YELLOW SHEET Office of the State Auditor of Missouri Claire McCaskill

Report No. 2004-69

September 15, 2004

The following problems were discovered as a result of an audit conducted by our office of the City of Independence, Missouri. 

Expenditures from the General Fund have exceeded revenues in three of the last five years resulting in a decline of the fund balance. The city's goal is to maintain 5 percent of General Fund annual revenues in undesignated fund balance to be used for unanticipated and/or catastrophic events.  At June 30, 2003, the undesignated fund balance was approximately $2.5 million below the city's goal of 5 percent of annual revenues.  While recent monthly financial reports suggest ways to increase the undesignated fund balance, the city has not developed a plan to restore the balance in accordance with its policy.

The following, if eliminated or handled differently, represent discretionary spending or designating of funds that could have increased the undesignated General Fund balance:

• The city chooses to earmark unrestricted tax increment financing (TIF) distribution monies for capital projects.  Within the General Fund, the city designated $1.5 million in TIF distribution monies to be spent on capital projects during the year ended June 30, 2003.  Additionally, $330,000 in other General Fund monies was transferred from the General Fund into restricted funds to be used for capital projects.  Therefore, $1.8 million in unrestricted monies used or reserved for capital improvements could have been available for other purposes or left as undesignated in the General Fund during the year ended June 30, 2003.

• The Revolving Public Improvements Fund had a $235,000 balance at July 1, 2002, of which the city spent $196,000 on capital projects during the year ended June 30, 2003.  This balance consisted of interest revenue remaining in the fund which was not restricted and could have been transferred into the General Fund.

• The city paid approximately $6.8 million from the General Fund for its portion of employee medical insurance premiums during the year ended June 30, 2003.  The city continues to pay 86 percent of the total premium costs, despite a recommendation in an actuarial study done in 2000 that the city should increase the portion paid by its employees.

The following concerns were noted regarding the Stay Well Health Care Plan, which is the city's self-funded medical insurance plan for employees and retirees:

• The city has not been meeting the Council-approved funding goals established for the Stay Well plan, and as of June 30, 2003, the plan was underfunded by approximately $1.9 million. Expenditures have exceeded revenues in three of the last five years, resulting in a decline in the plan's fund balance.  While the city prepares annual analyses to project premium rate increases necessary to fully fund the plan, full funding is projected to occur three or five years subsequent to the preparation of these analyses, and the city has not enacted the required rate increases over these three- or five-year periods to fully fund the plan.

• The city pays for actuarial studies of the Stay Well plan.  The study performed in March 2000 included nine recommendations and the city has only implemented two of them.

• The city could potentially save costs by dropping its aggregate attachment point reinsurance coverage, which is coverage when total employee medical claims for the year exceed a specified dollar limit.  The city has never had to use this coverage, and the city spent $33,000 for such coverage during the year ended June 30, 2003.

• The city provides a Health Maintenance Organization (HMO) option to city employees and retirees which costs the city less per employee/retiree than the Stay Well plan.  If every employee/retiree was enrolled in the HMO, it appears the city could have saved over $1 million in premium costs during the year ended June 30, 2003.  The city should perform a thorough analysis comparing the costs and benefits of the Stay Well plan to the costs and benefits of other employee medical insurance plans, including the HMO option.

The construction of the Santa Fe Trail Tax Increment Financing (TIF) area has been delayed and no additional development is expected within the next year.  Currently, TIF expenses (bond payments) are significantly higher than the revenues generated.  If additional development is not started soon, the city will need to use general funds to make the majority of the remaining debt service payments, which increase significantly during the latter years of the project and average $921,000 per year through 2023.  For the year ended June 30, 2005, the city estimated $861,000 in available TIF funds; however, the required debt payments for the year totaled $955,000.

Also included in the report are recommendations to improve records and procedures for procurement card purchases and other city expenditures, vehicle and equipment inventory and usage records, vehicle allowances paid to city officials and employees, and closed council meeting minutes.

Complete Audit Report