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County reviews 2016 audit

Colleen Hoffman apologized for the tardiness of Hubbard County's 2016 audit.

"I am still battling with the state auditor," she said, adding that, on Jan. 3 (today), the Minnesota Supreme Court will determine whether counties have the legal right to hire private firms.

Minnesota State Auditor Rebecca Otto asked the Minnesota Supreme Court to reconsider a lower-court ruling that upheld a state law she believes limits the powers of her office.

The appeal would mark the third time the case has been heard. Two lower courts previously ruled against Otto, finding that a 2015 law allowing Minnesota counties to use private audit firms was constitutional. Otto has sued a handful of counties (Ramsey and Wright counties) that have retained private auditors and contends that the law removes an essential public function of the state auditor.

Hubbard County and at least seven other neighboring counties hire Hoffman, Philipp & Knutson of Thief River Falls to conduct their audits.

The Supreme Court appeal will be live-streamed at 9 a.m. on mncourts.gov.

"So that's a life-changing event either way for me, seriously, and for you somewhat," Hoffman said, adding no private firms will continue to perform county audits "if Otto's going to continue to pound on us. It's not worth it."

Last spring, Otto deemed fiscal year 2015 audit results by Hoffman, Philipp & Knutson "substandard" and grounds for her office to re-audit the eight counties. She later notified the counties she intends to re-audit their fiscal year 2016 audits as well.

In September, the affected counties — Hubbard, Koochiching, Roseau, Clearwater, Kittson, Lake of the Woods, Pennington and Red Lake — sent a joint letter to Otto, encouraging her to work with them to find "a mutually agreeable solution."

At issue for the counties is money — it can cost twice as much for the state auditor's office to conduct the annual audit. A private firm charges roughly $30,000 while OSA's fees reach $87,000.

2016 finances

According to the 2016 audit, the total net position of governmental activities was $81,911,065, of which $64,831,836 is the net investment in capital assets, $7,272,627 is restricted for specific purposes, and $9,806,602 is unrestricted. The total net position of governmental activities increased by $560,086 for the year ending Dec. 31, 2016. This is attributed primarily to courthouse renovations, fair weather resulting in decreased utility costs, staffing shortages in various departments, and December's employment benefits not invoiced and paid until January 2017.

"Your general fund, in 2016, the county did have a net gain of about $500,000 in equity. In other words, the net worth of the county went up about $500,000," Hoffman said. "Part of what explains that is the money you get from MnDOT for roads. That money comes from gas tax and the state and goes into your pool to improve the roads, so it's an investment into the county."

The nursing home "not so good," Hoffman said.

The Heritage Living Center reported an operating loss in 2016 of $710,616. Heritage Manor reported an operating income of $46,242 and Heritage Cottages reported $187,729. The Heritage Center Project Fund reported an operating loss of $65,000, resulting in a combined operating loss of $541,645 for the Heritage Community.

"The Heritage Center Project Fund was the fund used to account for the $10 million in bonds that was issued for this project to get the market tax credit money," Hoffman explained. "Friends of Heritage got the bond proceeds and the new market tax credit money because it couldn't go to a government. It had to go to a not-for-profit LLC. It has to sit there for seven years before it can be transferred back to the county."

Total resident services and ancillary revenues increased one percent from $5,696,309 in fiscal year 2015 to $5,782,801 in fiscal year 2016. Total revenues decreased less than one percent from $6,220,364 in fiscal year 2015 to $6,219,205 in fiscal year 2016. Resident service expenses increased 1.1 percent from $6,025,642 in 2015 to $6,702,042 in 2016.

"Hopefully, with this new project, when those beds get full, they'll have more patient revenue. There is a trend now in the demographics of more people needing that care so we're not worried about having empty beds at any point," Hoffman said.

County Commissioner Cal Johannsen said finding nursing home staff may be the biggest problem.

When the county refinanced Heritage Cottage bonds, County Auditor/Treasurer Kay Rave noted that the county's bond rating from went from AAA to "AAA 3 with a negative outlook."

"That means they don't like that operating loss of $700,000," Hoffman said.

A better bond rating means a better interest rate.

County Commissioner Char Christenson said the county has received offers for the nursing home.

"You have about $14 million in bond debt that would have to be paid off. Your sale price at least needs to be enough to pay off your bonds, no questions asked," Hoffman said.

There are very few county-owned nursing homes, Hoffman added.

"The counties that are getting rid of nursing homes, is it because it's just basically sucking up money?" asked Christenson.

"Yep. With the way the wheels of government turn, it's harder to be competitive in that market, especially with PERA (Public Employees Retirement Association of Minnesota) and all the benefits that government employees receive. Private sector can be a bit more cutthroat," Hoffman replied.

As for the general fund, Hoffman noted that the county generates revenue from timber sales on tax-forfeited lands.

"That's a big bonus you have that a lot of counties don't have. That helps keep your levy down," she said.

The total net position of the county's business-type activities had a deficit of ($4,988), of which

($97,815) is the net investment in capital assets, $2,128,046 is restricted for specific

purposes, and ($2,035,219) is unrestricted. The total net position of business-type

activities decreased by $1,015,723 for the year ended Sept. 30, 2016, primarily as a

result of construction and renovation of the nursing home resulting in decreased

occupancy.

At the close of 2016, the county's governmental funds reported combined ending fund

balances of $24,828,070, an increase of $2,673,286, from the prior year. Of the total fund

balance amount, $337,540 is non-spendable, $6,220,862 is legally or contractually

restricted, $10,811,752 is formally committed for specific purposes, $7,432,589 is assigned

for specific purposes, and $25,327 is unassigned. "Maintaining an adequate fund balance is

necessary to provide county services throughout the year," stated the audit report.

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