Robert Stein was mayor pro tem of Bovey four years ago when he received a phone call from the city’s bank saying that the IRS had frozen the city’s accounts.
It was the start of a financial nightmare for the city of 800, jeopardizing $251,000 in state local government aid (LGA), more than half the city’s funding. With Bovey’s books in chaos, the city turned to neighboring Grand Rapids for help.
For $20,000 a year, Grand Rapids takes care of the smaller city’s accounts and makes sure records are prepared for the state’s required annual financial report.
“Small cities cannot cut corners,” says Stein, who remains on Bovey’s City Council. Without Grand Rapids’ help, he says, “the City of Bovey would have folded, would have had to go in with [the City of] Coleraine, or would have gone bankrupt.”
Problems meeting state requirements
Minnesota law requires all cities to submit annual financial reports to the Office of the State Auditor (OSA). The deadline for those reports is March 31 for cities that operate on a cash-only basis, and June 30 for cities that use generally accepted accounting principles.
If they don’t submit the reports, they risk losing their LGA. In addition, cities with populations under 5,000 could lose their Small Cities Assistance Fund disbursement, a new program providing money for construction and maintenance of roads in those cities.
In 2012, 17 cities sought relief from the Legislature to recover a total of almost $795,000 in 2011 LGA because they had not filed their 2010 financial reports. Last year, three small cities missed their March filing deadline and were docked a total of almost $102,000 in LGA.
The traditional remedy for penalized cities has been to seek relief from the Legislature by getting special dispensation and their LGA restored in the tax bill.
During the 2015 legislative session, however, legislators expressed concern that cities were receiving significant state funding while not complying with reporting requirements.
There is no guarantee that legislators will continue to pass special legislation. This year, because the Legislature did not pass a tax bill, the three cities that sought relief have not had their LGA restored.
Legislators “made it known they don’t have the appetite for this in the future,” says Heather Corcoran, League of Minnesota Cities (LMC) intergovernmental relations liaison. “They wanted to convey the seriousness of it.”
State Auditor Rebecca Otto says staff in her office are willing to work with cities to help them with forms or assist them with other issues. Informing OSA staff early when problems are identified, rather than waiting until deadlines pass, results in better outcomes, she adds.
Reasons for missed deadlines
In letters of appeal to legislators, officials in cities that have missed their reporting deadlines indicate that city staff have simply gotten overwhelmed. Most of the cities that end up in trouble are small communities that operate on a cash basis. Often their only employee is a city clerk, sometimes part-time, who runs all city operations.
Among the last group of cities that missed their state reporting deadlines, reasons included too much work for clerks, trouble with confusing new financial software, crashing computers, miscommunication with auditors who were hired by cities, and complications involving accounting of state grants and loans.
One clerk reported that her city had been without good Internet service and a reliable computer and printer for two years. The clerk worked full-time six days a week in another community and was trying to manage the small city as well.
Staff turnover also creates issues. “A clerk who starts in January will have just two months to turn things over [to the state by the March deadline],” Corcoran says.
“They have to show receipts, hire a private auditor, travel to a regional center, and have a fair amount of communication with that accounting company. It’s time-consuming. And … taxes are due in April for everyone, so auditors are doing this work for businesses and private folks at the same time.”
League efforts to help
In an effort to make sure cities file their state financial reports on time, the League provides those due dates in an annual document on its website. Corcoran says the League will also send out messages in November and December reminding clerks of approaching deadlines and that they need to get their internal financial house in order and line up a qualified auditor.
The League also has 25 “Ambassadors,” retired city officials assigned to cities around Minnesota, who act as trouble- shooting liaisons between the League and cities who need help. H. Dan Ness, a retired accountant and former mayor of Alexandria, is the LMC Ambassador to cities in Douglas, Pope, Grant, Stevens, and Traverse counties.
Ness says that this year, the League sent him a list of cities in his area that were tardy with their financial reports.
“I sent emails and made phone calls urging them to get their audited information to the state auditor,” he says. “Only one contacted me … and told me they got an extension.”
