- DRAFT -
SUNFISH LAKE SPECIAL COUNCIL BUDGET STUDY MEETING AUGUST 2, 2022
5:30 P.M. – ONLINE MEETING
Mayor: Dan O’Leary
Councilmembers: Mike Hovey, Steven Bulach, Shari Hansen and Ginny Beckett.
City Treasurer: Ann Lanoue
Attorney: Tim Kuntz
Engineer: Jeff Sandberg
City Clerk: Cathy Iago
1. CALL TO ORDER: Mayor O’Leary opened the meeting at 5:30 p.m. for the purpose of discussing the proposed 2023
City of Sunfish Lake Budget and Tax Levy.
2. DISCUSS CITY OF SUNFISH LAKE PROPOSED 2023 BUDGET: Mayor O’Leary advised that the City has a large problem related to escrow accounting associated with building projects. He explained that part of the problem was due to the fact that in the past, the City only requested $2,500 in escrow fees when a major plan review application to build within the City was submitted. He advised that in April of this year, Council had taken action to amend the amount of escrow fees to be collected with major building plan review applications to the amount of $12,500. He stated that in December last year, he asked the City Treasurer to reconcile the escrow accounts, as the City was carrying a large deficit there.
The Mayor explained that recently, this again came to our attention because John Johansson had been contacted for an outstanding escrow amount of over $20,000. This is the same property owner that the City had made errors on in the installation of his dock over a year ago and we hate to see the same resident again have problems with the City. Although there are explanations as to why Mr. Johansson’s building project caused an excess amount of staff time, he should have been notified all along that additional escrow amounts would be due. The Mayor noted that applicants were supposed to be notified early on if there were additional funds required and that did not occur in Mr. Johansson’s case. The Mayor further advised that Council had directed staff to notify property owners immediately when escrow funds were nearing depletion, and to advise them of issues that remained outstanding and would require them to submit additional funds to complete inspections and reviews on their project.
Mayor O’Leary indicated that at this time the escrow fund deficit was $119,722.06, which is 14.08% of the City’s annual budget. He stated that the Treasurer claimed she inherited some of the problem when she was hired in 2013. He further stated that the City Attorney indicated that some of the older project escrows could be handled by writing them off as uncollectable. The Mayor also noted that there were some current projects that still owe the City approximately $40,000 of the escrow deficit. He pointed out that the escrow deficit prior to 2013 was only $1,704.45. The Treasurer explained she did not fully understand how the escrow accounting was collected and documented by the planning staff when she started. Thus, she believes that a substantial amount of the escrow deficit would come from the years 2014 and 2015. The Mayor indicated that the current projects amount to only around $40,000-$50,000 of the escrow deficit. He stated that the Treasurer was in the process of compiling documentation on the outstanding escrow funds. He explained that there appears to be an unaccounted escrow balance of approximately $68,000 to $78,000.
The Mayor explained that in civil disputes there is a 6-year statute of limitations for the purpose of collecting money from clients. However, he advised that the City Attorney indicated that if no billing statement was ever sent to the property owner, it is possible the statute of limitations would not apply. The Mayor explained it was his opinion it would not be appropriate to request funds from the years 2014 or 2015 or beyond six years if the resident had not received any billing statement initially on the project. He suggested that Council would have to determine an appropriate timeframe to go back and contact residents for the uncollectable escrows, after the Treasurer has compiled the documentation on the outstanding funds.
Mayor O’Leary advised that WSB was changing their billing policies to assist in this problem. He explained that the City Engineer had set up a billing payment system with a “not to exceed” notification that notifies the Planner and Engineer when an escrow account gets close to $10,000 of the $12,500 escrow funds paid. The Planner and Engineer would then meet to determine how much more time is needed to complete the project and would then send a notice to the property owner that lists the items remaining on the project and estimated costs and to request additional escrow funds to complete the project. He noted that this should safeguard against huge future deficits in escrow and allow property owners to be initially advised of any upcoming costs.
Councilmember Hovey asked if staff had identified residents who owe the escrow fees.
Mayor O’Leary stated the Treasurer had not compiled it at this time.
Treasurer Lanoue explained that she would have to manually go through the project billing statements from the planning firms to extract this information.
Councilmember Beckett pointed out that the properties may have been sold and it may not be the same owners who submitted the applications.
Mayor O’Leary stated that he wished to be fair and it is his opinion that if the City has been in error by not having proper procedures in place, it should be the City’s responsibility to cover the costs. He indicated that Council should be thinking of what would be the best method to handle the matter. He commented that the good news is that the City is financially in good shape with cash reserves to cover the deficit if necessary.
