First Reading: Bonding funds — funding what?

Nothing makes people run for the hills quite like an audit. It doesn’t matter if you’re an individual taxpayer or a business — that notice can come at any time. It can also come to recipients of the state’s bond proceeds.

While most of the discrepancies found in the state’s 2006 bonding law have been resolved or are working toward a resolution, the Office of the Legislative Auditor has advised the Legislature to examine its policies and possibly tighten its requirements to make sure future bonds are managed more responsibly.

“We prefer specificity (in the law) so we know exactly what you meant,” Legislative Auditor James Nobles told the House Capital Investment Finance Division Jan. 29. “If there has been a change in what you want or the entity wants, we ask that it be formalized.” Otherwise, there may be a lawsuit because of an unauthorized use of bond funds.

“You would literally have to cancel the bonds and reissue them for a different purpose,” said Rep. Alice Hausman (DFL-St. Paul), division chairwoman.

Being good stewards

Nobles said the audit was conducted because it was an area that needed more attention. Because of cost, his office will not be able to do this kind of audit on an annual basis. He also said a bond audit hasn’t been completed “in a long time.”

“This hearing says that you take it seriously,” he said. “You need to make sure you give proper heed to the law. You need to make sure your procedures are working.”

Since bonding money comes with tighter parameters and strings attached and a lot of the discussion taking place up front, Nobles said the discussion needs to be followed through the entire process as entities spend the money to avoid any confusion.

“There are lots of things one can learn from an audit,” Hausman said. “One of the things we need to ask ourselves is if rigidity is built in. Does language allow for flexibility? That’s the question that occurs to me as to our role in this.”

Nobles and Jim Riebe, the audit manager, said that even though they haven’t been doing much audit work in the bond area, they wouldn’t call this audit bad.

“We found that controls were generally good,” Nobles said. “Some things just need some tightening. Agencies are out there trying to do the right thing; this is just a complicated area.”

Riebe said he felt, “very strongly that in each case (the entities) thought they were being good stewards with the money.”

But he and Nobles also said Minnesota Management and Budget needs to play a larger role by doing various things, including:

• verifying the sufficiency of political subdivision matching funds, as required by state statute;

• developing a process to track property purchased or bettered with general obligation bond proceeds and ensure that entities file declarations with the applicable county to protect the state’s interests;

• monitoring actual use of bond funds by reviewing financial activity recorded on the state’s accounting system and/or requiring periodic and final accounting reports for each capital project; and

• providing better guidance to entities that grant bond funds to political subdivisions as to the level of fiscal monitoring required, and periodically review entity practices to ensure oversight agencies adequately monitor political subdivision grants.

What they found

The audit looked at 25 entities and examined 60 bond appropriations. Capital projects authorized in the 2006 bonding law totaled about $1 billion. As of March 31, 2008, about $460 million had been spent, and of that, $385 million was audited. Of the $385 million, there were $1.5 million in questioned costs.

MnSCU

Minnesota State Colleges and Universities’ use of general obligation bond proceeds for the purchase and leaseback of a building may not comply with state constitutional and other legal requirements.

In August 2006, MnSCU acquired an existing building for St. Cloud Technical College and leased 85 percent of the building back to the previous owner for three and a half years. While the college plans to remodel and use the space for classrooms when the lease expires in 2010, during the lease term, 85 percent of the building is being used by a nonprofit organization for a private, commercial purpose. The Minnesota Constitution requires that all general obligation bond proceeds be used for a “public purpose,” and state statutes require that property acquired with general obligation bond funds be used to support a “government program.”

These requirements still apply when the building and property is leased to another entity. In this case, Reibe said the use of the leased space had no connection to a government program or public purpose.

MnSCU financed 95 percent of the $3.5 million purchase with general obligation bond proceeds by using its appropriation of $3.4 million from the law and used other funds for the remainder of the purchase price.

MnSCU must return revenues from the lease to Minnesota Management and Budget as required by statute. The lease revenues were deposited in the college’s operating account and total lease revenues over the three and a half year term of the lease will total more than $1 million.

Riebe said it is recommended that MnSCU pay 95 percent of the revenues from the lease to Minnesota Management and Budget to be in compliance with statute.

Minnesota Zoo

The Minnesota Zoo may not have complied with restrictions on bond funds designated for asset preservation for some expenditures, and did not submit reports on asset preservation projects to the Legislature, as required by statute.

The zoo used asset preservation bond funds for the following questionable expenses, according to the report:

• $160,000 for a new holding pool and surrounding area;

• $107,000 to purchase and situate newly acquired portable classrooms to replace classrooms that had been demolished as a result of the new Central Plaza construction; and

• $431,000 for new construction and additional space for the zoo’s Minnesota trail exhibit, as a part of major improvements to the exhibit. The zoo requested $1.9 million in asset preservation funds for this exhibit. However, neither the zoo nor Minnesota Management and Budget had evidence that justified the zoo’s use of asset preservation funds to finance the new construction portion of the trail renovations.

In addition, the zoo did not submit reports on asset preservation projects to the Legislature, as required. Although the zoo is generally exempt from this statute, it was unaware that the 2006 law specifically required compliance with this provision.

Using bonds for payroll

Some entities used bond funds for internal project management costs without clearly connecting those costs to authorized capital projects.

Riebe said Minnesota Management and Budget did not have a formal, written policy regarding the eligibility of paying internal project management costs from bond funds. Several entities charged payroll costs and, in some cases, supplies to bond funds; other entities charged a fixed percentage of payroll costs to bond accounts.

The Minnesota Zoo, the Historical Society, and Minnesota State University, Mankato periodically charged their appropriations for payroll for various employees. As of March 31, 2008, these three entities had budgeted a total of $659,000 for these types of costs.

Rep. Al Juhnke (DFL-Willmar) said he was troubled to see any bonding money going to internal salaries.

“So we’re paying salary and benefits for that person to be there anyway, and then if you put bonds on top of that we’re paying twice to that entity or billing it through the department and they’re using it internally for other things, clearly,” he said. “But even above that you’re paying more because bond funds have interest to pay back. Now you’re paying a salary you have to pay back over 20 years and it costs you more. I think it is troubling and we need to be very careful.”