Accountability Audit Report

City of Republic

For the period January 1, 2017 through December 31, 2018

Published January 23, 2020

Report No. 1025547

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 Pat.McCarthy@sao.wa.gov

Office of the Washington State Auditor

Pat McCarthy

January 23, 2020

Mayor and City Council

City of Republic

Republic, Washington

Report on Accountability

Thank you for the opportunity to work with you to promote accountability, integrity and openness

in government. The State Auditor’s Office takes seriously our role of providing state and local

governments with assurance and accountability as the independent auditor of public accounts. In

this way, we strive to help government work better, cost less, deliver higher value and earn greater

public trust.

Independent audits provide essential accountability and transparency for City operations. This

information is valuable to management, the governing body and public stakeholders when

assessing the government’s stewardship of public resources.

The attached comprises our independent audit report on the City’s compliance with applicable

requirements and safeguarding of public resources for the areas we examined. We appreciate the

opportunity to work with your staff and we value your cooperation during the audit.

Sincerely,

Pat McCarthy

State Auditor

Olympia, WA

Office of the Washington State Auditor Page 3

TABLE OF CONTENTS

Audit Results ................................................................................................................................... 4

Schedule of Audit Findings and Responses .................................................................................... 5

Summary Schedule of Prior Audit Findings .................................................................................... 9

Related Reports ............................................................................................................................. 11

Information about the City ............................................................................................................ 12

About the State Auditor's Office ................................................................................................... 13

Office of the Washington State Auditor Page 4

AUDIT RESULTS

This report describes the overall results and conclusions for the areas we examined. In most of the

areas we examined, City operations complied with applicable state laws, regulations, and its own

policies, and provided adequate controls over safeguarding of public resources.

As referenced above and described in the attached finding, we identified areas in which the City

could make improvements.

These recommendations are included with our report as a finding.

About the audit

This report contains the results of our independent accountability audit of the City of Republic

from January 1, 2017 through December 31, 2018.

Management is responsible for ensuring compliance and adequate safeguarding of public resources

from fraud, loss or abuse. This includes the design, implementation and maintenance of internal

controls relevant to these objectives.

This audit was conducted under the authority of RCW 43.09.260, which requires the Office of the

State Auditor to examine the financial affairs of all local governments. Our audit involved

performing procedures to obtain evidence about the City’s uses of public resources, compliance

with state laws and regulations and its own policies and procedures, and internal controls over such

matters.

In keeping with general auditing practices, we do not examine every transaction, activity or area.

Instead, based on our risk assessment for the years ended December 31, 2018 and 2017, the areas

examined were those representing the highest risk of fraud, loss, abuse, or noncompliance. The

following areas were examined during this audit period:

Financial condition and fiscal sustainability

Interfund activities – loans and transfers

Payroll – gross wages, overtime, leave balances, accruals, and benefit deductions

Tracking and monitoring of theft sensitive assets – cell phones and fuel

Accounts receivable – utility billing, adjustments, and collections

Office of the Washington State Auditor Page 5

SCHEDULE OF AUDIT FINDINGS AND RESPONSES

2018-001 The financial condition of the City’s Garbage Fund puts it at risk

of not meeting financial obligations or maintaining current service

levels. Further, the City has not consistently complied with

requirements for interfund loans.

Background

An elected City Council and Mayor govern the City, and the Clerk/Treasurer

records and reports financial transactions. The City provides garbage services to

about 525 residents and commercial accounts on an average annual budget of

$295,000.

We reported concerns about the City’s financial condition and its use of interfund

loans in our prior audit.

Description of Condition

Financial condition

The City experienced negative cash positions in the Garbage Fund from 2014

through our 2017-2018 audit period and continuing into 2019. The City’s

expenditures in the Garbage Fund exceeded revenues from 2014 to 2017 as the

table shows below.