Councilmember Beckett stated that at some point she would like to know what the procedure was that caused this issue prior to the current procedure.
Mayor O’Leary stated that it bears repeating that the previous system was defective and that staff at WSB has now initiated a solution so that this will not occur in the future. He noted that the City still needs to resolve the issue so that it does not happen in the future. He explained that in the past, the City planner sent their billing statement to the City Treasurer that listed the properties and the Treasurer would chart the amount to that property and then send a check to WSB or the previous planning firm, NAC. However, it appears that no one was documenting what portion was to be paid from escrow and what should have been paid by the property owner. He also noted that no one did anything to document when the escrow was depleted. He pointed out that in his opinion, the City cannot go back to the property owner after the fact. He stated that staff will have to review all the billing statements to determine if the escrow fees were properly logged to the correct address and confirm that letters were never sent to the property owners for additional escrow amounts.
Mayor O’Leary explained that the current planner will work to keep the new procedure documentation at WSB and the City Treasurer will be the stop gap protector to ensure that the problem does not occur in the future.
The Mayor noted that there would be a request for $15,000 to conduct an audit of the City finances in 2023, however, the City Attorney advised that a regular audit would not address the issue of the escrow accounting. He asked the City Attorney what the additional cost would be to have the audit review the escrow accounting. The attorney suggested an additional $3,000 be added, since that type of review would be outside the scope of the regular audit. The Mayor then suggested that $18,000 be placed in the 2023 budget to conduct an audit of the City funds that includes the escrow issue.
Councilmember Bulach questioned if the City is on top of the current applications that are in progress such as the Punch and Maurer residences.
Engineer Sandberg stated that all of the open projects are being closely monitored.
Councilmember Hansen asked how many projects are open at this time and the Engineer responded approximately six (6).
Mayor O’Leary explained that the Planner had sent a letter to one of the current large escrows, this being Mr. Johannsen. He also noted that the large bill was due to the fact that the applicant had redone or changed some items from the initial application submitted. The Mayor noted that he has no issues discussing the matter with Mr. Johannsen, however, it would be difficult to attempt to discuss the matter with applicants that are long past their project completion.
The Mayor advised that if Council determines the total amount of funds that would be uncollectable, staff would prepare a resolution requesting these funds be deemed uncollectable and prepare a journal entry that would reduce the escrow deficit to zero. He advised that thereafter he and Councilmember Hovey could review the monthly financial reports to insure there would be no future deficits.
Councilmember Hansen asked how long it would take the Treasurer to complete the escrow review.
Mayor O’Leary explained that the Treasurer would be preparing the preliminary budget for Council to review and adopt in September, therefore, the escrow information would be compiled and presented at the October meeting. He asked if there were any further questions and there was no response.
The Mayor asked Treasurer Lanoue to provide an overview of the proposed 2023 Budget and Tax Levy.
Treasurer Lanoue explained that the Market Value and Tax Capacity had increased 17% from 2022. She reviewed the following requests from staff:
Police Department: Requested an increase of 1% over 2022.
Fire Department: The Treasurer advised that the Mendota Heights Council had not yet met to set their budget, however, the preliminary amount requested from the Mendota Heights Finance Director was $79,996; the 2022 amount was $71,045. She explained that the cost is based on a formula that calculates the amount between the three (3) cities that use the fire services. She noted that there were also charges included for the remodel of the Fire Station on Dodd Road.
Legal Services: The City Attorney requested $35,000 for civil and municipal legal services. There will be a separate Attorney that will handle prosecutions for the City and they have not yet submitted an amount for 2023.
Finance: $15,000 was placed in the 2023 Budget for an audit to be conducted and Mayor O’Leary, after advice from the City Attorney, requested an additional $3,000 be added to this amount to cover the costs of reviewing the escrow accounts. The total request is $18,000 for an audit. The Treasurer also requested $1,200 to upgrade the SAGE Financial software for accounting purposes and this fee would be ongoing annually.
City Clerk: There is no election held in 2023, therefore, $600 would be placed in the budget for maintenance of the election machines. The Clerk also requested funds be placed in the 2023 budget for attendance at the International Institute of Municipal Clerks (IIMC) Conference which will be held in Minneapolis in 2023. The Clerk also requested amounts for membership fees and for storage and records retention for 2023.
City Planner: The Planner requested $45,000 for Planning Services; this does not include the code review of $38,000 that was approved this year.
