave the $13.4 million lent by the general fund to the construction of McDermont and retroactively accounted for the transfer of $3.8 million in borrowed funds for McDermont operations over the years since it was created. Resolution 17-44 retroactively categorizes advances to and from various funds to the general fund and wellness center while also creating a projected 47 year repayment schedule.
The adjoining staff report for Resolution 17-43 noted that during a 2010 audit conducted by Brown Armstrong Certified Public Accountants, the City’s auditing firm at the time, the City was instructed to record a $13,476,016 advance from the general fund to McDermont to account for the funds used to build the McDermont Field House and categorizing it as an asset. The expectation at the time was that McDermont’s revenue would pay back the advance from the general fund. However, as years have gone on the City has not seen a return on investment and it may never, according to Harmon.
“There is not a reasonable expectation McDermont will be able to repay this advance…the City should not continue to carry the advance on the general fund balance sheet as an asset,” Harmon wrote in a staff report for the meeting
Of course this comes at the end of a multi-year long cycle of the general fund lending McDermont millions of dollars in order to continue operations, completely separate from the initial costs of construction. The City has seemed to have changed course on that aleady as they took steps in July to close a general fund budget gap by laying off four McDermont employees. The move saved the City $440,000 on the year and created a balanced general fund, wellness center fund and an almost balanced McDermont fund.
“Since its creation, McDermont has not operated within a balanced budget. As a result, it has consistently spent more than it generated, which has caused its cash balance to be overdrawn by $3,823,984 by the end of fiscal year 2016-2017,” the staff report stated.
Now, by passing the Oct. 10 resolution the City simultaneously vacated the advance of $13.4 million which removed it as an asset from the general fund, and made explicit the $3.8 million borrowed by McDermont from the general fund over the years.
And by not considering the McDermont advance as an asset in the general fund while recording transfers for operations, the staff report notes that the general fund will reflect a $12 million deficit.
“While a deficit condition is not ideal, it is the realty for the City,” the report read.
Although, according to the resolution, if McDermont were ever in a position to create enough revenue to pay back the general fund, the City could reinstate the advance to collect borrowed funds.
The second resolution passed by the Council on Oct. 10, Resolution 17-44, formalized the advances and repayment schedule for the funds already borrowed by the general fund and wellness center. According to a staff report, on the resolution, “Without formalizing the advances, the City’s financial statements would overstate the cash available to the lending funds.”
In all the resolution recognized the $2,060,100 borrowed by the general fund from the Community Development Block Grant, Economic Development Block Grant and HOME funds collectively, and is intended to be paid off over 10 years starting on Dec. 30, 2018 at $206,000 per year.
The resolution recognized as well the $6,244,000 borrowed by the general fund from the street improvement, transportation, water, sewer, refuse, capital improvements and storm drain funds collectively, and is intended to be paid off over 30 years starting on Dec. 30, 2028 only after the full repayment of the $2,060,000 loan.
And lastly the resolution recognizes the $612,000 borrowed by the wellness center from the general fund intended to be paid back over 7 years starting July 20, 2045 at $88,000 per year. All advances are assigned a 0.754% interest rate. And the advances are to be paid off in that particular order.
Harmon noted as well that payments on debt service will change the amount of money the general fund and wellness center can spend in future years.
“Repayment costs will reduce the spending capacity of the general fund and wellness [center], which will necessitate organizational and operational adjustments,” according to the staff report adjoined to the resolution presented by Harmon.
There was little comment by the council aside from Councilman Brian Watson.
“I think it is safe to say that we are all very very thankful for all the heavy lifting you guys have been doing,” stated Watson.
Both resolutions were passed 4-0 with councilmember Steve Velasquez absent.