Garbage Fund

Year

Ending Cash and

Investments

Operating Revenues less

Operating Expenses

2014 -24,570 -30,686

2015 -68,404 -43,834

2016 -77,373 -8,939

2017 -100,832 -24,489

2018 -90,955 9,877

September 2019 -63,737 31,525

The City failed to comply with requirements for interfund loans during the prior

audit period and continuing into the current audit period, further affecting the City’s

financial condition in the Garbage Fund.

The City also did not adopt a formal comprehensive plan to address its financial

condition, as recommended in the prior audit finding.

Office of the Washington State Auditor Page 6

Interfund loans

As explained in our prior report, the Budgeting, Accounting and Reporting System

(BARS) manual allows local governments to establish interfund loans between

funds but stipulates minimum acceptable procedures for making and accounting for

loans. The legislative body must formally approve all loans, including a planned

schedule of repayment with a reasonable rate of interest. It also must review the

loan status annually at an open public meeting.

In 2014, the City Council approved a $311,122 interfund loan from the Water &

Sewer Fund to the Garbage Fund but did not adopt a resolution to formalize the

loan and set the interest rate until 2018. The City set the interest rate at 2.29 percent

based on the rate used by the State Treasurer’s Local Government Investment Pool

(LGIP). However, the City only charged the interest on the original balance one

time for $7,125 and did not charge the interest annually to compensate the Water

& Sewer Fund for ongoing lost earnings on its investment. State law

(RCW 43.09.210) prohibits one fund from benefitting another. The Garbage Fund

received a benefit of $28,190 to date because the City did not charge interest

annually.

Interfund loans related to negative fund balance

State law (RCW 43.09.210) and the BARS Manual require the City to separately

account for each of its funds, including all resources, expenditures and interfund

activity. During the audit period, the City reported negative year-end cash balances

for Garbage Fund as detailed in the table above. A negative fund balance indicates

that a fund spent more than the resources it had on hand and as such, informally

borrowed resources from other City funds to pay its claims. However, the City did

not approve, record or set up a repayment schedule for these interfund liability

amounts nor did it have enough resources in the Current Expense fund to cover the

negative balances.

Cause of Condition

Management did not adequately monitor the City’s financial activities to effectively

control costs or make sufficient efforts to reduce expenses and increase revenue. In

addition, the City lacked knowledge of negative fund balances and their effect on

other funds, interfund transfers and interfund loans.

Office of the Washington State Auditor Page 7

Effect of Condition

Not understanding the requirement for financial activities caused the City to be at

risk of not meeting financial obligations or maintaining operations at their current

levels for the Garbage Fund. Specifically,

The Garbage Fund lacks resources to repay about $205,000 of its interfund

loan in a timely manner without further cost to citizens.

Water & Sewer customers support other government costs due to the

negative fund balance and might not be able to cover necessary repairs or

other expenditures.

The Water & Sewer Fund has lost $28,190 in interest earning to date for the

established interfund loan and additional interest earnings for its resources

that covered the Garbage Funds negative fund balance.

Recommendation

We recommend the City’s elected officials and management:

Amend the Garbage interfund loan resolution to pay interest annually on the

outstanding balance, and either adopt a new interfund loan or amend the

current interfund loan to account for the resources the Water & Sewer Fund

is using to cover the Garbage Fund’s negative fund balance

Establish a formal, written comprehensive plan to address the City’s

financial condition and revise the plan as needed to resolve financial issues

Closely monitor financial operations to ensure the City can meet its

financial obligations

Provide ongoing training opportunities for the Clerk/Treasurer to increase

knowledge of City operations, transactions and reporting to prevent further

non-compliance for interfund loans.