Mayor O’Leary noted that the Council had already approved funding for the Planner and Engineer to review the Zoning Code this year, however, he would request that the same amount be included in the budget for next year. He explained that if the funds are not used, they would assist in replenishing the surplus funds. He suggested that an additional $37,000 be included in the 2023 budget for review of the City Code.
The Treasurer asked if funds should be included under the Planner for next year. After a brief discussion, it was determined that the total amount to be included for the Planner in 2023 should be $59,000 total.
City Attorney: Mayor O’Leary explained that he would be working with the Planner, City Engineer and City Attorney on the Administrative and Zoning sections of the City Code and that the Mayor’s services would be free. He explained that he would request the City Attorney’s advice on some issues and also once the codes are completed, the Attorney will review all codes for consistency and legality. The Mayor and City Attorney estimated this may require approximately 150 hours at $135 per hour for a budget amount of $20,250.
The Mayor advised that the Police Chief Sturgeon had also agreed to work with him and staff on the solicitor, peddler and junk vehicle sections of the City Code at no additional cost to the City.
The Treasurer stated that so far the budget would be increased $41,000 from 2022.
City Engineer: Engineer Sandberg referred to his memorandum dated July 25, 2022 and reviewed the proposed engineering budget requests for 2023. He explained that he had presented the proposed budget at the July Council meeting and that the only change from that meeting was to add 3-1/2 to 4% percent wage increase in 2023.
Mayor O’Leary pointed out that the City would not be undertaking any major street projects in 2023.
Engineer Sandberg agreed and explained that the City had moved some projects to this year, therefore, there would be no street projects in 2023.
Mayor O’Leary pointed out that in his meeting with the City Attorney, the Attorney commented that “this is an off-year for roadway projects”, so budgeting for the code revisions and adjusting the escrow balance to zero should result in no increase in taxes for residents this year. He asked the City Attorney if Council should take formal action on any of the items discussed.
Attorney Kuntz advised that Council could provide direction to the Treasurer as to any items they determine should be included in the preliminary budget that Council would adopt at the September meeting and that a motion was not necessary.
Clerk Iago advised that Council should not take formal actions at a work session or study meeting, but providing direction to staff would be appropriate.
Mayor O’Leary recommended that the Treasurer include the additional $3,000 for the audit for a total of $18,000 and that an additional $38,000 be included for the City Code review, as well as $20,250 for the City Attorney to review the code revisions.
Council concurred with his recommendation.
City Forester: Treasurer Lanoue explained that the Forester had already exceeded the 2022 budget due to Emerald Ash Borer (EAB), therefore, he added $5,000 for EAB to the 2023 budget and $10,000 for tree removal.
Mayor O’Leary noted that the Forester is always fiscally conservative and the Treasurer pointed out that the Forester is also always under budget.
Treasurer Lanoue stated the preliminary budget included a 3% salary increase for the Clerk, City Administrator, and Treasurer and that the Engineer had requested a 4% salary increase. She noted that the cost of living had increased 9% and that Council usually sets up a committee to review salary increases for staff.
The Treasurer stated that the tax rate is unchanged at 2.8529% and that the City would have $125,000 more to levy than in 2021, which would bring the tax rate to $862,841 from $736,898, again, keeping the tax rate the same. She noted that if the tax levy dollars remain at $738,898, it would bring the tax rate down to .24365 and would be a 14.6% decrease.
Mayor O’Leary pointed out that Council would need to know the total amount with all the additional funding discussed earlier prior to making a final decision.
Treasurer Lanoue agreed.
Councilmember Hovey commented that he would add approximately $60,000 to the budget in anticipation of writing off the $60,000 escrow deficit as discussed previously.
Attorney Kuntz questioned why the Council escrow write-off would impact the budget.
Councilmember Hovey stated if the Council wrote off the escrow deficits, he would want to recoup the money in taxes.
Mayor O’Leary stated in his opinion the escrow deficits are a past event that should not be levied since the residents’ taxes in the past provided the funds that were used to pay NAC and WSB. It would be unfair to tax them again for the write-offs of those funds. The City may recoup some of the money from the review of the City Code, if all the 2023 budget amount is not used up here. Those funds would go toward the surplus. However, the City should not recoup the escrow deficits from the residents but would have to remain fiscally conservative and build back up those surpluses.
Attorney Kuntz indicated that it becomes a policy issue for Council as to whether to recoup (i.e. levy the $60,000 and replenish the reserves) or show an adjustment (i.e. write off the $60,000) in the assets.
The Mayor asked wasn't it unfair to levy when the amounts should have been paid by the specific property owners?
