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Beaver Island’s St. James Township forgives $105k in sewer debt to itself in order to move on

BY BENJAMIN J. GOHS, EDITOR

Nearly two years after it was revealed St. James Township was missing years of records and many thousands of dollars in relation to its sewer fund, municipal leaders have found a solution.

At its Feb. 1 meeting, township officials voted unanimously to forgive the remaining balance of what they called a “loan” from the general fund to the sewer fund in the amount of $104,903.

 

“[O]ver a period of several years, the St. James Township General Fund loaned money to the Sewer Fund… [T]he loans were used to assist with maintenance, repair and payroll taxes of the St. James Township sewer system and … during that time, the sewer fund encountered necessary major unexpected infrastructure and weather-related issues,” it is stated in the township’s resolution on the matter. “[T]he township failed, over time, to charge/collect sufficient rates to/from its customers to cover the infrastructure and operating costs of the system.”

This matter originally came to light publicly back in March 2015, when during a special meeting of the township, attorney-client privilege was waved and the issue was discussed at length.

“This is 13 years of bad record-keeping,” Rehmann Principal Accountant CPA Stephen Peacock, who was hired to investigate the matter, had said back in 2015. “And, the state will act. When they see deficits in general funds, that is a trigger for them to start considering an emergency manager.”

The State of Michigan requires the township to file a deficit elimination plan.

However, in the resolution, officials go on to state that the remaining loan amount “represents the stumbling block to elimination of the deficit.”

According to officials, the township has now collected historic sewer use fees to the extent permissible by law.

This makes it unlikely funds for repayment to the general fund can be raised through current and future sewer fund operations.

“[T]he township has developed a stable budget plan for the sewer system, which does not contemplate repayment of this amount to the general fund,” it states in the resolution… “[I]n a business decision to enable the sewer fund to operate in the future with a balanced and planed budget, to further put this regrettable deficit behind and allow the current township board to plan for future needs of the sewer system, the township desires that the amount be forgiven by the general fund.”

The resolution ultimately passed by a 5-0 vote.


Below is the rather lengthy story detailing the full scope of issues which led to the deficit and record-keeping issue.

By Benjamin J. Gohs, Editor — originally published online March 26, 2015

Just what is going on with the record-keeping and finances on Beaver Island’s St. James Township?

During a March 4 special meeting of its board of trustees, attorney-client privilege was waived and it was divulged that the municipality may be missing years worth of records and at least $125,000 in taxpayer funds.

“Why we’re having this meeting is we’re a little bit financial(y) strapped in some of our funds here,” said St. James Township Supervisor Bill Haggard. “About a year ago, we had a freeze-up at a sewer which cost us anywhere pretty close to $30,000.”

He added, “We didn’t have the money (in) the sewer fund and we took it out of the road fund, so that raised a red flag.”

Hoping to learn why the township had insufficient funds to maintain its sewer system, an investigation was launched by the township’s civil counsel Bryan Graham who found an apparent long-term lack of record-keeping, insufficient finances and a lack of cooperation from some township officials.

Over the next nearly eight months, beginning in summer of 2014, an engineering consultant and accounting firm were brought in to help determine the state of the township’s sewer system finances and records to no avail.

“From then on, just nothing really happened,” said Haggard.

AUG. 21, 2014

In an Aug. 21, 2014, memo from Graham to the St. James Township Board of Trustees, he outlined the results of an investigation into the financing and legal status of the township’s sewer system.

“In summary, I noted a number of problems with the financing and legal status of the sewer system,” Graham stated. “These problems can be corrected. However, because the administration of the sewer system has not been a high priority of the township over the years, the action necessary to correct the problems may be difficult.”

Graham’s memo covered the major issues in detail.

Special Assessment District (SAD) and municipal bonds – According to Graham, in 2001 the township established a special assessment district to generate revenue sufficient to repay municipal bonds issued to cover costs of initial construction of the sewer system.

The initial district, as of July 2001, consisted of 35 parcels with five unable to be developed and four property owners having paid their assessments. This left a total of 26 parcels being billed from 2007 to 2011. Then, in 2012 and 2013, 25 parcels were billed because it appeared that one property owner paid the assessment early.

“The procedures used to establish the special assessment district were correct,” Graham stated. “As a result, there can be no legal challenges to the creation of the special assessment district.”

On June 28, 2001, the township board adopted a $500,000 bond resolution which entailed numerous legal requirements to be met which included that the bonds be paid for primarily by special assessments and that, if insufficient, the bond then be a primary issue paid out of the township’s general fund, and that the township “pledged its full faith and credit to repay the bonds as a secondary pledge.”

A special fund entitled “2001 Special Assessment Bond Debt Retirement Fund” was also supposed to have been created to collect assessment revenue so bond payments could be made from it.

“Unfortunately, the legal procedures outlined in the bond resolution have not been followed,” stated Graham.

Apparently, a special assessment fund called the “Beaver Island Redemption Fund” and a sewer use fund were established following creation of the special assessment district.

