EGF Audit

EGF Audit Click to Enlarge

May 28, 2014 at 1:27 pm


East grand forks officials continue to review an audit of the city’s economic development and housing authority.   That audit in part led to the discovery of an  unpaid loan to boardwalk enterprises to the tune of 510-thousand dollars.   City administrator david Murphy says the audit also highlighted a handful of other notes with “issues” that need to be addressed.   Murphy says in some cases they’re dealing with a company that has gone out of business.

the largest of the loans is in the 100-thousand dollars range.   there were over 100 loans in the e-d-h-a portfolio dating back to 1997.  

 the city administrator says he expects a decision on the future of the e-d-h-a to be made quickly in light of the recent retirement of jim richter.

murphy says one option is to contract out the housing side of e-d-h-a to another group and name an economic development director.

knox / doug barrett

full audit report

Member of City Council and Administrator
City of East Grand Forks
East Grand Forks, MN
This is in response to your request for consulting services summary as performed as follows:
• Obtain an understanding of the transactions the EDHA is processing throughout the year. In addition, we will also obtain and understanding of the authority the board, director, and staff have as it pertains to approving transaction and entering into agreements.
• Review of lot sales by following the trail of documentation from advertised prices, to recording the transaction in the New Home Incentive fund. The documentation within this process will be evaluated for appropriate support and use of the funds.
• Review of revolving loan funds to document the process of setting up new loans through the collection. Our review will determine the proper approvals are being obtained and documents files as appropriate with the County. If there are loans that have been written off, we will analyze the process taken and decision made to write the loan off.
• Review any transfer of funds between EDHA account for proper approvals and whether there is support/documentation as to the reasoning.
During our review of the files, we noted areas of concern that were not on our original list of procedures. One item included a significant loan that had not been recorded on the books nor have any payments been received. In addition, other loans have been made to other businesses with similar owners to the delinquent loan. Another procedure we performed included summarizing activity in each of the funds from 1996 through 2012 to get an understanding of what activity has been recorded in each of the funds.
Obtain and Understanding of Transactions the EDHA is Processing:
We first identified the funds management either directly or indirectly by the EDHA. These currently include the following:
EDHA discretely component unit funds:
1. General fund – account for general operations of EDHA
2. TIF #1-1 Triangle – accounts for receipt of tax increment revenue for the pay-as-you-go obligations.
3. TIF #1-2 East DeMers – accounts for receipt of tax increment revenue for the pay-as-you-go obligations.
4. IRP Loan – accounts for loans provided to businesses under the USDA Rural Development Intermediary Relending Program (IRP).
5. DRLF Loan – accounts for the funds provided to the City through the Minnesota Investment Fund flood-recovery funding.
City fund under direction of EDHA director:
1. New Home Incentive fund – this fund accounts for the land held for resale on land purchased and developed by the City to provide available lots to build on within the City.
City of East Grand Forks
May 28, 2014
Page 2
Our procedures and findings are as follows:
1. Procedures: Review EDHA General Fund activity and budget. We summarized audited financial statement activity recorded in the EDHA’s General fund from 1996 through 2012.
1. During this period, the fund has been used to issue certificates of participation and loan the proceeds to the City for the acquisition and renovation of the police building. The certificates and amount due from the City were paid back in 2006.
2. The reserves have been used for loans to businesses in the community as well. Currently there are no loans outstanding in this fund.
3. From 1996 through 2010, the City transferred funds to the EDHA’s General fund to support operations. The fund does not have another consistent stream of revenue. In 2011 and 2012, the City did not transfer funds to support the fund.
4. Other EDHA funds have made transfers into this fund to support the operations. In 2011, the General fund borrowed $107,516 from the TIF #1-1 Triangle district to finance a negative cash balance.
Criteria: A complete budget process includes annual consideration of all revenue and expense necessary to sustain the activities of the fund. A budget should be done annually.
Effect: As noted above, the activity of the General fund appears reactionary rather than planned. Since the revenue stream appears to be inconsistent and intermittent, funding can be challenging when you most need it.
Recommendations: The EDHA Director needs to prepare a detailed annual budget that corresponds to line items presented in the financial statements. The budget should be approved by the EDHA board and any funding request from the City should be requested and determined at the time the City is preparing their budget. Without a steady stream of revenue, City Council will need to determine whether to include a funding source from other City funds to support the EDHA’s general operations. At the end of 2012, the fund had a $112,260 deficit fund balance.
2. Procedures: We summarized audited financial statement activity recorded for two active TIF districts (TIF #1-1 and TIF #1-2) from 1996 through 2012.
1. As previously mentioned, the EDHA General fund borrowed $107,516 from TIF #1-1 at the end of 2011. The balance at the end of 2012 was $100,775. The fund had $695,960 of cash and cash equivalents at the end of 2012. During that year, TIF #1-1 transferred $5,000 to the EDHA’s General fund.
