Utility loans may be illegal, state says

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Rockwood board member initiated comptroller contact

By Cheryl Duncan, Assistant Editor

An official with the Tennessee Comptroller’s Office determined last week that Rockwood Water, Sewer and Natural Gas may have violated state law by allowing interdepartmental borrowing of operating funds.
Rod King, general manager of the utilities, and the city board governing the operations have openly admitted the more profitable gas department has loaned money to the water and sewer departments.
A comptroller’s office review of city finances indicates, however, that the issuance of such loans was not previously approved as required by statute.
“ ... financial statements disclosed a due to the natural gas fund balance from the water and wastewater system that increased from $630,228 to $850,887 during the fiscal year ended June 30, 2009,” wrote Dennis Dycus, director of the Comptroller’s Office Division of Municipal Audit, in a Sept. 8 letter  addressed to the Rockwood City Council and mayor.
“Because the above loan(s) were not approved in advance by the Office of State and Local Finance as required by state statutes, combined with the fact that the loan has increased over the last several years with no attempted reduction of the principal, such outstanding debt would appear to represent an illegal transfer of funds from the gas fund to the water and sewer fund,” Dycus continued.
Rockwood Mayor James Watts said Wednesday he believed utilities officials had received the state’s blessing to allow for borrowing between utility departments.
He maintained that stand on Friday, saying that it was his impression that officials had previously received the green light “from someone” at the state, and “from that time forward, that’s what they did.”
The Sept. 8 letter is the second Dycus has addressed to Rockwood officials in the past week.
Water board member Glen McCuiston initiated contact with the Comptroller’s Office because he believed it was against state policy to mingle funds between operations, a practice he has reportedly told Watts leaves the water and sewer systems owing $1.3 million to the gas department.
Dycus’ reply to McCuiston on Sept. 1 promised the subsequent review of the city’s financial statements.
That letter prompted the mayor to ask the water board to recess a called Tuesday meeting until Rockwood City Attorney Elmer Rich could issue a legal opinion on Dycus’ findings.
According to the Sept. 8 letter, borrowing between departments without repayment or the state’s blessing is a direct violation of state law.
“In part, the statute requires that such illegal transfers be repaid over a five-year period at 20 percent a year,” Dycus wrote.
“Upon discovery of such violation, any city official in violation of this section is subject to ouster ... . Please provide this office a plan of repayment of the illegally transferred funds within 60 days of the receipt of this letter.”
Watts refused on Friday to speculate about which official the statement referred to.
“I’m kind of waiting for Elmer to get his opinion prepared,” he said. “Whatever the problem may be, we’re going to correct it.”
Repayment options, he said, could include the water board taking out a long-term bond issue or a rate increase.
Appointed to the board earlier this summer, McCuiston has been a vocal opponent to rate hikes proposed as a means to make the water department more solvent.
He was the standout vote against a measure that would raise rates almost 18 percent for customers using 1,500 or more gallons of water per month.
McCuiston instead proposed a 10-percent across-the-board budget cut. The board voted it down, partially because King said the cuts would cost four utility employees their jobs.
Dycus’ findings indicated a $324,567 deficit in water and sewer net assets. He warned in the letter that if the change continues for another year, the water utility would meet one of the state’s criteria “defining a finanically distressed system.”
Dycus added, “This office is required by state law to refer financially distressed systems to the Water and Wastewater Financing Board.”
King made a similar revealing in an August workshop meeting between water and city officials.
“We’re going to see that the city properties are taken care of,” Watts vowed Friday. “It’s not something that happened yesterday or day before yesterday. It’s been going on all along.”
The water board has been in a state of upheaval ever since three board members abruptly resigned in late April.
James Nuckols and Chairman Harold Ishman, the board’s council liaison, were the only remaining board members until council approved Watts’ appointments of McCuiston and Jonathan Foust on June 4.
The other seat remains vacant, though an attempt to appoint J.J. Neerman to the seat was voted down by the council on Aug. 16.
“The thing that’s bad about it is that I’ll have three new board members,” Watts said Friday. “The problems didn’t occur then (under their leadership). It’s the past that’s caught up with us.”
Other findings pointed out by the Comptroller’s Office related to city finances. The 2009 audit, performed by Daniels, Uselton and Clay of Kingston, showed $113,124 in overspending in the general fund, which ended the year with a $24,535 fund balance. The streets and highways fund also reflected an overage of $11,174, with a year-end fund balance of $343,584.
“State statutes, charters and local ordinances assign the responsibility of the budgeting process and establish budgetary authority for municipal expenditures,” Dycus wrote. “To avoid possible legal conflict, municipal officials should authorize all expenditures and transfers either in the original budget, in an amendment, or in a supplemental appropriation.”

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