Report No. 2007-11

March 2007

The following findings were included in our audit report on the City of Farmington, Missouri.

The city of Farmington operates various city-owned utility operations including electric, water, and sewer services, with the electric and water operations being accounted for in the Utility Fund.  The operating  revenues and expenses of the Utility Fund totaled over $19 million and $17.5 million, respectively, in fiscal year 2006, with the electric operations accounting for over 90 percent of the fund's activity. 

The city has historically transferred substantial amounts of money from its Utility Fund to help finance the operations and activities of the General Fund.  From fiscal year 2001 through 2006, year-end net operating transfers from the Utility Fund to the General Fund totaled approximately $5.6 million.  City officials indicated these transfers made up for a gross receipts (utility franchise) tax the city would otherwise collect if a private utility company operated within the city and to cover administrative costs incurred by the General Fund to operate the city utility operations.  However, no ordinance has been established authorizing monies to be transferred from the Utility Fund to the General  Fund as payments in lieu of taxes (PILOTS).  In addition, no documentation has been prepared to determine the amount of administrative costs being paid by the General Fund to support the utility operations. 

Utility services should not generate profits to fund other services provided by the city.  If the city continues to transfer utility monies periodically to the General Fund, the city should develop a methodology for determining reasonable PILOTS and ensure such transfers are properly authorized by ordinance.  In addition, documentation should be prepared and maintained to determine/support the amount of any utility–related administrative costs reimbursed to the General Fund.

During fiscal year 2006, the City Council approved significant electric rate increases in October 2005 and February 2006, of 29 and 16 percent, respectively (these rate increases were not fully realized as the council did not implement the 2006 summer rates). It appears these rate increases occurred due to significant increases in the cost of power incurred by the city and the transfers made in prior years.

Over 80 percent of the expenditures of the electric operation  represent power purchases from its power supplier, with total power purchases increasing from about $6.8 million in fiscal year 2002 to over $14.3 million in fiscal year 2006.  Total operating revenues of the electric operations have not kept pace with the increased power costs, and it appears the city did not effectively monitor the cost increases and approve substantial rate adjustments until fiscal  year 2006.    In addition, the city  did not maintain  adequate documentation to support how the recent rate increases were determined, with little or no documentation to support some information included in the budgets.  Further, the city does not maintain separate funds to account for the financial activity of its electric and water operations.  This is necessary to fully account for the respective activities of the electric and water operations.

The financial condition of the city's General Fund has been in decline in recent years.  From fiscal year 2001 through fiscal year 2005, expenditures exceeded revenues and net transfers in.  Available cash and investment balances of the General Fund decreased significantly from $2.7 million in fiscal year 2001 to $275,000 at the end of fiscal year 2005.  Had various interfund transfers to the General Fund not been made, the fund's financial situation would have been even worse.  The city cannot continue to expend monies in excess of its available resources.  City officials should monitor the financial condition of the city and develop a long range plan which will allow the city to operate within the resources that are available.  In fiscal year 2006, the city took various measures to reduce its expenditures, resulting in the General Fund's financial condition improving in that year.

The financial information provided to the City Council did not always provide an accurate reflection of the financial activity and condition of the city's funds.  Transactions related to monthly power purchases of about $1 million in fiscal year 2005 were not properly reflected in the accounting information provided to the council in that year.  In addition, the information presented in the city's budgets and budget amendments was not always reasonable nor did the annual budgets always include all required or necessary information.

Improvement is needed in the Finance Department's controls and procedures related to bank reconciliations, outstanding checks, and receipts.  Utility billing adjustments have not been adequately documented nor reviewed and approved on a periodic basis by management.  In addition, records and procedures related to the handling of receipts in other city departments need to be improved. 

The city did not always solicit bids for various goods and services or procure general engineering  and architectural services in accordance with its purchasing policy.  In addition, the city did not enter into contracts for some services.  

In December 2005, the city purchased gift cards and gift certificates at a cost totaling $13,000 for the city's full-time and regular part-time employees.  The costs of such expenditures for city employees do not appear to be prudent uses of public funds and may violate the Missouri Constitution.

The city's published financial statements have not included receipt and expenditure information as required by statute and annual financial reports have not been submitted to the State Auditor's Office (SAO) as required by state law.  In addition, the city's annual financial audits have not always been completed timely.

Also included in the report are recommendations related to credit card purchases, the use of city vehicles and operating costs, the untimely remittance of taxes to the Department of Revenue, minutes and ordinances, and the municipal court.

Complete Audit Report