FINANCE COMMITTEE MINUTES

OCTOBER 9, 2006

The meeting was called to order by Chairman Burke at 6:45 p.m.

MEMBERS PRESENT: David Burke, Dan Fogt, John Gore

OTHERS PRESENT: Kathy House, John Morehart, Mike Balestra

AGENDA:

Ø 2005 Post Audit Review w/auditing firm, Balestra, Harr & Scherer

Mr. Balestra presented the audit results. Any adjustments made are reflected in the Audit Report. Any other adjustments that were considered immaterial were discussed with management. The Audit was concluded on June 29, 2006. Reports issued in the Audit Report were Independent Auditor’s Report, the Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based On An Audit of Financial Statements Performed in Accordance with Government Auditing Standards, the Report on Compliance with Requirements Applicable to each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133 and Management Letter.

Audit Report is a public record and is posted on the Auditor of State’s website.

Responsibility of the auditing firm is to audit the financial statements. It’s the responsibility of the Finance Department to prepare the financial statements and get them ready for auditing. There were some changes in Accounting Policies and Procedures implemented this year. Government Accounting Standards Board #40, Deposit and Investment Risk Disclosure and GASB Technical Bulletin 2004-002, Recognition of Pension and Other Postemployment Benefit Expenditures/Expense and Liabilities by Cost Sharing Employers. These resulted in no changes in the financial statement presentation; they were mainly just disclosure changes in the notes to financial statements requiring additional disclosures.

As far as significant management judgments the accounting experts made, the only significant estimate is the appreciation of capital assets. Adjustments were recorded, all adjustments were made to the audit report and any adjustments made were immaterial to both management and the auditing firm.

Did not audit the MD&A, the Management’s Discussion and Analysis, therefore, no opinion was given. The MD&A is an overview prepared by the Finance Office.

There were no disagreements with management and no complications with other accountants. There were no difficulties in performing the audit or no major issues discussed prior to (inaudible).

The one biggest change in the Audit Report this year was that the City was required to have a single audit under OMB A-133 because of the amount of Federal assistance received during the year.

Independent Auditor’s Report is the auditor’s opinion on the Financial Statements. City has an “unqualified opinion”, which is the cleanest opinion you can get. Found nothing wrong with financial statements as presented.

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based On an Audit of Financial Statements Performed in Accordance with Government Auditing Standards. In this report, the auditors look at the controls the City has over the financial report and also how they handle the compliance and legal issues that are required by the State of Ohio. Auditors had no reportable conditions or material items that they felt were significant to be included in this report. This is another clean report for the City.

He noted Pages 57 and 58 are new that weren’t in last year’s report. These schedules list the significant Federal Programs received during the year and the dollar amount spent during the audit period on those Federal Programs. Any program over $300,000 is required to be tested as a major program. The Fire Grant was tested in compliance with the applicable Federal Laws and Regulations that were required. Pages 61 and 62 are the results of that program. Found nothing significant enough to report in the body of the Audit Report itself.

Management Letter. These comments reflect the auditor’s opinion that represents material instances of noncompliance or reportable internal control conditions, which they believe represent matters for improvements that the auditors wanted to bring to the City’s attention.

Auditors had no recommendations that were significant. Mr. Balestra noted two noncompliance issues, one dealing with Federal Programs. When you use Federal money and you have contractors outside of it, you are required to check to see if they are debarred from participating in Federal Programs, and it must be documented that you did that. It’s a contractual requirement that Legal Counsel should have taken care of. Auditors could find no documentation that this was done. However, they checked and the contractors were not debarred, so there was no problem with it. This note is to make sure that if the City does this again, it needs to be part of the contract.

The other noncompliance issue was instances with Ohio Revised Code Section 5705.36 dealing with the Amended Certificate. When comparison was done, some appropriations actually exceeded the estimated resources available for those; not in significant amounts, some less than $200, but felt it should be mentioned to the Finance Director. Should be reviewed more timely and if adjustments are needed, adjust them so you don’t have negative variances. Mr. Morehart noted that if the estimated resources, which would be revenues, change tremendously, he has to make an adjustment to Council which eventually goes to Mary Snider’s office. For example, in last year’s budget, dollars were in there for assumptions based on the water reclamation funds that never materialized, or certain debt that we were assuming we would receive didn’t materialize, then you have to make an adjustment or reappropriate downwards to make sure you’re consistent with the actuals.

