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07-02-1992 P.A. Report09-02 -92 19:42 Ph1G ASSOCIATES 212 P01 p1t0 as,iaciettv,s,, AU/. ECONOMIC. MARKETING AND MANAGEMENT CONSULTANTS MIMORANDUM TO: John Drago FROM: Phil Gonot DATE: July 2, 1992 SUBJECT: Review of Nabors, Giblin Nickerson, P.A. Report I have reviewed the Phase I report prepared by Nabors, Giblin Nickerson regarding the alternatives to provide regional water and wastewater services. This review generated some comments and reactions to the statements, findings and conclusions. I believe that there are several misstatements of fact and erroneous conclusions drawn in this report. I believe that it is important for the report authors to explain some of these points. 1) The study did not consider the City as a viable alternative to supply regional services. In many areas, municipal systems have been expanded to meet this role. It may be likely that this alternative is cost effective. Without even objectively considering the option of the City serving the regional role, the question can never be answered completely. 2) The grant from the South Florida Water Management District could be given over to the City to study and prepare alternatives. With the only truly viable system, at this time, the City of Okeechobee is in a better position to meet EPA guidelines on the cost effective approach to regionalization. 3) Page 25 No mention is made of the conversion to a well system for raw water supply, yet pages are dedicated to the problems with lake withdrawal as the source. If the procedures were reasonable presented, would the conclusion be different? 4) Page 29 States that the extent of water loss is not measurable. The issue of water loss was discussed in the Task Force report analyzing alternatives to an authority. The report included a review by an independent engineer (Chen Associates) who concluded that the system was efficiently managed. 5) Pages 36 37 52 Makes specific statements that the revenues generated from the utility system must be subsidized by the General Fund and that the fixed charges do not meet debt service. Both statements are incorrect. Net Income from the utility system for FY 1991 exceeded $730,000 meeting bond coverage tests without the pledges for support form utility taxes. In addition, the rates are set in such a manner to insure that annual debt service payments are collected through the debt service portion of the rates. Historic financial records document this fact. 6) Page 37 States that the City's procedure of depreciating infrastructure is incorrect. The authors are obviously not aware of Generally Accepted Accounting Principles that require depreciation for any Enterprise Fund such as the water and wastewater utility. It is not an option of the City, but a requirement. 7) Page 38 Reference is made to provisions of the Okeechobee County Comprehensive plan regarding the rates of water and wastewater consumption and generation. Any analysis should have been based on the engineering reports from the City of Okeechobee system. 8) Page 41, Table 7 The authors used their valuation method to arrive at a value of the City system. This method ignored Generally Accepted Accounting Principles which states that assets must be placed on the Balance Sheet at the lower of cost or market value. The figures presented on the Balance Sheet are audited and official, the arbitrary numbers presented by the authors are also not referenced or footnoted to declare to the reader that the figures are incorrect. 9) Page 42 The presentation of the operating cost figures are also arbitrary and without back -up. It is unreasonable to state that the authority could operate the system at less cost that the City, especially in light of the operating report provided by the independent engineer (Chen Associates). 10) Page 43 subsequent It appears that the option A that has the City operating the system and selling bulk to Beach is the most cost- effective. Yet the conclusion is to create another organization. The relationship is not explained. 11) The options did not consider that the City cannot deed its system to this new authority due to the provisions of the bonds. All bonds will have to be recalled and reissued. Costs for this action was not considered in this process. The options also did not consider payment to the City for the fair market value of the system. The City Council must recognized their fiduciary responsibility to the taxpayers and cannot give away something that has significant value to the City. 12) Page 52 Statements that the City distribution lines are unsafe are both undocumented and untrue. The analysis also did not consider the costs to replace these lines in the regional authority option. 13) Page 54 States that the City residents will see stable rates with the authority. However, rates will increase under this option for City residents. The Task Force study proved that the most cost effective option is the existing structure. 14) The effects of the loss of Beach Water will not devastate the City's revenue picture. With a significant amount of unfulfilled demand from other customers, this revenue stream will be replaced quickly. It is also true that with retail customers, the amount of revenue per 1,000 gallons of water delivered will be higher that for the bulk customer of Beach. 