Alva Review-Courier -

"We have an opinion in here, and it's a clean opinion so it's not modified for anything. Everything is materially correct," said Andy Cromer, CPA with HPSG & Associates, PC. He presented the annual audit for the year ending June 30, 2022, during the Alva City Council meeting Monday, March 20.

First Cromer clarified that Crawford & Associates is a separate CPA firm. They are employed by the city, and part of that work is to get ready for the audit. "They actually write the report that you have," said Cromer. "They give it to us as well as the city, and we review it."

Pointing out the audit year ended June 30, 2022, which was nine months ago, Cromer said, "It's hard to put this into context without something to compare it to, namely how did we do last year, the prior year? So to make this two years of data, the thing is twice as thick, and if one year didn't wear you out, two years certainly would. I've just taken a few big picture metrics, if you will, comparing how did we do in '22 to '21.

"I have been made fully aware of the prior year and the budget issues and the spending that occurred in prior years and that you all are trying to dig yourselves out of that so I got the background of all of that."

The Big Picture

"Your total cash balance, cash and investments (CDs), lumped together regardless of what fund at the end of 2021 your cash and investments were $3.8 million. At the end of '22 it is $4.4 million, so about a $550,000 increase just in your cash balance.

"Your fund balance, again regardless of what fund or if it's restricted for some purpose or not, just total fund balance, which is your assets less your liabilities, that went from $4.5 million to $5.6 million so about a $1.2 increase.

"Your debt has declined. You didn't take on any new debt, and the debt you had you paid off about $480,000 worth. And then there was a large ... due to the general fund owed money to the airport, and so not all that's been paid back but almost $900,000 got paid back to the airport in 2022 from the general fund to the airport."

However, Cromer cautioned the city council that federal COVID relief money is involved in recent years. "Keep in mind during 2022, you had about $430,000 in CARES Act money so it's not a recurring revenue stream, and now you've probably received another approximately $430,000 this year, and in '21 you received $380,000 or so of CARES Act, so all this COVID money," he said. "So you got three years of large COVID checks. But it's not recurring ... it's not something you can count on. So know that yes, it's helped, but it's not a recurring revenue stream."

"Now your general fund still shows a negative fund balance of some $375,000. At the end of last year (2021), it was $870,000, now it's $375,000, still negative but it's a smaller negative than it was," said Cromer. "That's really it on the financials."

Internal Control and Compliance

Cromer said the State of Oklahoma requires a report on internal control and compliance. "So when we do an audit, we do not audit your internal control. We look at, we understand it, but we don't audit it," he said.

"If we do see something in your internal controls that could be significantly improved, or is a problem, that would be in here. There's not a comment in here about that so there's not comments there.

"The other part of this report deals with compliance, and you might say compliance with what? Well, it's generally compliance with state law, compliance with federal law. It could be in some degree compliance with your own internal law, if you will. So anything that can have a direct and material effect on your financial statements from a compliance standpoint.

"We do have one comment on compliance, and it deals with that negative fund balance that I just mentioned. And I think you've had this comment before, but the state says your General Fund cannot have a negative fund balance. In fact, none of those governmental funds – Utility Authority is not governed by the state, the state doesn't address whether that can or not – but your other funds cannot have a negative fund balance. The city's response is also in there."

The City of Alva's response is: "The fund balance deficit was a result of financial stress in previous fiscal years, which city administrative overspent without City Council authorization or knowledge. This has been a finding in consecutive fiscal years, though the deficit has improved.

"Council members and staff acknowledge understanding that Oklahoma statutes prohibit deficit fund balances.

"Since learning of the deficit balances in January 2020, the City has implemented numerous measures to restore deficit fund balances. At June 30, 2022, the City had made significant progress towards this goal. As of December 31, 2022, the City's fund balance was positive. It is the intent of the City to maintain positive fund balances and comply with Oklahoma state law."

City Council Input

Councilman Daniel Winters, who is chairman of the council's Finance Committee, said, "I do have two comments that I want to bring up just for clarity, because again, he's talking about June of 2022. I didn't mention this in our finance report. Our total cash and asset balance currently is $5.6 million so it's continuing to trend upwards. And then our General Fund deficit that you're referring to, as of a couple of months ago is no longer a negative fund balance. It's actually sitting at about $104,000. So just to put it in perspective, the issue he mentioned has been corrected and should not be on our next audit.

Councilman Taylor Dowling asked, "Just out of curiosity, can you go into the fund balance compared to the unassigned fund balance, the unassigned deficit?"

"Sure, and in fact that's where I was leading," said Cromer. "But let's just stop and talk about that for a second. So your fund balance, before we start slicing and dicing is simply assets less liabilities. So if you have more liabilities than assets, then you have a negative fund balance, not where you want to be.