The last issue is a recommendation for legal counsel dealing with contracts of public nature. The Auditor of State requires that before you award a contract, you are supposed to check the website that identifies anybody who has a finding for recovery issues against them, because they are not allowed to get a public contract until they pay their debt. When checking with the City Attorney, he said he did that, but did not document it. Auditors recommended documenting it and keeping that documentation in the contract file for future reference.

Mr. Balestra stated everyone in the City was very cooperative in getting all the information that was needed to complete the audit in a timely manner. Mr. Morehart complimented Mr. Balestra and his staff on their efficiency.

Mr. Burke complimented Mr. Morehart on his hard work. Mr. Morehart stated that John Green should receive the credit; he is the one who puts together the auditing statements and works closely with the auditing staff.

Ø Tap Fee Indexing

Mr. Burke gave two options for open discussion. Option 1 - Ordinance to have a review every year by the Finance Committee or Option 2 - Automatically link that to an actual index and have it occur automatically on an annual basis with periodic reviews on either option.

Mr. Fogt would like to have it linked so it kicks in automatically then evaluate it every four or five years. He fears that if it has to be reviewed every year, it may not get done. Mr. Gore and Mr. Burke agreed with Mr. Fogt. Mr. Burke will proceed accordingly. He will get names of Finance Directors of other cities for further discussion. Hope to have this finalized by an April 1 implementation date.

Finance Committee Minutes

October 9, 2006

Page 4

Ø System Capacity Fee Incentive Policy

This document was presented at an earlier meeting. The only difference with this document from the one presented at the last meeting is item III, letter C. This results from a conversation with Eric Phillips. Initially this was a stand-alone policy, but he was concerned it was too binding. It could potentially limit the City if a major employer came in. Previously discussed how to integrate this and how to keep this free from an overbearing Administration or City Council so that the citizens are best served by the policy. Initially talked about the majority of Council or the majority plus one. In this draft, he proposed two-thirds majority elected. For the record it would read: “On projects that are determined to have a major impact on the city, the amount of the system capacity fee can be decreased with approval by the Mayor and a two-thirds majority elected to City Council. Also, the Mayor and a two-thirds majority of City Council elected may approve the use of additional incentives including the SCFIP, tax abatements, municipal income tax credits (Asset Based Investment and Employment Agreement), or any local incentives.”

Discussed whether the vote should be two-thirds or three-fourths. Mr. Gore had no problem with two-thirds majority elected.

Ms. House noted one unresolved issue. The Enterprise Funds are going without and the General Fund reaps the benefit of that. We need to figure out how best to refund or be more equitable. Possibly some of the General Fund dollars we’re bringing in need to go back to the Enterprise Fund. Mr. Fogt felt that the General Fund should refund a partial amount to the Enterprise Fund. Mr. Morehart said the impact would be felt in the Enterprise Capital Funds. Those are the funds that potentially would receive the most dollars. The benefit would be hopefully more jobs and more income tax revenue, so the General Fund would benefit from this particular policy. Mr. Burke’s initial thought on that was when the multi-family was increased to .7, it created excess dollars in taps theoretically for the life of the plan. Ms. House agreed with Mr. Fogt’s point about things getting lost or attrition happens, that concept might get lost somewhere unless it’s written down somewhere. Some provision should be agreed upon. Mr. Burke will work on adding language to the policy stating that we should attempt to reimburse that fund as that revenue from that project becomes available.

Mr. Fogt said in the area where the school is going to be built, the folks in the Southard Road area think they are getting free taps. Mr. Gore stated the Mayor told him that anyone who annexed would get a free tap. The offer is for an existing residence only; it does not include new homes. Mr. Fogt does not feel the capital funds of the water and sewer should suffer because we’re offering free taps. At this point, he does not endorse free taps. If that happens, the Enterprise Funds need to be reimbursed from the General Fund in a similar fashion as was mentioned earlier. Mr. Burke asked if the area is annexed, would the City get payroll and taxes from the construction? Mr. Gore said that was discussed. If we annex the present school building without annexing anything else right now, we could start collecting the withholding on all the construction workers. Ms. House stated she’ll have more information after an Administration meeting on Thursday. Mr. Fogt noted the City could be receiving approximately $200,000 from tap-ins to the 18-20 houses in that area. Mr. Gore said you need to figure what the expected income would be from the individuals and look at what the cost is to get their signature on an annexation and look at the potential earnings from the withholding on the construction workers. If it’s a loser, you don’t want to do it, but if you break even or better, you may be better off in the long run. There will have to be more discussion on this issue. Mr. Burke noted you have the cost of trying to contractually service the line. Mr. Fogt asked if we’re allowed to create funds for annexations. He noted there are people living there that already work within the City limits from which we’re already receiving income taxes, and you have retired people from which we would not be receiving income taxes. He figures for about half of the 18/20 homes, there would not be additional income tax revenue. Mr. Gore stated he understands we presently collect income tax on nine homes. Some are retired, so about 50% already have family members that work within the City somewhere.

