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First meeting for new Audit Committee

Town's accounting firm assures members that criminality not a factor in current situation BY GLORIA J.
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Outlining a summary of a 64-page audit of the Town’s financial records, Trevor Ferguson, a partner from Deloitte LLP, reported no indicators of corruption or inconsistencies the first Audit Committee meeting. GLORIA KATCH PHOTO

 

Town's accounting firm assures members that criminality not a factor in current situation

BY GLORIA J. KATCH Special to the VOICE

While an audit report from Deloitte LLP, an independent accounting firm, appeared to quash rumours of financial improprieties in the Town of Pelham, it also confirmed that previous council adopted a counting-chickens-before- they’ve-hatched mentality when it came to financial decision-making.

Previous council ran a shortfall to pay for the Meridian Community Centre (MCC) by borrowing from the bank against taxes and development levies they hadn’t received yet, and land they hadn’t sold yet.

However, at the first Audit Committee meeting on Monday, May 13, Town Treasurer Teresa Quinlin said, “The wonderful news is once the homes are built, we will have the money.” She estimates long-term net debt is about $30 million dollars.

Quinlin told the committee the Town was not “bankrupt,” and would replenish the cash in about three to five years.

“The Town is stable, and under control. It’s just the timing of the cash and building-up the reserves again.”

Quinlin later reiterated to the Voice that the reserves are like a savings account.

“The goal is to ultimately have cash equal to reserves, and if there is an issue then I can go to reserves.”

Trevor Ferguson, with Deloitte, presented an overview of the Town’s audited financial statements for 2018 in a 64-page report that was forwarded to council for information and final approval. (The report may be found here, within the meeting's agenda.)

When Councillor Bob Hildebrandt asked Ferguson in his experience auditing other municipalities, if previous councils experienced similar financial difficulties as a result of building a large community project such as the MCC, Ferguson noted every municipality was unique, and that he wouldn’t disclose other client’s financial issues.

As a matter of business, the committee nominated Councillor John Wink as its chairperson. They also welcomed Pelham citizens to the committee, Michael Cottenden and Bill Crumm. Holly Willford, Deputy Clerk, said council would decide who would make up the remaining members of the committee, since the list of candidates, besides those present, were all councillors.

Overall in the audit report, Ferguson said there were “no corrective or incorrective” statements in the audited report for the Town according to Canadian Accounting Standards. Ferguson said his firm is compelled to identify any “fraud risks,” and it did not identify anything “unordinary” after a team of three spent two weeks combing through the Town’s finances, and asking numerous questions. He said any significant variances or differences, quantitatively or qualitatively would be red-flagged. Deloitte listed 21 communication standards, and there were “no unusual representations” in its findings. Like other municipalities, any new accounting practises that were recently adopted by the Town would not have any significant impact in the future.

While numerous questions were asked throughout the committee meeting regarding every aspect of the budget, including capital expenses, interest, reserve funds, and cash flow, Quinlin did state the Town’s financial picture would turn around in three to five years as development costs and taxes rolled in, which is where the “true cash” exists. At the end of 2018, cash, including reserves, was listed as $1,280,672 on the financial report. Quinlin described 2019 as a “catch-up year” for several reasons.

One of them is that the Town is slated to complete $2.6 million of required projects. Although she said the original intention of council was to pay for these ongoing capital projects, a few of which began as early as 2015, but they were deferred due to the development of east Rice Road, including roads, storm ponds, etc. Quinlin said that land being offered for sale by the Town is currently valued at about $12 million dollars, but it hasn’t sold in time to cover the other required capital projects.

When Councillor Mike Ciolfi asked about future financial projections, Quinlin said the sale of the old Pelham arena would cover principal and interest for $2.6 million in capital projects.

“As long as we stay within our budget we won’t have a shortfall,” she said.

Quinlin also confirmed for Ciolfi the sale of the Haist Street Arena wouldn’t —and was never earmarked to—offset MCC costs. However, considering the Town’s current cash flow and financial position, “it was critical” and “made sense” to sell the dated recreational facility to save on demolition and restorative costs for the area around the Haist Street building, as well as increase the tax base once new homes are built and occupied.

As a newcomer to the committee, Crumm asked if it was common for municipalities to borrow against reserves, and Ferguson replied that it was.

Councillor Michael Ciolfi asked what the cash and financial position was at the end of April of this year. Charlotte Tunikaitis, Deputy Treasurer for the Town, reported the Town’s balance was $5.5 million dollars. However, Quinlin said the cash flow “fluctuates a great deal,” and recently $3.8 million was sent to the Region in taxes. However, she said, Town council has approved a $4 million debenture, which would help with cash flow. She told the Voice that taxes will be received once again in June, which puts the Town in “good shape.”

