The Town of Oro Valley recently received an unmodified opinion from its independent auditor, Heinfeld, Meech & Co., P.C., meaning that the town completed another fiscal year with proper accounting practices. However, at the last council meeting, the accounting firm indicated there was a minor hiccup in the staff’s otherwise sufficient record-keeping procedures.
Corey Arvisu, a partner of the firm, told the council the audit found some inadequate procedures within the town’s government that resulted in $2.5 million of street infrastructure not being added to the town’s capital asset records, resulting in a misstated general ledger. From this previously unreported street infrastructure, $630,830 in impact fee credits were issued to developers. $199,000 of those credits were drawn and used by developers during the last fiscal year, according to council documents.
Impact fees are imposed by local governments on developers to pay for some or all of the costs of providing public services to the new developments they build, such as improved streets. Stacey Lemos, the Oro Valley’s Chief Financial Officer, told Tucson Local Media that in 2014, the Arizona Legislature made substantive changes to impact fee laws in state statute and Oro Valley updated its own code to reflect those changes, including the ability for developers to receive impact fee credits and enter agreements for the construction of development-related infrastructure.
The impact fees are collected into a general account and some of that money is awarded back to developers in the form of impact fee credits after an agreement is reached between the two parties. The credits are a minor incentive to the developers, so they can receive some money from the total impact fee fund to use toward those street infrastructure costs. The developers would only be eligible to receive the credits if their infrastructure projects are included in the town’s Infrastructure Improvement Plan.
Lemos said the $2.5 million worth of street infrastructure was the total amount of work that granted impact fee credits last fiscal year. Those street infrastructure improvements were adjacent to newly-developed subdivisions. The developers of those projects paid for the extension of streets, and the improvements in the intersections that serve their developments.
The primary source of documentation for these impact fee agreements was email communications and internal spreadsheets. The auditors warned that without the right procedures to ensure all financial transactions are recorded properly, there would be a risk that the town’s financial statements will be incorrect in the future.
“Impact fees are credits provided to them that can be applied to future construction-related costs,” Arvisu said. “So, those credits end up essentially being a liability if the developer were to use them in the future, so we want to make sure those credits are somehow recognized in the financial statements.”
“We meticulously documented all the credits, in fact we had an internal impact fee committee which would evaluate any requests that would come up,” Town Engineer Paul Keesler said at the Feb. 6 council meeting. “The process is essentially a negotiation; they’re building things that far exceed what their credits are. The town is getting a good investment for these credits.”
Keesler said the town officials would come to an agreement on how much the infrastructure would cost, then the developers would submit contracts and the town would confirm it and document it through an email process. However, this email documentation process did not transfer over into the town’s capital asset records and did not make it into the general ledger.
Lemos said the staff is now putting together a formal impact fee credit agreement form, which is currently being vetted by the town’s legal department. Developers and town officials will use the new form to document any future agreements, and that form will have to be signed off on by the legal, finance, public works and town clerk departments so everyone has a chance to view it.
According to council documents, the forms will be followed by training with all key staff involved in “collecting, approving, managing and accounting for impact fees and impact fee credit agreements.”
Although the town did not have formal procedures in place, Arvisu said all the information related to the value of infrastructure and impact fee agreements were readily available to be entered into the town’s ledger.
“We as auditors, when we get the general ledger of financial statements we want to see it in there, we don’t want to see it in a second set of records … it was a relatively easy adjustment to make,” he said.
Arvisu believes the discrepancy was not a major issue. As long as it doesn’t continue to happen, it doesn’t concern the auditors very much.
“We have not had any other incidents in prior audits and it was a record keeping error and I take responsibility for that as the CFO,” Lemos said. “I’m responsible for the information to be complete and accurate... The value for these assets was $2.5 million, to put that into perspective, the total value of all town assets is over $250 million so we have a significant amount of assets that we are required to track and maintain and so we want to make sure this does not happen again.”
Lemos added that the finance department takes pride in its past audits where they have always historically received unmodified audit opinions. Despite the $2.5 million, the auditors kept their unmodified opinion this year because it didn’t impact the overall financial statements.
The auditors also found a cash donation of $133,000 that was incorrectly documented. Lemos said that donation was received for one of their projects, and based on the information they received on the gift, it was initially categorized incorrectly. But upon further discussion with town staff, they were able to remedy the mistake.
The town’s Comprehensive Annual Financial Report is now available as well. Oro Valley ended the previous fiscal year (on June 30, 2018) with about $2.6 million more in the general fund than the previous year. All of the major local sales tax categories experienced increases ranging from about five to nine percent.
The town had $49.8 million in expenses related to governmental activities, a decrease of 11 percent from the previous year. The Community Center Fund had $6.7 million in revenues primarily from sales taxes and charges for services. The total expenditures were $6.5 million. Total expenses for the town decreased by about $5.4 million (7 percent) primarily due to changes in public safety-related pension obligations and contributions to the Public Safety Personnel Retirement System. The report indicates that an increase of $3.2 million in total revenues was largely due to sales tax collections from construction and residential building permit revenues coming in higher than anticipated.