"But then in the fund balance, you can have categories of fund balance. It's based on, is that fund balance restricted for a purpose? And there are several levels of restrictions. There's one level that's actually called 'restricted', which means it's been restricted as to how funds are spent, generally by an outside party. It could be the government with a grant. It could be debt issues or a contract, or whatever, some legal thing that says 'here's how you spend the money'. The thought being, that's the hardest for you all to change. In fact, you really can't. The other party would have to agree to have that changed.

"And then you can have 'committed' which is internally designated for a specific purpose. So this body here could vote to say we want to set aside some money for a specific purpose. That would be carved out of fund balance. Now it's a lesser restriction because you all could also turn around and vote to un-restrict it. You can't un-restrict a government grant.

"And then you would have unrestricted, that last bucket.

"You have restricted of $470,000, so that is what it is, and then there's committed. That committed is with your stabilization policy. And that's about almost $800,000. So we've got a total net deficit fund balance. So when you start carving out pieces ... you start carving out positive restricted, positive committed, that gives you a much bigger unrestricted deficit cause you've still got to come back to this set number, right? So the bigger that committed gets, the bigger this unrestricted deficit gets as well. That's just the math."

Dowling said, "The idea is that we would have to pay back that unassigned deficit eventually because that's funds taken that was outsidely restricted or restricted ourselves from restrictions we put on it but not lifted."

Yeah," said Cromer. "This is where it's an internal designation is how much weight do you put on that? Maybe this is a good point to get into this other one page letter because they go hand in hand."

Two Things to Think About

"We've got two comments for you all to think about. This letter doesn't go to the state, it doesn't go anywhere but to you guys," said Cromer. Since the letter was not included as part of the audit, the council was not provided with copies. Later Mayor Kelly Parker apologized for the oversight, saying he would email the referenced letter to council members.

"The first one is talking about towards the end of 2022, the business manager left and went to the hospital (as CFO)," Cromer said. "That business manager is also serving in the dual role as finance director. And so when you lost one person, you're really losing two positions.

"My understanding, in the past it had actually been two different people, not just one person. So you have really gone from two people to no people. So the Crawfords (Crawford & Associates) have stepped in and helped to alleviate some of that burden, but you're also down two bodies and as far as internal controls that can lead to having people doing things that you prefer maybe they didn't.

"So there's certain duties that you don't want one person doing multiple things. You're losing some checks and balances that way. We don't have a silver bullet to that problem except to let you know of it and be careful and do whatever you can. It's just an inherent problem that you faced."

Continuing with the second comment, Cromer said, "Then the second comment, which is to your (Dowling's) report – the stabilization policy. It's a little confusing what the intent was, and probably even more so when you've got a deficit in total to begin with, and so how do you set up a stabilization reserve when you're negative to begin with? That reserve is to carve out some of your positive fund balance and set it aside. And so we don't have anything to pull from to begin with.

"The whole thing is a bit odd and confusing, the way it's worded and the way it's being implemented, and so our comment to you all is just be aware of that, look at it, see if there are some changes that you need to make – either to the policy itself, or maybe the policy is fine, it's what you want – it's the implementation of it that needs to be reworked a bit."

Stabilization Fund

Speaking of the stabilization fund, Mayor Parker said, "It wasn't brand new information. It's the first time it's really been reported to us this way in our audit. But if you recall, when we put performance measures in place for the new manager that we're hiring, part of that included stabilization fund, having that have an appropriate balance.

"It's something that, we do have an ordinance for a stabilization fund. To my knowledge, none of us (mayor and council) have looked at it to any great depth. It was implemented prior to my time on city council. A stabilization fund is a fund you have in place for insuring that your financial health is good. It had already kind of been on my mind that we need to readdress this. Having Andy say that it really doesn't make a lot of sense actually helps"

Parker said he'd like the council to look at the ordinance and see if changes need to be made. In fact, for the city's budget retreat March 25 with council members, administrators and department heads, he had penciled in budget line items for stabilization. "It is a financial measurement that is important to our community. And if, heaven forbid, we do have something catastrophic happen in our community, a stabilization fund will be there to help us carry through whatever period of time that might be," he said.

"The rule of thumb in a lot of municipalities is to say ok we want somewhere between 10 to 30 percent of our annual revenue for the general fund set aside, whether it's formally designated or just in their budget process," added Cromer.

Parker said that he and Deputy Clerk Heather Bonham have been looking into adding more positions in the city office to provide more internal control and reduce reliance on Crawford & Associates. "We're paying for a Cadillac to serve as a wheelbarrow," he said of the way the city has been using the CPA firm. "We haven't had a choice this year."

Dowling asked what happens with the city being noncompliant with state law.

"Maybe one out of ten municipalities will have this, and I've never seen, I don't mean to lessen the severity, but I've never seen any consequences from the state auditor's office," answered Cromer. "I would imagine at some point if it got so far out of hand, that you all are going to become insolvent, then maybe they would jump in and do something. But I've never worked with anybody that was ever anywhere near that degree."

"We are in compliance now," reminded Councilmember Sadie Bier.

A video of the Alva City Council meeting may be viewed at http://www.AlvaReviewCourier.com.