Councilmember Hovey indicated it appears we are doing that anyway if we are trying to recoup by increasing the levy.
The Mayor noted that the cash reserves are also from being fiscally conservative in the past, which benefits all residents.
Attorney Kuntz pointed out that Councilmember Hovey made a good point that the City could recoup the monies now or do it later. He indicated that this may not be the year to recoup the funds and that it could be dependent upon the City reserve funds.
Treasurer explained that there is $1,924,288 in cash reserves at this time.
There was discussion regarding upcoming bond payments and the Engineer and Treasurer disagreed on the dollar amount of the upcoming bond payments.
Mayor O’Leary suggested that the Treasurer contact Ehlers to determine the exact amount of the bond payments for 2023.
The Mayor questioned how much of a “rainy day fund” does the City maintain in reserves that is not anticipated to be spent within the next 12 months.
Treasurer Lanoue stated the $1,924,288 is the total reserves and the amount of the budget would be the amount that is anticipated to be spent. She pointed out that there would be no spending of cash by writing off the escrow deficits, it would only reduce the reserve balance.
Mayor O’Leary commented that if it doesn’t reduce cash, there is no need to increase the surplus in the future. He stated in his opinion there is no need to levy to replenish the surplus. He asked what would be done to balance out the account.
Treasurer Lanoue indicated that would be a question for a governmental auditor or state auditor.
Councilmember Hovey noted it would not affect the cash accounts and the way to recoup cash would be to increase the levy.
Mayor O’Leary stated that given those facts, he would prefer not to increase the levy.
Treasurer Lanoue stated she would prepare the proposed tax levy and budget for the September meeting at which time Council would adopt the preliminary budget to be sent to Dakota County. She noted that there would be a public hearing in December to review the proposed 2023 Budget and Tax Levy and Council would then adopt the final budget and tax levy. She noted that the budget and tax levy may be decreased in December, however, it may not be increased once it is adopted in September.
Attorney Kuntz advised that Council needs to decide if they are going to increase the tax levy and budget to accommodate the escrow deficit at their September meeting.
Mayor O’Leary asked the Attorney if he would contact the State Auditor to discuss the possibility of writing off the uncollectable escrow deficit.
Treasurer Lanoue suggested that it would be more appropriate for her to contact the State Auditor regarding this matter.
Attorney Kuntz suggested that the Treasurer contact Ehlers to determine options for handling the escrow deficit.
Mayor O’Leary agreed that Ehlers should also be contacted about how to proceed with writing off the deficit vs levying for the deficit.
Councilmember Hovey commented that it is his opinion there is not enough information at this time to make a decision. He wanted to see the information prior to making a decision.
Treasurer Lanoue explained that she would have the information for Council in October.
Councilmember Hovey suggested that $119,000 be included in the September “not to exceed” preliminary budget and that Council would then have the option to lower the amount in December. He commented that in his opinion it is better to reduce the amount and that it would provide sufficient time to review the documentation prior to making a decision.
There was discussion regarding using a lessor amount. Mayor suggested $80,000 Councilmember Hovey suggested $70,000
Treasurer Lanoue suggested using an amount that would keep the tax rate unchanged.
Engineer Sandberg advised that there would be a $69,000 differential.
Treasurer stated that $69,000 would keep the same tax rate as 2022.
Mayor O’Leary asked if Councilmember Hovey agreed and Councilmember Hovey responded yes.
Treasurer Lanoue stated she would calculate five (5) properties to determine how they would be affected by a tax increase. She asked if they should be chosen at random and Council concurred that would be appropriate.
Mayor O’Leary suggested doing the calculations based on using the additional $69,000 amount with and without that amount.
Councilmember Hovey agreed.
Attorney Kuntz summarized that the 2023 Preliminary Budget and Tax Levy would be based on the same tax rate as last year and would include the amended amounts for the City Code review and recapturing the escrow deficit in the amount of $69,000 to $70,000, and include the additional $3,000 for the audit for a total of $18,000 for the audit. He noted that the Treasurer would also prepare a comparison for five (5) random properties within the City showing the tax impact with and without the additional escrow funds included in the budgets.
Mayor O’Leary asked if there were any further questions or comments and there was no response.
Council concurred to direct the Treasurer prepare documentation for the 2023 Preliminary Budget for their review and adoption at the September meeting as discussed and summarized.
ADJOURN: Mayor O’Leary asked if there was any further discussion and, hearing no response, adjourned the meeting at
Catherine Iago, City Clerk Dan O’Leary, Mayor