Ø 2007/2008 Water User Rates

Mr. House stated user rates were established for this year only. After the water study was completed, 8% was recommended for the next four years. Mr. Morehart stated the revenue is pretty much on target for the projection. Ms. House stated the City got approval from the EPA for the pilot study on the water plant re-rating. The reason the increase is only being recommended for two years is because potentially the fourth or fifth year rates could differ if the rating comes through and delays some of the capital projects beyond the five-year period, which were included in the Water Master Plan.

Mr. Fogt has a hard time raising rates by 8% when senior citizens are only receiving 2-3% increase in their Social Security checks. City has delayed the building of the reservoir and the building of the water treatment plant. Ms. House stated the water treatment plant has not been delayed at this point. The Pilot Study should tell us whether it can be delayed or not. Using his water bill, Mr.

Fogt figured the difference between a 5% increase and an 8% increase would be $18.24 per year and in the following year it would be $20.64. The second year would be a total of roughly $39.00 more per year than at 5%. Mr. Morehart said he could see it both ways. One thing the City is facing now is that the reservoir probably will cost more than what was in the Water Master Plan. The figure in the Water Master Plan used by Malcolm Pirnie was $17M; we’re looking at $22M now. If we go with a 5% rate for the next two years and follow through with the $22M, at some point we’d have to increase the rates to account for that additional debt service. If we have two 8% years, any excess dollars will be used to reduce the borrowing. That would have the affect of reducing the debt service, which would have the long term affect of keeping the rates lower potentially in years four and five. Our plans are to move forward with the reservoir next year. The debt service will be hitting the books in 2008. In addition to that, Ms. House stated if the water plant is not re-rated, we won’t be able to move out the building of the water treatment plant. Mr. Fogt stated he is in favor of building the reservoir and water treatment plant as soon as possible. A new water plant would do wonders for the quality of the water. His problem is not building the reservoir and water treatment plant; his problem is raising the rates 8% to people who can’t afford it. He said he’s on board with raising tap-in fees and hopes that this revenue can offset costs a little. Ms. House said we can’t depend on hope; we need to look at the data and trust that the money that we spent on the Water Master Plan, which was significant, is accurate and that the recommendations are sound. No one wants to put more burden on others. However, we don’t want our water system to end up like our wastewater system and have to raise rates 17% rather than 8%.

Mr. Fogt asked if Sugar Run develops and other businesses develop, is the City going to continue to maintain the system clear up to 161. Response was yes. Tap-in fees and water revenue would be received for anything along Industrial Parkway. Mr. Morehart said for the first few years, the tap-in fees will be used to pay down the County debt, which is $4M. Once that’s paid, we can use the tap-in fee revenue just as we do with regular tap-in fees. That will probably be 3-5 years until that debt is completely paid off.

Mr. Burke will support the 8%. If we know we have a major capital expense coming, he’d rather get in line with that expense. By raising it to 8% and keeping it at 8%, in the long run, you’re actually paying less and you still have money in hand to pay down the debt. The rate increase will pay for existing needs today and tap-in fees pay for additional needs. Ms. House stated the reason why the recommendation is for two years as opposed to one year, is that the Pilot Study won’t be done until late next year. Once that is finished and results are known, we need to look at the Master Plan reassessment to see where the capital needs fall. We need time to be able to complete both of those pieces of the puzzle and those will not be completed in total by the end of next year.

Mr. Fogt noted we cannot use tap-in fees to figure the rates. He does not want to raise the rates too much when we’ve got tap-in fee revenue coming in if we’re not taking that into account. Tap-in fee revenue would be if the housing market turns around in the next couple of years and we receive substantially more tap-in fee revenue, that’s additional revenue to be used to reduce the future debt. Some of that will be used for normal operating capital expenditures and some of that will be put in the Incremental Fund to be used for the reservoir.

Ms. House stated one thing that will enhance our position is the Indexing that’s being discussed. It will be looked on more favorably by the rating agency.

Mr. Burke agreed to sponsor the legislation.

Meeting adjourned 7:39 p.m.