The Ladysmith Common Council received a report Monday, Nov. 9, on the city’s 2019 financial statements and audit report.

The audit report noted three material weaknesses in the areas of annual financial reporting under generally accepted accounting principles, material audit adjustments and lack of segregation of duties.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Companies and organizations using GAAP must adhere to its regulations. Material audit adjustments are a proposed correction to the general ledger made by a company’s outside auditors based on evidence found during audit procedures, or a reclassification of amounts into different accounts. One of the biggest risks of lack of segregation of duties is the increased risk of fraud when one person is given the sole responsibility of two conflicting tasks the risk of fraud increases, so having more than one person carry out these tasks reduces this risk.

April Anderson with Clifton Larson Allen called the city audits three material weaknesses “common,” especially in audits of smaller municipalities with small staffs. She added they appear in past city audits.

“These are not new to the city. They are recurring ones,” Anderson said. “They are very common. They are nothing to be overly concerned about, but to be aware of.”

“Overall these are positive results. The material weaknesses are common and recurring so nothing new there, and of course financial statements are in accordance with rules and regulations,” Anderson said.

Anderson highlighted shortterm assets due from other funds that increased to $470,239 in 2019, compared with $1,441 the prior year. This is an interfund loan from the general fund to the water and sewer utility to assist with cash flow matters at year end.

She also cited declines in longterm advances to other funds that decreased to $83,376 in 2019 compared with $129,405 the prior year due to a deficit in Tax Incremental District 5.

“These are expected to be paid back to the general fund in time as funds become available,” Anderson said.

Current payables of total liabilities increased to $2.54 million in 2019 compared with $1.71 million the prior year due to street projects that took place in 2019.

The city’s overall fund balance in the general fund decreased 21.7 percent to $1.16 million in 2019 compared with $1.48 million the prior year. Almost all the decrease resulted from the assigned portion of the fund balance that includes 2019 funds used to balance the city’s 2020 budget. At the same time, the city’s unassigned fund balance increased 32.8 percent to $461,128 in 2019 compared with $347,223 the prior year.

That leaves the city’s percent of unassigned fund balance to general fund expenditures at 9.9 percent at the end of 2019 compared with 8.2 percent at the end of the prior year. This was 22.2 percent in 2017 and 30.5 percent in 2016.

City policy recommends this amount be between 25 and 30 percent.

“It is nice to see you got that up a little bit and we will hope to increase that to a more comfortable level,” Anderson said.

Fund balances remaining at the end of 2019 included CDBG Deferred Loan Program at $39,757, Mining Fund at $420,027, Meadowbrook Center Income Fund at -$142,501, Rail Site Facility Revenues at 102,226 and Fritz Avenue Revenues at $323,772.

Capital Project Fund Balances total $2.59 million broken down to TID 5 at -$83,376, TID 8 at $202,673, TID 9 at $417,839, TID 10 at -$109,339, TID 11 at $512,123 and Capital Projects Fund at $1.65 million. 

These types of funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities other than those financed from proprietary funds, according to Anderson. The Capital Projects Fund $1.65 million balance helped fund the public works garage renovation and street projects funded through debt refinancing.

Negative balances are common in these types of funds, according to Anderson. She added the Capital Projects Fund spending was moved out of the city’s general fund and recorded separately so it qualified for expenditure restraint funding from the state.

The water utility showed a net income loss of $199,254 in 2019 while the sewer utility showed a $191,138 net income. Despite the water utility loss, this fund actually showed a $30,000 surplus before a $240,000 annual required tax equivalent payment to the general fund.

“You are looking at increasing your water rates,and the hearing is coming up pretty soon, and that will bring you up to a better rate of return,” Anderson said. “The rate adjustment will help bring that to a level the Public Service Commission would like to see.”

The sewer fund had shown a loss, but about $360,000 in grants for projects helped move this fund to positive territory.

The city’s longterm obligation debt as a percent of debt limit increased to 50 percent at the end of 2019 compared with 38 percent the prior year. The city’s equalized value at the end of 2019 was $167.09 million while its general obligation debt limit is $8.35 million.

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