“In 2008, the township did not have sufficient revenue in the sewer use fund to pay current sewer system operating costs,” stated Graham. “As a result, the township transferred $48,070.25 from the Beaver Island Redemption Fund to the sewer use fund and closed the redemption fund.”
Payments were then made from the sewer use fund in the years 2009 through 2012.

In both 2013 and 2014, there was not enough money in the sewer use fund to make payments.

“As a result, the township borrowed $11,000 from the township road fund to make the 2013 bond payment and borrowed $32,310 from the township road fund to make the 2014 bond payment,” Graham stated. “These two ‘loans’ from the township road fund have not been repaid.”

To further complicate matters, the township did not have enough money in 2011 to make improvements the sewer system required. In order to deal with the matter, the township agreed to an installment purchase plan to finance the work.

“[T]he agreement was for the purchase of sewer system equipment at a price of $59,166.67 and was to be repaid over 10 years in quarterly installment payments of $1,845.03,” stated Graham, who added that he requested from township officials, but had not received, information regarding how the payments were being made.

“I am also concerned about the bond payments that have been made since 2009,” stated Graham. “The payments being made do not reflect the bond payments legally required to be made and do not reflect the amount of special assessment revenue being collected.”

A table summarizing info Graham found is as follows:

• 2009 SAD revenue (2008) $41,647.77

Principal Bond Payment Required $35,000

Total payments $52,147.50

• 2010 SAD Revenue $40,014.54 (2009)

Principal Bond Payment Required $35,000

Total payments $45,432.50

• 2011 SAD Revenue $38,441.14 (2010)

Principal Bond Payment Required $35,000

Total payments $43,813.75

• 2012 SAD Revenue $36,875.18 (2011)

Principal Bond Payment Required $35,000

Total payments $42,177.50

• 2013 SAD Revenue $34,594.62 (2012)

Principal Bond Payment Required $30,000

Total Bond Payment Made $35,362

• 2014 SAD Revenue $32,625.86 (2013)

Principal Bond Payment Required $30,000

Total payments $34,612.50

In Graham’s memo, he stated that explanations for the difference in the bond payments might be that they included installment purchase agreement payments or that the township tried to pay off the bonds early. He also stated that he was unable to verify either of those potential reasons.

Sewer Ordinances – St. James Township officials enacted a sewer usage and administration ordinance and a system rate ordinance in May of 2003 but, since they were both published after the allotted time period had passed, neither were valid.

“The bottom line is that the township does not have the legal authority to force a property owner to pay any delinquent fees or charges,” Graham stated.

The Aug. 21, 2014, memo also included numerous recommendations made by Graham, the highlights of which are as follows:

1. Full and independent audit of township sewer system records

2. Hire someone to conduct a complete rate study

3. Re-enact the township’s sewer use ordinance and sewer rate ordinances

4. Pass a rate resolution

5. Establish a special assessment bond debt retirement fund, a sewer use fund and a sewer capital improvement fund

6. Develop an administration system to ensure regular billing is completed, an accounting system is developed, sewer regulation enforcement system created, accounting system to track special assessment revenue collected, accounting system developed to track bond payments and installment purchase agreement payments

Back at the March 4 meeting

“Unfortunately, I am unable to report that we made much accomplishment on my six recommendations,” Graham said during the meeting. “The only recommendation that was really accomplished was the enactment of the sewer use ordinance.”

He added, “My concern that I have, and I want to emphasize this … your financial records are very poor at best and we need to take some actions that would in fact (put) the township financially and the financial records in a better light.”

Graham recommended the township hire someone with forensic accounting experience who can help go back and reestablish records that would accurately reflect the financial condition of the township.

“My concern is that there have been observations made from bank statements that the township has very little money,” Graham said. “That causes me very very much concern.”

He added, “Obviously, townships should have money, and if their financial records or bank statements don’t show that money, my question is: what happened to it?”

Graham said these issues are many years in the making.

“Your current accounting firm has not red-flagged these issues and I’m not exactly sure why,” he said… “I think it’s also appropriate, there may be a need, to bring in law enforcement to find out what happened to the moneys that should be in your bank.”

FEB. 12, 2015

Engineering Consultant Gary C. Voogt had been assigned, back in August 2014, to proceed with a sewer rate study. However, he regretfully reported to Graham on Feb. 12 of this year that he was unable to even begin the study.

“Sewer rate studies rely on existing township records for operational income and expenses,” Voogt stated. “And, in the case where special assessments were used to pay construction costs, a ledger demonstrating the SAD income was sufficient to make the annual bond payments to the bank.”
Voogt was initially retained in June of last year to review the township’s administration and finances of its sewer fund. However, he was unsuccessful in obtaining “complete and meaningful” financial records from either the township treasurer, township clerk or the township supervisor.

• June 12, 2014 – Voogt requested 10 items relating to a sewer finance study. He received three.

“I began to suspect the special assessment payments and sewer use collections and expense records did not exist,” he stated.

• July 26, 2014 – Voogt published a list of 11 observations and met privately with each board member.

“In general, individual members seemed unfamiliar with what I was asking, and seemed unaware of the danger of no supporting township records,” he stated. “To this date, I do not believe any of the observations were taken seriously.”

• Aug. 16, 2014 – Voogt wrote a personal e-mail to the clerk and treasurer requesting specific records needed.

