Auditor Ken Berthiaume presented Dowagiac City Council with financial statements for Fiscal Year 2009-2010 Monday night, giving an unqualified opinion — “the best that can be rendered. The city is in full compliance with all the GASB (General Accounting Standards Board) pronouncements relative to current accounting principles and State of Michigan requirements for an audit.”

In fact, “The net asset balances were on the increase last year, for both governmental and business type activities,” Berthiaume reported. “This statement is prepared on full accrual method of accounting, so it includes all assets the city owns or acquired and any long-term liabilities.”

“A couple of things that stood out to me,” he said, “was that property taxes revenue remained steady. That’s the primary source of revenue for your government activities,” Berthiaume said. “In 2009, you showed $1.975 million in property tax revenue. In 2010, $2 million and $51,000. We don’t know, of course, what the future will bring, with property values still being suppressed.”

State-shared revenues — primarily from sales tax — declined from $692,000 to $657,000 — a “small decrease,” he stated. “Investment earnings were down about $100,000. But overall, we see good changes, increases in net assets.”

The general fund balance “held steady” at year-end Sept. 30 at about $901,000. “The previous year’s general fund balance was about $804,000, so even with all of the challenges that the city faced last year, you still managed to increase your general fund balance by about $100,000,” Berthiaume noted. “All of the other non-major governmental funds showed a net decrease in fund balance of about $1,500. That’s pretty good, relatively break even.”

The auditor turned to enterprise funds, of which the major one is electric, followed by water, sewer and Dial-a-Ride Transit.

“Last year management put in considerable extra effort to clean up some receivables showing in the book that were not good. An allowance was made for bad debts, which put the receivable balance at a more fairly stated amount. That’s reflected in the balance. Even after that adjustment, we ended up in pretty good shape. For the electric fund, there was an intra-fund loan. At the end of the previous year, the balance was about $3 million $48,000. At the end of September that balance was $2 million $256,000, so we saw a pretty good reduction there. A couple more years like that will help. The electric fund shows a $31,955 deficit balance, though there is $313,000 set aside in net assets as a replacement fund so that deficit will be wiped out next year. It’s not a problem at all.”

Sewer fund revenues dropped $150,000, a “large decrease,” the auditor related. “Then, the bad debt expense of $217,000. That reflects the cleaning up of those receivable balances. There were some companies over the past few years that have gone bankrupt in town and so forth.

“The sewer fund shows considerable net loss, $360,000. The water fund showed a negative $46,000, DART a negative $40,000, which is similar to the loss the previous year. At the end of the year it had about $135,000 still in cash, so it could absorb those kinds of losses without a problem. The city would not necessarily have to subsidize (bus service) in the near future. If sewer fund revenue continues the way it is, there may be need for consideration of a rate increase.”

“Certainly, that’s a number that raises eyebrows,” City Manager Kevin Anderson agreed.

“There are a couple of factors that should be noted. Revenues definitely were down this past year. The main reason that revenues were down, though, is that every year we do a reconciliation with our large customers, Sister Lakes and Cassopolis. The original billing is sent based on estimated numbers, then we reconcile those based on actual audited numbers. If we go back a year, we’ll see revenues in the sewer utility were higher, and we had to refund this year, so there is a balancing out in the two-year time period, so we don’t expect to have the same lower revenues next year. We just started the reconciliation.”

Anderson also noted that City Council imposed a rate increase which has since taken effect.

“The other thing we have done to deal with that particular deficit,” the manager said, “is we did refinance some debt that’s going to reduce our costs about $10,000 a year within this fund. The other thing, we did have a large write-off of bad debt that hit the books. When we factor in reconciliation, the rate increase, that bad debt calculation and refinancing, we are projecting this upcoming year at a break-even amount.”

“And that debt was for some years prior,” added Mayor Don Lyons, lingering from 2001 to 2006. “Our accounting procedures are much better than they have been.”

“A good chunk of these bad debts related to some of our policies, especially during winter months when utility bills can get out of hand. This past year, council spent a lot of time and we worked closely with landlords to develop policies regarding deposits. Initial indications appear to be quite good. The first two months into winter, we’re sitting on about $4,000 (bad debt) — a far better position than in the past,” Anderson said.

Dowagiac bills some $600,000 per month.

Berthiaume touched on the employee pension plan. “It ended up being about 56 percent funded,” he stated. “That’s based on actuarial information. There’s still a substantial liability. That unfunded liability does not appear in your balance sheets, only in the footnotes.”

In other “post-employment benefits,” Berthiaume said, “the city has a program for employee/retiree health care, according to an established policy. This year, GASB 45 required that the city acquire an actuarial analysis report to determine what the liability for those old benefits was. The report came back that the liability amounts to about $1.2 million if you had to have all the money in the fund today to take care of all the benefits that have been earned by employees.

“The city currently has about $243,000 in a fund with MERS to take care of that liability, so that liability is only about 20 percent funded. About a million dollars is unfunded. The situation isn’t unusual, compared to other cities all over the country. Everybody is now coming to grips with the situation that these liabilities have been created in the past. Previously, all you had to do was use a pay-as-you go method. You made an annual payment, but you didn’t have to compute the liability for that obligation. The city currently has a trust fund set up. Whether or not you’re going to make annual payments into it is up to the council and management. Actuarials have figured out that if you make an annual contribution of $94,000 per year for the next 28 years, you’d amortize the payoff of that debt. Last year the premiums the city paid for retired employees was about $26,000 — so unfunded annual required contribution for last year was about $67,000. It’s not necessary, only something you should consider. Overall, the audit went smoothly. We had excellent help from staff and management, so we don’t anticipate any problems.”

An audit is an independent review of the city’s financial position and recordkeeping.

Council accepted his report and made it part of the city’s records, so the audit is available for public review in the clerk’s office or on the city’s Web site.