2. TIF #1-2 had $225,361 in cash and cash equivalents at the end of 2012 along with a note receivable of $250,000. In 2012 the fund transferred $100,000 to TIF #1-1 and $5,000 to the EDHA’s General fund.
3. The TIF districts are required to file reports on tax increment activity annually to the Office of the State Auditor. These reports report the increment collected and the associated expenditures it has been used for. There are limits to the amount administrative costs the increment dollars can be spent for.
Criteria: Administrative costs charged to TIF funds require documentation of expenditures. We did not see documented expenses related to the transfers. In addition, the loan from the TIF fund to the EDHA General fund will need to be repaid prior to decertification.
Effect: The City payment charged to the TIF fund’s would be at risk of needing to be paid back without documenting how the amount were arrived at. Moreover, without a current revenue source in the EDHA’s General fund, the plan to repay of the interfund loan will need discussion.
City of East Grand Forks
May 28, 2014
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Recommendations: The annual TIF reports appear to be completed by the EDHA director with assistance from the Finance Director. If administrative charges are being paid with tax increment dollars, the charges need to be documented and kept on file. The $5,000 transferred from each TIF district in 2012 appear to be for administration charges from the EDHA’s General fund and would require documented expenses. We did not see documentation related to the charges. Additionally, the Board and/or Council will need to determine how the interfund loan will be repaid and the TIF fund made whole.
3. Procedures: Review of IRP Loan fund. We reviewed USDA IRP program policies and objectives as published on the USDA Rural Development website as well as activity in the fund since 1996.
1. The Intermediary Relending Program notes are a liability of the U.S. government. The fund has notes payable at the end of 2012 totaling $370,464. This amount is due to the U.S. government with 1 percent interest. The City charges 5 percent on the loans it makes with the funds. The IRP fund cash balance as of December 31, 2012 was $820,651
2. Based on USDA guidelines, loans are made by the City to “Ultimate Recipients” and must not exceed $250,000 or 75% of the total project cost, whichever is less. In addition, the IRP fund can have no more than 25 percent of its outstanding portfolio in loans that exceed $150,000. Ultimate Recipients are defined as individuals, public or private organizations, or other legal entities, with authority to incur the debt and carry out the purpose of the loan. In addition, 51% of the owners or member must be of US citizens or legally qualified aliens and are unable to obtain credit elsewhere.
3. As of December 31, 2012, the IRP fund had $16,199 of outstanding loans.
4. According to a listing of IRP loans from the EDHA director, there were two other 10 year loans issued in 2005 to Touch of Magic for $150,000 and Cuckoo’s Nest for $150,000. Portions of each of these loans appear to have been written off.
Criteria: Loans written off should have detail documentation in the EDHA board minutes for reasons for the write off as well as the amount written off. This would be followed by a vote by the board.
Effect: Without documented discussion in the Board minutes there does not exist a proper internal control structure to ensure the board is aware of loans not being repaid or written off.
Recommendations: If a loan becomes delinquent, the EDHA Board minutes should clearly indicate the discussion on how to proceed with either collection or determining it as uncollectable.
5. Procedures: Review of DRLF fund. Beginning in 1997 and through 2012, the City has received approximately $2.5 million from the State for the program and has had loans outstanding of as high as $2.6 million in 2001. As of December 31, 2012, the fund had approximately $470 thousand of cash and cash equivalents and approximately $2 million of outstanding loans. Of the loans outstanding, $261 thousand is recorded as an allowance for doubtful accounts. The net assets as of December 31, 2012 were approximately $2.2 million.
City of East Grand Forks
May 28, 2014
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Results: The activity of the DRLF fund since 1997 is summarized below:
1997 - 2012RevenueIntergovernmental Revenue2,500,000$ Interest on investments141,000 Interest on Loans906,000 Projected Net Assets3,547,000 ExpensesLoan write-off/misc expenses(1,322,000) Actual Net Assets as of 12/31/20122,225,000$
As noted above, there has been a significant amount of loans written since the fund began. Based on this, we reviewed files related to the notes outstanding as of December 31, 2013 from the schedule of loans outstanding kept by the City Finance Director. Based on this review, we noted the following observations and questions that we believe need to be considered for further action.
1. A&L Potato
• In 2001, company was loaned $252,010. The company made timely payments, then in 2008, they were loaned an additional $90,000 to bring the principle balance back to original loan amount.
• The original Loan amount of $252,010 is significantly higher than what the document titled "Application Evaluation Criteria" mentions for a maximum loan amount. When we discussed the policy with the EDHA director (the Director), he stated that there is no policy regarding the MIF loans and that the tables on the aforementioned document are guidelines, that the commission reserves the right to adjust amounts as it sees fit.
2. Surface Pride
• The loan ($25,000) was put into an allowance for doubtful account because company was bankrupt after only a few months of the loan being approved and paid out. The loan was approved on January 8, 2013 and by the end of the year the company was bankrupt.
• We noted no information in the file relating to a risk analysis or credit worthiness of the borrowers.
