The community of Lindsay is in a state of uproar after many residents learned that the City Council had approved transfers of money from different funds into others in order to take corrective action in the city’s finances. At the last City Council meeting, multiple people stood in front of the Council to address this issue and express their anger, disappointment, and disbelief.
After investigating these transfers, some clarity arose as to why the city would decide to move these monies around and how it would affect the city.
A staff report from the Feb. 12 City Council meeting states, “The city’s past continues to take from its present and future. [The transfers are] intended to help the city hit reset, at least partially.”
To do this, the financial department had to look at the money that flowed through the different funds for the city over Fiscal Year (FY) 2017-2018. Upon studying these numbers, it was discovered that there was a major error in the city’s system. The street improvement fund (known as Fund 200) received 23.6 percent from the total utility revenue from the water (Fund 552), sewer (Fund 553), and refuse (Fund 554) funds, which collectively entered into the Utility Users Tax.
When processing these numbers in their system, only one line was available to input the numbers, eliminating the possibility of tracking the 23.6 percent separately. The city nor its auditors identified this error until January 2019. The finance department must now take steps towards correcting this issue by returning monies collected in Fund 200 to their proper places in Funds 552, 553, and 554. Fund 200 will return a total of $791,059 in the following ways: Fund 552 will receive $307,639, Fund 553 will receive $273,952, and Fund 554 will receive $209,468.
The staff report later says “the city had borrowed significantly from various funds to cover the losses in the General Fund (Fund 101), the McDermont Field House (Fund 300), and the Wellness Center (Fund 400).”
It was soon realized that the funds they borrowed to cover their losses could not be repaid. Auditors recommended that the city record their borrowing as advances. The advice was taken and the following advances were created: a reverse advance from Fund 200 to Fund 101 by $982,880, and established new advances from Funds 552, 553, and 554 to Fund 101 in a total amount of $882,880.
Upon further inspection, the city’s finance department noticed negative balances in Fund 300 and 400. The staff report reveals “Excluding a required cash reserve for the final McDermont debt payment in 2025, Fund 300 had a negative cash balance of $160,000 (rounded) after the advances.” The report goes on to say “when the city outsourced McDermont operations, Fund 300 lost $581,000 (rounded).” This means that the McDermont had acquired a total debt of $741,000 that the city could not pay. On top of the debt from the McDermont, by the end of FY 2017-2018 the Wellness Center had acquired its own debt of roughly $189,000. This created a combined total debt of around $930,000.
To fix these debts, the city’s finance department created a number of advances. In total, $786,307 was taken from various funds and advanced to Fund 101. The city also advanced $740,635 from Fund 101 to Fund 300, and $188,672 from Fund 101 to Fund 400.
By creating these advances, the city virtually eliminated the debt from McDermont and the Wellness Center, bringing both of those funds to a total zero at the end of FY 2017-2018.
After creating these advances, the city was then obligated to change them to transfers. The difference between an advance and a transfer is the repayment expectation. An advance comes with the expectation of repayment, while a transfer does not. The city knew that they could not realistically pay back the advances created. The Council approved to convert all advances to transfers, except for those between the city and the California Department of Housing and Community Development (HCD).
The staff report concluded with “the consequences of these conversions will be continued debt to the HCD Funds on one hand, and a significant reduction in General Fund debt on the other. It will not pull the city out of its General Fund deficit because of the funds owed to HCD; however, it will be a major move forward. Additionally, it will present the true nature of the city’s financial condition.” This means that the General Fund will remain low, but the city will still have money to complete street projects and other planned improvements for the community.