09 -02 -92 15:44 PMG ASSOCIATES ACCOUNTING FOR GOVERNMENTAL AND NONPROFIT ENTITIES LEON E. HAY, PH.D., CPA Ralph McQueen Distinguished Professor of Accounting University of Arkansas 1985 Seventh Edition 212 P02 RICHARD D. IRWIN, INC. Homewood, Illinois 60430 09 -02 -92 15:45 PMG ASSOCIATES Proprietary Funds 212 P03 2 Principles of Accounting and Financial Reporting for State and local Governments 1! (6) Enterprise Funds--to account for operations (a) that are financed and operated in a manner similar to private business enterprises —where the intent of the governing body is that the costs (expenses, including depreci- ation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has derided that periodic determination of revenues earned, expenses incurred, and /or net income Is appropriate for capital maintenance, public policy, management control, accountability, or other pies. (7) Internal Service Funds —to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost -reim- bursement basis. Fiduciary Funds (d) Trust and Agency Funds--to account for assets held by a governmental unit in a trustee capacity or as an agent for Individuals, private organiza- tions, other governmental units, and /or other funds. These include (a) Expendable Trust Funds, (b) Nonexpendable Trust Funds, (c) Pension Trust Funds, and (d) Agency Funds. Accounting for each of the fund types defined in Prindple 3 is explained and illustrated in Chapters 3 through 14. Accounting characteristics common to each of the three categories of fund types governmental funds, propri- etary funds, and fiduciary funds —are set forth in the final section of this chapter. NUMBER OF FUNDS 4. Governmental units should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established, how- ever, since unnecessary funds result in inflexibility, undue complexity, and inefficient roundel administration. The importance of Principle 4 is sometimes overlooked by academicians. The eight fund types defined in Principle 3 are to be used if needed by a governmental unit to demonstrate compliance with legal requirements or if needed to facilitate sound financial administration. If neither legal require- ments nor sound financial administration require the use of a given fund type, it should not be used. In the simplest possible situation, a governmental unit could be in conformity with GAAP if it used a single fund, the General Fund, to account for all events and transactions. In addition to that one fund, however, it would need the two account groups for reasons set forth in Principle 5. ACCOUNTING FOR FIXED ASSETS AND LONG -TERM LIABILITIES 3. A clear distinction should be made between (a) fund Axed assets and general fixed assets and (b) fund long -term liabilities and general long -term debt. 01-02 -92 15:46 20 PNG ASSOCIATES 212 PO4 a. Fixed assets related to specific proprietary funds or Trust Funds should be accounted for through those funds. All other fixed assets of a govern- mental unit should be accounted for through the General Fixed &sets Account Group. b. Long -term liabilities of proprietary funds, Special Assessment Funds, and Trust Funds should be accounted for through those funds. All other unnra- tured general long -term liabilities of the governmental unit should be ac- counted for through the General Long -Term Debt Account Group. General long -term obligations are those to be paid from general tax levies or specific debt service tax 1evin. Accounting and reporting for the General Long -Term Debt Account Group is explained and illustrated in Chapter 8. General fixed assets include land, buildings, improvements other than buildings, and equipment used by activities accounted for by the five fund types classified as "governmental funds" in Principle 3. Principles 6 and 7 supplement Principle 5 in establishing requirements that relate to fixed asset accounting. VALUATION OF FIXED ASSETS 6. Fixed assets should be accounted for at cost or, If the cost is not practicably determinable, at estimated cost. Donated fixed assets should be recorded at their estimated fair value at the time received. DEPRECIATION OF FIXED ASSETS 7. a. Depreciation of general fixed assets should not be recorded In the accounts of governmental funds. Depreciation of general fixed assets may be re- corded in cost accounting systems or calculated for cost finding analyses; and accumulated depreciation may be recorded in the General Fixed Assets Account Group. b. Depreciation of fixed assets accounted for in a proprietary fund should be recorded in the accounts of that fund. Depredation is also recognised in those Trust Funds where expenses, net income, and /or capital mainte- nance are measured. Application of Principles 5, 6, and 7 to the General Fixed Assets Account Group is explained and illustrated in Chapter 7. ACCRUAL BASIS IN GOVERNMENTAL ACCOUNTING 8. The modified accrual or accrual basis of accounting, as appropriate, should be utilized in measuring financial position and operating results. a. Governmental fund revenues and expenditures should be recognized on the modified accrual basis. Revenues should be recognised in the account- ing period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long- term debt and on special assessment indebtedness secured by interest bearing special assessment levies, which should be recognized when due. b. Proprietary fund revenues and expenses should be recognized on the accrual