Councillor Ron Kore asked what would happen if the Town experienced an emergency such as a broken water main, and Quinlin replied Pelham has a $7 million line of credit with the bank to cover expenses.

The Town currently has a bridge loan for $13.5 million for the Rice Road area lands, but Quinlin pointed out the Town has until 2020 to pay it off, and if it isn’t paid by then, a debenture could be taken out to do so.

Consolidated Financial Statements between 2018 and 2017 indicated that net debt was roughly $41 million and $31 million respectively. Councillor John Wink asked why there was a $10 million increase in debt in one year? Quinlin said it was because of the $13.6 million bridge loan for Rice Road.

Wink said he was concerned the Town’s tangible assets were only listed at $361,000, which was low considering the amount of land Pelham had for sale. Quinlin replied that the areas of Rice Road and the Haist Street lands were based on “2009 net book value” information, which was used when the budgets were devised, but is clearly outdated.

Transportation services were listed as $6,821,947 in the operating budget, which raised a few eyebrows, but Quinlin explained that transportation was actually listed under public works, and certain items are written as an expense rather than an asset, because they don’t fit the criteria of an asset under the Public Sector Accounting Guidelines. Kore later said he didn’t see where $6 million dollars was spent on Pelham’s roads, but was told that about $1 million in capital items under public works were expensed including road based services, maintenance, and repairs, according to the management summary of financial statements.

Councillor Hildebrandt earlier expressed dismay and some confusion over having capital items listed as expenses. In general, Quinlin stated due to the opening of the MCC, “more areas were expensed than usual.” She noted in previous years, “we haven’t had such variances.”

Recreation and cultural services also rang up a $6 million price tag, and Quinlin attributed this largely to the community centre, including expenses such as hydro costs, removal of ash trees, the grand opening, etc., but pointed out these were items planned for in the budget and “not over-budgeted.”

Another area of concern for Kore was the amount of interest— $914,000—the Town paid in 2018 on its long-term debt. On the positive side, Quinlin noted in 2018 a higher priority was given to accounts receivables to collect the money owed to the Town, and the MCC was completed, resulting in $1.2 million gained from the previous year in this category. This all helped maintain “healthy cash flows.”

The community centre generated $600,000 in revenue in 2018. There is $3.2 million in pledges and donations for the MCC, on different payment schedules, with the longest being 25 years, said Quinlin. The Town basically pays off the MCC at a rate of about $445,000 a year, which includes 3.3% interest.

While Pelham collected $34,122,668 in taxes in 2018, a large portion, $23 million, is allocated to the Region and school boards, leaving the Town with a net amount of $13 million for municipal use.

At the meeting’s end, the committee advised Deloitte be selected as the auditor for the 2019 accounting statements.

Council offered the new Audit Committee members copies of previous reports that would assist them in their service, which chair John Wink said they should’ve received earlier, which explained why Cottendum had “a puzzled look on his face,” at different times throughout the meeting. However, Wink said he was “really excited” about having both Cottendum and Crumm on the committee because they are Chartered Accountants, and asked some “pretty good questions,” regarding accounting for municipalities, which somewhat differs from accounting for businesses.

The two members and the Audit Committee mean an “extra pair of eyes” on Town finances, which is what the Town and Quinlin wanted, said Wink.

“I know there is a sense in the community that [the Town] is hiding something,” he said, but Wink maintains current council has asked many in-depth questions of the Treasurer and staff, and Quinlin has been candid and transparent in her responses.

As the committee moves forward, Wink said he is concentrating on “revenue leakages.” While he wants to see the MCC generate more revenue, he said all community centres have a great deal of expenses and are, generally, “not large profit-making ventures,” as they act as a service to the community.

As far as the Town’s debt is concerned, Wink believes the sale of the lands around East Fonthill will help cover the $13.5 million bridge loan. Debentures for the Meridian Centre are amortized over 30 years, so “it will take some time to pay off.”

Wink noted two “ah-ha” moments as a result of the Audit Committee meeting. The first was confirmation of the depletion of the reserves. Second, Wink asserted that Pelham pays “the lowest water rates in the peninsula.”

The Region has increased water services by about 2%, but these taxes were never passed down to the public. The Town has been absorbing these costs for several years, which has added to its financial difficulties. Similarly, residents in certain areas of Pelham who get their power from Peninsula West Power Inc. get relatively lower hydro-electric rates compared to those receiving power from Hydro One.

While Wink has declared a conflict of interest regarding the sale of the Haist Street arena, he later said he believed the Town needed to “get rid of its assets.” Asked to clarify, he added, “We have a lot of land around the MCC that needs to be sold. We have a $13 million bridge loan that needs to be paid from the sale of lands.”

The Audit Committee will bring the new members up to speed, and then probably meet every second month, Wink said. “We’ll get there.”

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