Memorandum

City of Lawrence

City Manager’s Office

 

TO:

Tom Markus, City Manager

FROM:

Casey Toomay, Assistant City Manager

CC:

Diane Stoddard, Assistant City Manager; Brandon McGuire, Assistant to the City Manager

DATE:

September 26, 2017

RE:

Farmland Investments

 

Background

Recent reports about the remediation at the former Farmland Fertilizer Plant, now known as Lawrence VenturePark, have raised questions about the projected costs of remediation and the City’s ability to pay for these costs.  Specifically, questions were asked about the original projection for interest earnings from the investment of the Farmland Trust funds and the impact on actual interest earnings on the City’s ability to pay for the remediation into the future. 

 

The memo below provides a history of the City’s interest earnings estimates for these funds, addresses the status of interest earnings, and outlines efforts to improve the City’s processes regarding investment of City funds. 

 

Projected Interest Earnings

The City took receipt of approximately $8,500,000 from Kansas Department of Health and Environment when the City took over the responsibility for Farmland Remediation October 29, 2010. At that time, there were several estimates of earnings and expenditures over a 30-year period.

 

In March of 2010, a memo from former City Manager David Corliss regarding possible Farmland acquisition was presented to the City Commission.  The memo included a link to Frequently Asked Questions, which included an analysis estimating interest earnings of $4.4 million, over the 30-year term, assuming an interest rate of 3.35% and an escalation cost of ten percent.

 

It is unclear who was the precise author of this analysis or where the assumptions behind it came from.  It appears no current city staff were involved in any discussions of the financial projections.  Former Finance Director Ed Mullins, who oversaw the City’s investments in 2010, left the City in September of 2014, and former City Manager David Corliss left the City in May of 2015. 

 

According to a footnote in the City’s Comprehensive Annual Financial Report for FY2010 (see pages 57-58), dated June 24, 2011, prepared by the City’s Finance Department, the final projection was an average interest rate of 2.0%, with estimated interest earnings of $2.6 million over the 30-year term.  

 

Finance Director Bryan Kidney, who began work for the City in January of 2015, did preliminary work on an updated Farmland projection pursuant to an inquiry from then-Commissioner Stuart Boley in May of 2015, but was unable to get agreed upon projections of the needed cash flows from the City’s Stormwater Engineer and Farmland Project Manager, as the scope of the operational needs at that time was influx.  The preliminary projection at that time assumed an interest rate of 0.40% with estimated earnings from 2016 through 2034 of $320,247.

 

Actual Interest Earnings

The remediation funds were placed in a trust account in 2010 and restricted only to be used for remediation costs. The actual interest rates have been much lower than the projected 2.0%.  According to bankrate.com, the one-year CD rate in 2010 was 0.48% and by 2016, the rate was 0.27%. 

 

The actual interest earned since 2010 totals $159,414 through 2015.  A breakdown by year is provided below.

 

2017 YTD

$701.62

2016

 $0.0

2015

 $4,749.31

2014

 $43,366.11

2013

 $18,264.20

2012

 $24,649.75

2011

 $62,863.97

2010

 $5,520.83

 

It should be noted that investments that matured in December of 2015 were not reinvested until 2017, resulting in no interest earnings in 2016.  (In 2015, investments were handled by a former Assistant Finance Director.  It appears Kidney directed the Assistant Director to reinvest the funds, however, the investment was not made.  In accordance with the trust and with no direction from the City regarding the investment, the trustee returned the funds to a zero-interest account.)  The interest earnings for 2016 if the funds had been reinvested are estimated to be $19,869. 

 

Kidney first realized the funds were not in an interest-bearing account in 2017 during the financial audit of FY 2016.  Accrued interest was recorded on an annual basis so there was no other incremental method to monitor what funds were accruing interest.  Upon learning of this oversight, Kidney immediately contracted with an investment advisor to assist with all investments.  Additional changes have been made and are outlined below.       

 

Process Improvements Regarding Investments

The Farmland Trust is one of several pools of funds available for investments.  As interest rates were dropping in 2014, it appears the task of actively managing the City’s investments was discontinued.  The former Assistant Finance Director began in May of 2014, just four months before Mullins’ departure, and it appears was never trained on how to manage the City’s investment of idle funds.  I served as Interim Finance Director during fourth quarter 2014.  Mullins provided me with a brief overview on how to do the investments on his next to last day, however, I did not make any investments in fourth quarter 2014.  Some funds were in the City’s Municipal Investment Pool; however, most funds were just kept in the City’s regular account at the bank. There were no cash flow systems in place and no monthly reconciliation of trust funds.

 

Upon taking over in January of 2015, Kidney identified investment of idle funds as one of the many areas in the Finance Department that needed improvement.  One of the first improvements made in the Finance Department was to hire a Senior Accountant.  This position increased the number of accountants to 2.0 FTEs, doubling the number of people responsible for the daily accounting needs of the entire organization.  This position also took over management of the City’s investments.

 

However, the Senior Accountant who was hired in May of 2015 left the City in August of 2016.  In October of 2016, the Assistant Finance Director left the City after the position was eliminated through the budget process.  The Senior Accountant position was filled in August of 2016 and was responsible for the City’s investments until leaving City employment in August of this year. 

 

As of August 2017, Kidney is responsible for managing the City’s investments.  He has worked with our investment advisor over the past several months to establish a solid investment plan and to improve processes and reporting. 

 

The investment process now includes a monthly cash flow analysis.  Monthly investment reports are also posted online.  Beginning with the fourth quarter of 2017, accrued interest will be recorded monthly as opposed to annually for trust funds and a comprehensive reconciliation of all funds will occur.  These improvements create a check and balance and ensure the City’s investments are being monitored more frequently so adjustments can be made, if needed, in a timelier manner.

 

Summary

The original projection for interest earnings was based on a set of assumptions established in 2010 and it appears those assumptions were never revisited.  Just as the City did not have a robust capital improvement plan prior to 2015, there was no long-rage financial forecast.  Bryan Kidney has led implementation of both of those processes in just two years.  A project team is working toward determining the scope of future operational needs for the remediation program at the site given recent operational challenges.  Once that assessment is complete, cash flows can be projected and the projection for interest earnings can be updated. 

 

There are additional improvements that are needed.  The Senior Accountant position that is currently vacant needs to be filled as soon as possible.  Documentation of procedures and succession planning in the Finance Department are needed to ensure multiple people in the City can manage the City’s investments to avoid disruption due to employee turnover in the future.