Revenue from struggling water system is Marion’s sole positive position, while city ran a general fund deficit of over $1 million for the year
The Times-Standard-Herald has obtained a copy of Banks, Finley, and White’s outside audit of the City of Marion’s 2022 fiscal year. The long-delayed audit shows a negative General Fund balance, unrecorded payables and debt of more than $2 million, questions about hundreds of thousands of dollars in unpaid water, sewer, and garbage bills, and a long-running federal payroll tax dispute that remains unresolved.
The 54-page report, covering the year that ended Sept. 30, 2022, was signed by the city’s independent auditors on May 10, 2024. Instead of the “unmodified” or clean opinion local governments usually seek, Marion received a qualified opinion on its governmental activities, business-type activities, the General Fund, other governmental funds, and the Water Utility Fund.
The auditors report that, because of inadequate records in years before 2022, they could not obtain sufficient evidence to verify the city’s capital assets or more than $830,000 in outstanding water, sewer, and garbage receivables.
According to the city’s own financial statements, Marion’s total net position fell from $1,743,767 to $1,249,976 during the 2022 fiscal year, a decrease of $493,791. Governmental activities, which include most general city operations, ended the year with a negative net position of $341,399, while business-type activities, primarily the water system, ended with a positive net position of $1,591,375.
The audit also reports an unrestricted net position deficit of $1,383,722 at year’s end, compared to an unrestricted deficit of $988,236 the year before. In plain terms, the governmental side of the city’s operations is in the red, while the Water Utility Fund remains in positive territory and is the main source of the city’s overall positive net position.
In the governmental funds, the General Fund shows only $48,143 in total assets at Sept. 30, 2022, including $337,783 in cash. Against that, the fund carried $1,117,924 in accounts payable and payroll liabilities, producing an unassigned General Fund deficit of $1,070,660 and a total General Fund deficit of $1,069,781. Collectively, Marion’s governmental funds ended the year with a combined deficit fund balance of $829,466.
In a note to the statements, management acknowledges that “expenditures exceeded revenues in prior years,” resulting in recurring General Fund deficits, and states that reductions in spending and efforts to increase economic development “should eventually” reduce or eliminate the deficits.
The budget-to-actual schedule shows that in 2022, the General Fund took in more revenue than expected but still overspent its plan. Actual General Fund revenues were $2,158,814, compared to a final budget of $1,619,974, while expenditures totaled $2,698,892, or $526,832 more than budgeted.
The Water Utility Fund, which accounts for the city’s water and sewer operations, reported a net position of $1,591,375 at year-end. At the same time, the auditors state they were unable to confirm $831,665 in customer accounts receivable for water, sewer, and garbage services as of Sept. 30, 2022, and could not obtain sufficient audit evidence about those balances from other sources.
In the schedule of findings, the auditors report that these receivables – totaling more than $831,665 – are not recorded in the city’s general ledger. More than half of the accounts are more than 90 days past due, there is no monthly reconciliation of the customer ledger to the city’s books, and the city has no written procedures for determining whether the amounts are collectible.
The Statement of Activities shows that business-type activities, including the Water Utility Fund, experienced a decrease in net position of $238,197 during 2022. The Water Utility Fund still shows positive net assets overall, but its operations reduced that balance in the period covered by the audit.
The audit also points to gaps in how Marion tracks what it owes. According to the findings, the city does not maintain an accounts payable subsidiary ledger to track obligations to vendors, employees, service providers, and creditors. As a result, the auditors report that Marion “cannot readily establish and report its short-term and long-term debt position.” They identified $1,249,918 in accounts payable at Sept. 30, 2022, that were not recorded in the city’s books.
Likewise, the auditors note that the city had not recorded loans, leases payable, and pension liabilities and maintained no subsidiary ledger of payments, resulting in unrecorded debt of more than $860,323 as of the audit date. A separate schedule shows $575,083 in long-term obligations at year-end, including $355,241 in notes payable, $54,194 in capital leases, $151,348 in net pension liability, and $14,300 in compensated absences, with $355,241 due within one year.
On the capital asset side, the auditors report that the city “does not maintain an inventory of its capital assets,” which total $34,162,440 at cost for governmental activities. They state that Marion does not keep records identifying the historical cost and location of its capital assets and has not historically recorded annual depreciation in the general ledger, as required under governmental accounting standards.
Because of these limitations in prior-year records, the auditors were unable to obtain sufficient evidence to support the amounts shown for capital assets and accumulated depreciation in the Statement of Net Position, or the $140,158 in depreciation expense reported for the year.
The notes list governmental capital assets of $791,423 in land and $34,162,440 in depreciable assets such as buildings, improvements, equipment, and infrastructure, with accumulated depreciation of $33,858,693 at Sept. 30, 2022. The water system’s capital assets are reported separately and had a net book value of $945,989 at year-end.
One of the most significant individual liabilities described in the audit is a long-running Internal Revenue Service assessment for undeposited federal payroll withholding taxes. In Note 8, the auditors report that the city’s accrued payroll-related liabilities “represent an assessment by the Internal Revenue Service for undeposited federal withholding taxes, plus accrued interest and penalties,” relating to tax years 2013 and earlier. The city disputes a substantial portion of the assessment and is negotiating with the IRS to correct it. As of Sept. 30, 2021, the unpaid balance was $738,800. Payroll and related liabilities are included in the $1,249,918 in current accounts payable and payroll liabilities reported on the Statement of Net Position.
In their report on internal control and compliance, the auditors state that they identified “material weaknesses” in Marion’s internal control over financial reporting. These are listed as Finding 2022-01, dealing with the sufficiency of accounting records, and Finding 2022-02, dealing with failure to pay employment taxes. They note that these issues have already resulted in the qualified opinion on the financial statements and state that, until the city corrects them, “the City can expect the issuance of subsequent qualified reports on the financial statements and deficiencies in internal control.”
The auditors also report that their tests of compliance with selected laws, regulations, contracts, and grant agreements disclosed noncompliance or other matters that must be reported under government auditing standards, again tied to the two findings. The audit notes that city officials provided written responses to the findings, and those responses are included in the report, but the auditors did not apply audit procedures to those responses and express no opinion on them.