• This was a startup business, MIF funds are to be used to help existing businesses.
3. Tortilla Flats
• No file was able to be produced, this loan was fully written off with a remaining balance of about $49,000
4. Way Cool
• Balance of $128,000 is in allowance for doubtful accounts. This balance is reflected as outstanding balance as of 10-01-2013. An agreement was signed with one of the original investors in the company on 9/10/2013 to repay the remaining balance, interest free.
• The Commission minutes do not reflect approval of the new repayment agreement dated 9/10/2013.
• Also noted in the new repayment agreement dated 9/10/2013 as item #4, all payments made in repayment will be treated as a tax deductible donation. Discussed this with Director and he explained that the individual whom is repaying loan was an investor of the original company. The individual decided to begin a repayment plan on the basis that all of the payments would be treated as a tax deductible donation. The loan should have been written off when the original business went bankrupt. The payments on this repayment agreement should be recorded as donations rather than principal reductions. The repayment plan shows the remaining principle of just over $113 thousand remaining after December 31, 2014, with the balance to be paid in full on January 1, 2015.
City of East Grand Forks
May 28, 2014
Page 5
5. Northland Custom 3
• The business received a loan for $33,000 in 2006, then in 2008 received and additional amount of $71,000. When combine, the two payment amounts from the original amortization schedules do not equal the amount being paid. There is a lack of support in the files for the actual payment amounts.
• The Finance Director provided us a reconciliation of the loan balances, on which there is a note that the loan was refinanced. We saw no support for this in the loan file. Support and new amortization schedules should be approved and in the loan files.
6. Boardwalk Bar and Grille
• The partners in this venture are similar to the partners related to the Boardwalk Enterprises loan discussed in observation number 8. Payments have been timely for this loan.
7. Boardwalk Entertainment
• The partners in this venture are similar to the partners related to the Boardwalk Enterprises loan discussed in observation number 8. Payments have been timely for this loan.
8. Boardwalk Enterprises LLP
• The loan was entered into in year 2000. The company received a total of $1,000,000 under the agreement. The total amount was broken down into the following portions: $400,000 was a Small Cities Development Block grant, $90,000 was a land grant, with the remaining $510 thousand to be repaid to the EDHA. No payments have been made to date, and the mortgage has not been filed with the county records. The Director claims he forgot about the file, but later stated he had had discussions with the individuals who own the building regarding when they would repay.
• Company has an inactive status on the Secretary of State's website.
9. Cutting Edge Performance
• MIF funds were to be used to assist existing businesses expand. Cutting Edge Performance is a new business and was granted MIF funds. This business is not related to manufacturing, technology or industrial.
• The loan was approved on 4/23/13 according to meeting minutes.
Criteria: Entities maintaining a portfolio of loans should have documented processes to assess applications and monitor approved loans. Typical documents to assess a loan application would include an application, current and previous financial statements, tax returns, and cash flow projections. This data would then provide support for a written risk assessment and recommendations. The written recommendations would then provide support for Commission approval. Once approved, procedures should be in place to ensure the EDHA’s security interest is filed and that frequent portfolio monitoring is done.
Effect: As noted above, there have been a number of write offs and a number of failed loans. It is unclear, what criteria was used to approve the loans and once they were in place, it remains unclear what was done to monitor and communicate results to the commission.
Recommendation: We recommend that the EDHA establish written procedures to review, approve, and monitor loans as outlined in the criteria above.
Issue 8 included a loan of $510,000 to Boardwalk Enterprises LLP. In addition to the Small Cities Development Block Grant, and land grant funds, the City agreed to abate a portion of the taxes on their property taxes. We discussed this loan with the City Attorney and determined the mortgage should have been filed with the County at the time of signing the final loan document. We recommend the mortgage now be filed and collection on the $510,000 be pursued.
City of East Grand Forks
May 28, 2014
Page 6
6. Procedures: Review of the New Home Incentive fund. We summarized the audited financial statements for the fund from 2001 through 2012. Additionally, from the detail transactions recorded in the fund for the year 2013, we matched the signed purchase agreements with the purchase price and the listing price. In addition, we determined whether the specials assessments on the lots have been paid or assessed to the property.
1. This fund was established in 2001 to account for the sale of land held for resale and provide an incentive for new home buyers in East Grand Forks.
2. As of December 31, 2013, the balance in land held for resale was $420,185. The fund also had $157,684 as notes receivable at the end of the year. The preliminary balance cash at the end of 2013 totals $345,730, compared to $652,854 the previous year.
3. We discussed the use of land held for resale proceeds with the City Administrator as well as the EDHA Director. It is unclear whether the funding for the incentive program should be coming from the sale of the land held for resale.
Recommendation: We recommend Council and management match the intended purpose of the funds to ensure they are being utilized for the intended purposes.

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