“My e-mail was never answered—either in person or letter, and no records were ever produced,” he stated. “Further, your confidential memo outlining the results of investigation into financing and status of the township sewer system included six recommendations. As far as I can determine, only one new ordinance has been pursued and adopted by the township.”

Finally, Voogt addressed the township’s audit of Dec. 31, 2014, which apparently showed special assessment taxes and sewer funds having been commingled.

“But, of special interest to me was the report of sewer use income for the year 2007 ($684), 2008 ($241) and 2009 ($84),” Voogt stated. “No explanations. It did seem to show the sewer funds in debt to other funds for about $90,000.”

Voogt also noted that a late-December 2014 bank statement revealed that the general fund was empty to the extent that five overdraft charges were levied against the township.

Back at the March 4 meeting

“This is a sad day for me,” said Voogt, who said the township was nearly $125,000 in the hole.

He added, “It just appears … that some sewer customers have been getting free service for seven years.”

FEB. 24, 2015

Rehmann Accounting Group was then approached to provide necessary investigation into St. James Township’s sewer system financial aspects.

“Unfortunately, we have not been able to accomplish … these objectives as a result of what we were given and, more importantly, what we were not given from the township officials,” stated Rehmann Principal Accountant CPA Stephen Peacock in a Feb. 24 memo this year to Graham.

According to Peacock, despite having reached out to township officials for items like the special assessment receivable listings and why some properties on the original assessment roll had not been assessed any amounts due, he got no answers.

He also wanted to know who was and was not charged a hook-up fee, why the operations of the sewer operational funds had revenues that vacillated from several hundreds of dollars to several thousands of dollars year over year, why the township was not following the state’s required Uniform Chart of Accounts, the township’s lack of using “fund” accounting as required, among other issues.

“Each of these factors lead us to conclude that the township books and records are substandard and, from our observations, un-auditable,” Peacock stated.

Back at the March 4 meeting

Of the information he did receive, Peacock said it just didn’t make any sense. He also said an average cost of forensic accounting in Northern Michigan is around $575 per hour and significant time to sort out 13 years worth of records could cost upward of $50,000 to $75,000.

“It didn’t come together and give me any level of comfort that they were either being billed or that they were being collected in accordance with the special assessment,” Peacock said.

“Likewise with the hookup fees (and) sewer operation, if you look at the financial statements over the last eight to 10 years, they have vacillated dramatically.”
Peacock added, “One year has got 300-some-odd-dollars in the operation of the sewer, the next year it might have $13,000.”

According to Peacock, the township’s coffers have no special assessment funds, no debt service funds and no sewer operation fund specifically identified in the QuickBooks file used.

Peacock said a special assessment district is necessary and it has meticulous accounting requirements … and those have not been met.

“Another issue that came up was that there had been funds advanced from the road fund and from the general fund to satisfy the obligations of the sewer bond, and you shouldn’t be doing that,” said Peacock. “There should be enough money in your sewer assessment to cover the principal and interest on those bonds.”

He added, “Again, that led us to believe that special assessments were not being billed or collected.”

More recommendations

Peacock then gave a series of recommendations, including the following:

1. The township must hire someone with substantial governmental accounting experience. The records will need to be gone back to at least 2002 to determine the status of the finances.

“This is 13 years of bad record-keeping,” Peacock said… “And, the state will act. When they see deficits in general funds, that is a trigger for them to start considering an emergency manager.”

2. Create a subcommittee that ensures progress is being made on the township’s financial records.

3. Create specific repayment plans for the repayment of funds advanced to the sewer fund to satisfy bond obligations.

“I don’t think the money should have been advanced in the first place,” Peacock said, adding that he’d like to see the money paid back in between one to five years… “When a millage-based fund is pillaged to provide for a sewer assessment, that puts all sorts of red flags up

4. Make sure the township is served by an audit firm that has substantial experience with governmental units and has been peer reviewed by other reputable financial accounting institutions.

“I really really think you need an industry expert here,” Peacock said, adding that it may be served by a smaller firm after a decade of guidance from an industry expert.

5. Determine sewer usage for customers and whether appropriate fees are being billed and collected.

6. Recommend the township switch from audits every two years to annually until the books are in order.

Ultimate Decisions

During the meeting, Haggard said there should be at least $125,000 in the township’s coffers.

Between the $125,000 of questionable whereabouts, the potential $50,000 to $75,000 for a forensic accountant, and a total of $10,000 to $12,000 for the accounting and consulting work already completed, the township is looking at a potential loss of nearly $225,000 so far.

“The whole thing has been in a long-term death spiral … based on accounting terms, thinking you had money you didn’t have and spending money you didn’t have and you got yourself in a deep hole,” said Haggard.

Officials said the only way to get out of that hole is to reclaim a “major amount” of funding back from the sewer fund that was transferred there from other funds.

A motion was unanimously approved to allow Rehmann any means necessary to determine the township’s financial situation, including the ability to bring in law enforcement, specifically the Michigan State Police, if it is determined that money is missing or if township officials are unwilling to provide the documents requested.

St. James Township Treasurer Jim Wojan was absent.

 

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