Sometimes cities try to save money and hire inexperienced auditors to prepare their reports. Ness says it’s best to seek out firms that are familiar with the state requirements, or to ask for help from a larger city as Bovey did with Grand Rapids.
“Some of these people are conscious of spending tax money and don’t seek out the most qualified CPA firms to do their reports. You need to get competent, qualified people who do more than one city, do a good job, and do it when it needs to be done,” Ness says.
“I would hope that people would raise the white flag and ask for help sooner,” he adds. “They shouldn’t be afraid to ask for help. And don’t be afraid to ask a large city for help. This is not just the clerk’s responsibility; the mayors and others have to get involved.”
Contracting with larger city
This year, both Bovey and the nearby City of LaPrairie (population 670) are having their financial accounting done by Grand Rapids.
Grand Rapids Finance Director Barb Baird says a state legislator connected her city and Bovey once the depth of the smaller city’s problems became clear. The city not only hadn’t filed its state financial report, but also hadn’t paid sales taxes or state and federal taxes.
“We are compensated $20,000 a year just to do financial accounting,” Baird says. “We do all accounts payable, pay-roll, the work papers for the auditor, pay their state and federal taxes. Anything financial, we do it.”
This year, Grand Rapids took over the financial duties for LaPrairie after the city clerk had to take a leave of absence.
LaPrairie is paying $36,000 a year for those services. Grand Rapids City Administrator Tom Pagel says he likely will negotiate a similar fee with Bovey for the next year.
With 11,000 residents, Grand Rapids has five employees in its finance department. Each have specific duties handling financial matters for the city as well as the Grand Rapids Housing and Redevelopment Authority. Grand Rapids has not added staff to deal with the additional duties created by helping Bovey and LaPrairie. Baird and Pagel say they are unlikely to do so.
“Right now, we are all very, very busy and haven’t had to pay overtime, but there are things that are not getting done because we have additional work to do, so we have to look at this,” Baird says. “We have to look to see if we can continue.”
“If we can provide a service with our existing staff, it’s a collaboration where both entities win,” Pagel adds. “If you hire someone and suddenly two cities drop off, your city is responsible for that cost. That really is not a business I want to get into.”
Happy ending for Bovey
Bovey eventually did get its LGA back, but it was because of the partnership with Grand Rapids. Bovey Councilmember Stein views the arrangement as a necessity. “It really comes down to checks and balances,” he says. “A small city cannot operate with just one person in charge of everything. We’ll stay with Grand Rapids as long as they’re willing to do it for us.”
Baird believes the demands on city clerks have increased in the last 15 to 20 years, making the job harder to do in tightly staffed small cities. Pagel thinks qualified people are harder to find, too.
“I don’t think this problem is going to go away,” he says. With increasing demand for accountability, some small communities may face hard decisions about whether to share staffing with nearby cities, he says. One way to cope would be for two cities to share one clerk and one financial specialist.
Stein says there has been discussion on the Bovey Council about whether to continue partnering with Grand Rapids because of the cost. In his mind, there’s no question that it’s worth the money.
“We get our LGA. I have faith in Grand Rapids. I think eventually they will have to raise the price, and I support that,” he says.
“My advice to smaller communities is, seek out other cities like Grand Rapids, that already have checks and balances in place, and ask if they can help with [your city’s] checks and balances,” Stein adds. “You have fiduciary responsibility to the community and your citizens.”
He says the alternative—the kind of crisis that Bovey faced—could lead to bankruptcy and perhaps even forced consolidation with another community that would result in loss of local control over things like taxes.
Avoiding collaboration because of the expense is penny wise and pound foolish, he says.
“You need to make hard choices to be safe,” Stein says. “Having this larger city do this for us is money in the bank.”
Mary Jane Smetanka is a Minneapolis-based freelance writer.
Another option for cities struggling to meet financial reporting responsibilities is to contract with an accounting firm. Read about one city’s experience with this.
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