City’s Response

The City acknowledges the deficits in the garbage fund and has been actively

working towards reducing that negative balance as well as the debt it has to the

Water/Sewer Fund. The City has renegotiated its contract with its Garbage service

to have the entire city’s waste picked up in one day rather than two days. This has

an estimated savings of $5,000 a year which will first be used to balance out the

garbage fund to remove it from its negative balance status, and then it will be used

to pay off the interfund loan sooner so that that debt fee can be removed from the

city resident’s monthly bill. Along with the increased garbage rates that the city

approved in 2018 the ending balance of the garbage fund at the end of 2019 is

Office of the Washington State Auditor Page 8

projected to be negative $86,000. Compared with the starting balance of 2019

(negative $94,802.69) the garbage fund has removed $8,802.69 of its negative

balance. Adding in the new renegotiated contract that amount should be higher

next year.

The City plans to amend the previous resolution that incorrectly set up the annual

interest for the interfund loan between the Water/ Sewer Fund and the Garbage

fund. The amended resolution will have an annual interest rate that will be applied

every year for the life of the loan instead of just on the first year of the loan. The

City is also looking into the State Auditors recommendation of amending the

current interfund loan to borrow more from the Water & Sewer Fund to fix the

Garbage Fund’s negative fund balance.

The new Clerk Treasurer is proactive in learning how these things should be done

and is actively working toward getting the city’s finances in order. The City

understands the importance of continuing education for its employees and is

proactively looking to send the clerks to trainings to keep them updated on

compliance and regulations.

Auditor’s Remarks

We appreciate the City’s commitment to resolve the issues noted and we will follow

up during the next scheduled audit.

Applicable Laws and Regulations

RCW 43.09.200 – Local government accounting- Uniform system of accounting.

Sets forth the requirements for the state auditor to develop a system of accounting

and reporting for all governments.

BARS manual 3.1 – Accounting Principles and Internal Controls sets forth the

requirements for management and the governing board to establish appropriate

internal controls, and accounting and financial reporting procedures.

BARS manual 3.9.1 – Interfund Activities sets forth the requirements for interfund

loans and repayment.

RCW 35.33.075 – Budget Final Adoption sets forth the requirements to adopt

budget limited to the estimated resources in a fund.

RCW 43.09.210 – Local Government Accounting – Separate Accounts for each

fund and activity sets forth the requirements to account for fund resources and

activity separately.

Office of the Washington State Auditor Page 9

SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS

City of Republic

January 1, 2017 through December 31, 2018

This schedule presents the status of findings reported in prior audit periods.

Audit Period:

2014 – 2016

Report Ref. No.:

1021812

Finding Ref. No.:

2016-001

Finding Caption:

The City’s financial condition puts it at risk of not meeting financial obligations or maintain

current service levels. Further, the City has not consistently complied with requirements for

interfund loans and transfers.

Background:

The City reported negative cash position in both the Garbage and Current Expense funds during

the audit period. In addition, the City:

1. Made an interfund loan from water/sewer to garbage without an ordinance, repayment

schedule or charging interest as required by the Budgeting, Accounting and Reporting

System (BARS) manual

2. Coded the debt service collections from customers’ utility billings to Current Expense

rather than the Garbage Fund and did not make the appropriate interfund loan

repayments to Water/Sewer

3. Did not take action to resolve funds with a negative balance through an interfund loan

4. Made interfund transfers without council approval, leaving a zero balance without

regards to the financial needs of the fund in the following year, transferred funds to close

funds they continued to use, and transferred the full balance of the Debt Service Reserve

fund without regard to the related bond covenants

Status of Corrective Action:

☐ Fully

Corrected

☒ Partially

Corrected ☐ Not Corrected

☐ Finding is considered no

longer valid

Office of the Washington State Auditor Page 10

Corrective Action Taken:

1. Resolution 2018-13 was passed December 17, 2018 to correct the interfund loan from

water/sewer to garbage which established a total loan amount remaining of

$231,867.14. An interest amount of 2.29% was charged on the original loan amount of

$311,122.49 but that will need to be updated by the City to have an annual interest rate

starting from the beginning of the loan until the loan is completely repaid.

2. Recoded the debt service collection to go into the Garbage Fund rather than the Current

Expense fund. Interfund loan repayments were also corrected and as of November 2017

the loan repayments are coming out of the Garbage fund.

