Common Council Addresses $1.6 Million-Dollar Accounting Practice Problem

The City of Marshfield Common Council held a special meeting tonight to explain and take action on financial issues related to accounting practices and TIF.

Finance Director Ron Aumann presented about issues related to accounting/financial practices and reporting procedures in the City, which have resulted in $1.6 million essentially being in the wrong place. Individual TIDS are off their debt schedule, which has resulted in the need for a general fund repayment. (Note: there is no money missing; it is just in the wrong place.)

The issue first came to the attention of Aumann, who began his position in June 2018, that he had uncovered some accounting discrepancies while reviewing previous financial reports and in preparing financial documents for the City related to TIF’s.

What Is TIF?

An economic tool approved by the State of Wisconsin, Tax Increment Financing (TIF) is a public financing method that is used to help bring about improvements for redevelopment, infrastructure, and other community-improvement projects.

Click here for our “Layman’s Guide to TIF”

The City of Marshfield currently has seven Tax Increment Districts (TID) that are currently active or under development. These are:
TID #2 – Purdy Building
TID #4 – Downtown
TID #5 – Mill Creek Business Park
TID #7 – Yellowstone Industrial Park
TID #9 – Hartl Site

The city also has four TID’s that are now closed. These are:
TID #1 – Air Park
TID #3 – Tower Hall
TID #6 – Figi’s Development
TID #8 – Northway Mall

The City is currently proposing another TID District (#12) on the former Knights of Columbus Hall property. In essence, if a City has a piece of property that is not doing well (like the KC Hall Property), it can borrow money to improve that property to attract potential development (in this case, a hotel is interested).

Currently, the property is not generating a lot of tax money for the City. When developed, it will provide more tax money to the City. This is where TID’s become a useful tool for a City.

Investors provide the City funding for TID developments, which are held in bonds. (This is similar to how a private citizen might invest in a company on the stock market. Essentially, investors are buying “shares” of a city.) After a designated period of time, a City must repay those bonds, plus interest. The City makes payments on the loan, similar to how a homeowner makes regular payments on a mortgage.

In the meantime, the City uses the funding provided by these investors to develop the TID property or to make infrastructure improvements in the district. By developing the TID property, it becomes more taxable. The tax money from the TID helps repay the borrowing for that district.

(The interest rate is determined by the City’s credit status, which is rated by an independent company.)

Property taxed within a TID is kept within the TID to help develop the property and help make it a viable taxable entity. For example, any taxes raised in TID #4 (Downtown) must be used to develop the downtown.

What’s the Problem?

TID money was moved incorrectly.

Financing for the City’s TIDs are kept in one account. Funds can be shifted from one TID to another, but only to help balance the books and to help the City maintain good credit. For example, if TID #2 had a bad year, but TID #4 had a surplus, money can be moved from TID #4 to TID #2 to make a loan payment. This is acceptable and is done through an approval process that involves the Common Council.

The problem arises when the money is not moved where it is supposed to go, and is instead moved into the City’s “General Fund.”

Essentially, money was being moved from a TID to pay for other debt service.

“The problem was you relied on that fund balance in the debt service to pay the other debt, not the general levy,” explained Jon Trautman, a CPA at Schenck and leader of audits and consulting services for government and not-for-profit organizations “It’s a budget process issue.”

Aumann said he is not sure about why in previous accounting practice it had been done that way.

“That isn’t sending one single dollar out of the City. It has zero cash effect. What you’re doing is moving fund balance from the general fund to TIF. That’s essentially what you’re doing by that entry,” explained Trautman regarding the solution. “You are moving it from one column to the next.”

“The methodology that we’re using is incorrect,” said McManus. “We’re now to the point that we have to pay the piper.”

“The overallocation isn’t the issue,” said Trachtman. “The issue was when that excess money went into the debt service, it shouldn’t have been used.”

Council members questioned why previous audits didn’t catch the problem.

“If I would have known that money was used for the budget projects, I would have said ‘no’,” said Alderman Tom Buttke. “I’m an amateur. We rely on an auditor to tell us when something is astray.”

“We keep alluding to ‘the council approved it,’ but they are approving what they were being told by professionals in the industry,” said McManus. “We rely on professionals, so at some point someone should have said you wouldn’t do it this way.'”

“An audit isn’t between me and you. It’s between your finance director and you,” said Trachtman. “I will take 100% responsibility if I thought this allocation was the problem, but I just can’t take responsibility for your budget process.”

“Who or what was the beneficiary of this style of accounting?” asked Alderman Spiros.

“That’s what we’re trying to figure out,” said Trachtman. “There has to be a reason why it was done this way. It’s based on a formula, that’s fact. It wasn’t an easy formula. Our best guess – we do not know … our expectation or best guess is at some point in the TIF when it was started, this formula was came up with.”

“The one person who can explain this isn’t here,” said Alderman Chris Jockheck. “It sounds like [former Finance Director] Keith [Strey] had a method. Even if he were here and we were asking him, he would have explained it to us.”

After discussion on the “how” and “what,” Council moved on to evaluate potential solutions.

Alderman Tom Witzel broke the issue down into layman’s terms, explaining that basically the City is looking to turn “Big buckets of debt” into “small buckets for better transparency.”

“Eventually we have to get to the budget part of this, which is the big problem,” said Aumann.

By making a transfer of $1,587,134 out of the general fund to correct an improver transfer in from TID funds, the City could remedy the solution up to budget year 2017.

This would transition the City to a new method on how the City will handle TID’s.

However, moving forward, the City must determine how to handle future years’ budgets under a new budget process and with a shortfall left by correcting the accounts. Essentially they are “wiping the slate clean” and moving forward.

This is a developing story…

News Desk
Author: News Desk

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