Mackinac Island Ends Year in the Black; DPW Underfunded
By Karen Gould

The City of Mackinac Island had a surplus of $75,771 at the end of its last fiscal year, and increased water and sewer rates, combined with a tax hike to support the troubled Department of Public Works (DPW), helped reduce the department's losses by $596,030. The increased funding, however, failed to provide enough money for the department to meet operational needs and debt service.

The ongoing financial struggles of the department were a part of the audit report for the fiscal year ending March 31, 2007, which was presented to the city council Wednesday, October 10, by city auditor Michael Konicki from the Rehmann Group of Cheboygan.

A three-year water and sewer rate increase that began in May 2005, and a millage hike last year, were not enough to dig the DPW out of the hole. To resolve the deficiency, auditors have recommended the city correct the shortfall by increasing cash flow to cover expenses. In response, the city is analyzing rates and the millage allocation to see if additional increases are required to cover costs.

Faced with an operating loss of $127,539 for the year, the DPW also is in noncompliance with bond covenants, said Mr. Konicki. The bond reserves remain underfunded by $188,152. The total requirement is $299,925, while the DPW has Enterprise Fund cash balances of $111,773.

The city refinanced the DPW bonds during the fiscal year to save approximately $200,000 over the 20-year life of the bonds. Before refinancing, the city had one reserve account to fund; now, under the new bonds, three reserve accounts must be funded.

A total of $243,325 is required for an operation and maintenance account reserve, and $56,600 must be held in a bond interest redemption fund reserve, and should be accruing cash totaling $232,588 to fund a bond reserve account.

In May 2005, the city adopted a three-year water and sewer use rate plan. Residents saw rates jump 50%, from $1.25 per 1,000 gallons of water to $1.88, while the commodity sewer charges increased from $2.25 per 1,000 gallons to $3.38. A second 50% increase went into effect in 2006, and water rates increased to $2.81 per 1,000 gallons, and sewer rose to $5.06. In May of this year, the plan included a 25% hike, which increased water to $3.52 and sewer to $6.33 per 1,000 gallons. The three-year rate hike amounted to a use rate increase of 181%.

A 2006 millage levy added $174,262 to the DPW's solid waste fund.

During the fiscal year, the city's general fund increased by $75,771. The general fund balance of $216,524 represents approximately 10% of one year of general fund expenses. The city spent $646,565 on fixed assets, with some examples of these assets being $329,500 used to replace a water membrane, $188,000 to reduce long-term debt, and $120,075 for a landing ramp at the British Landing dock. The landing ramp is considered a city asset, Mr. Konicki later told The St. Ignace News, and costs for the ramp were covered by a grant from the state.

The auditors found four material weaknesses while performing their audit, in addition to underfunded reserves for the DPW.

The city does not have the ability to prepare audited financial statements, as required, Mr. Konicki said, but approximately 90% of the municipalities his firm audits don't have that ability, either. To resolve the issue, the Island relies on external auditors.

Also, the city is similar to most other municipalities the firm audits in that it lacks a segregation of duties. The city operates with limited staff, which reduces its ability to segregate accounting functions. The city agreed it will monitor overlapping procedures.

Cited last year and again this year for the same issue of some departments lacking pre-numbered receipts, the city now said it will obtain the pre-numbered documents. Auditors specifically pointed to building permits, impact fees, and receipt books.

Deposit revenues for building and zoning permits, said auditors, need to be made on a more timely basis. Depositing the money when it is received would allow the city to earn the maximum amount of interest and reduce the possibility of theft.

Recent national legal cases involving accounting fraud, said Mr. Konicki, have resulted in additional accounting requirements, and will mean more inquiries and questions will be a part of the next fiscal audit.

"This is all because of Enron," he said. "We are mandated to ask these questions. We don't have any choice."

With 30 residents in the audience, Mayor Margaret Doud asked Mr. Konicki if he was satisfied with the shape of the city finances.

"You are getting better," he told Council.