3. Problems with having a negative balance and the process to fix negative fund balance

are now known to the City. The City plans to have the negative fund balances corrected

for the next audit period.

4. Interfund transfers are now approved by Council first. Also the full amount of the Debt

Service Reserve fund for the USDA bond covenant has been corrected as of June 19,

2018.

Audit Period:

2014 – 2016

Report Ref. No.:

1021812

Finding Ref. No.:

2016-002

Finding Caption:

The City lacked adequate controls to accurately process and support monthly payroll

expenditures.

Background:

The City paid hourly employees based on an average of 173.33 hours per month regardless of

the hours worked and did not perform a reconciliation to demonstrate employees received

appropriate compensation. In addition, the Public Works employees accrued and used extra

compensatory time tracked outside of payroll without retaining support.

Status of Corrective Action:

☒ Fully

Corrected

☐ Partially

Corrected ☐ Not Corrected

☐ Finding is considered no

longer valid

Corrective Action Taken:

All City departments now fill out timecards with daily hours broken down to the correct

departments. No more 173.33 hours or compensatory time are used.

Office of the Washington State Auditor Page 11

RELATED REPORTS

Financial

Our opinion on the City’s financial statements is provided in a separate report, which includes the

City’s financial statements. That report is available on our website,

http://portal.sao.wa.gov/ReportSearch.

Office of the Washington State Auditor Page 12

INFORMATION ABOUT THE CITY

The City of Republic serves approximately 1,000 citizens in Ferry County. The City provides an

array of services including water, sewer, police, parks and public works. The City contracts with

Ferry County Fire Protection District No. 1 to provide fire protection services to the citizens and

with Ferry County for Municipal Court services.

An elected, five-member City Council and an independently elected Mayor govern the City. The

Council appoints management to oversee the City’s daily operations as well as its eight employees.

The City also pays a stipend for the Mayor, Public Works Certification, and Building Inspector.

The City operated on a budget of $1.4 million for each of fiscal years 2017 and 2018.

Contact information related to this report

Address: City of Republic

987 S. Clark Avenue

P.O. Box 331

Republic, WA 99166

Contact: Nicolas Olsen, Clerk Treasurer

Telephone: (509) 775-3216

Website: www.cityofrepublic.org

Information current as of report publish date.

Audit history

You can find current and past audit reports for the City of Republic at

http://portal.sao.wa.gov/ReportSearch.

Office of the Washington State Auditor Page 13

ABOUT THE STATE AUDITOR’S OFFICE

The State Auditor's Office is established in the state's Constitution and is part of the executive

branch of state government. The State Auditor is elected by the citizens of Washington and serves

four-year terms.

We work with our audit clients and citizens to achieve our vision of government that works for

citizens, by helping governments work better, cost less, deliver higher value, and earn greater

public trust.

In fulfilling our mission to hold state and local governments accountable for the use of public

resources, we also hold ourselves accountable by continually improving our audit quality and

operational efficiency and developing highly engaged and committed employees.

As an elected agency, the State Auditor's Office has the independence necessary to objectively

perform audits and investigations. Our audits are designed to comply with professional standards

as well as to satisfy the requirements of federal, state, and local laws.

Our audits look at financial information and compliance with state, federal and local laws on the

part of all local governments, including schools, and all state agencies, including institutions of

higher education. In addition, we conduct performance audits of state agencies and local

governments as well as fraud, state whistleblower and citizen hotline investigations.

The results of our work are widely distributed through a variety of reports, which are available on

our website and through our free, electronic subscription service.

We take our role as partners in accountability seriously, and provide training and technical

assistance to governments, and have an extensive quality assurance program.

Contact information for the State Auditor’s Office

Public Records requests PublicRecords@sao.wa.gov

Main telephone (360) 902-0370

Toll-free Citizen Hotline (866) 902-3900

Website www.sao.wa.gov