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Audit of Walton County - FINDINGS AND RECOMMENDATIONS (continued three)

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Dispositions of Tangible Personal Property

(111) Our tests of tangible personal property deletions disclosed several instances of noncompliance with Chapter 274, Florida Statutes, and/or Chapter 10.400, Rules of the Auditor General. In addition, property disposals were not always timely posted to the property records or recorded accurately to the accounting records.

(112) Section 125.35(1), Florida Statutes, authorizes the BCC to sell County-owned personal property, whenever the BCC determines it is in the best interests of the County to do so, to the highest and best bidder. Also, Section 274.05, Florida Statutes, provides that a governmental unit has the discretion to classify as surplus any of its property that is obsolete or the continued use of which is uneconomical or inefficient, or which serves no useful function. Chapter 274, Florida Statutes, provides two alternative methods of disposing of property determined to be surplus:

· The surplus property may be offered for sale or donation to other governmental units in the county or to private nonprofit agencies. If the surplus property is offered for sale and no acceptable bid is received, the County shall offer the property to other governmental units or private nonprofit agencies. The County must accept the best bid.

· The surplus property may be disposed of for value without bids to the State, any governmental unit, or to any political subdivision or, if the property is without commercial value, it may be donated, destroyed, or abandoned. If the County estimates the value of the property at under $5,000, it may be disposed of in the most efficient and cost-effective means as determined by the County. Sales of property estimated to be $5,000 or more must be sold only to the highest responsible bidder, or by public auction, after publication of notice in a manner specified by law.

(113) Section 274.07, Florida Statutes, requires that the authority for disposal of property be recorded in the minutes of the county and in the property records required by Section 274.02, Florida Statutes. Section 10.470, Rules of the Auditor General, requires that for dispositions of property, the individual property records must include the date, authority, and manner of disposition; identity of employee witnessing the disposition, if the property was cannibalized, scrapped, or destroyed; receipt number and dollar amount if the property was sold; and receipt number and value of insurance proceeds if the disposition was the result of a casualty loss. The individual property record for the property disposed of should be transferred to an inactive and disposed property file and the cost or value of the item disposed of should be removed from the control account at the time of disposition.

(114) We selected a sample of 30 BCC tangible personal property items to determine whether these items were disposed of in accordance with the above-noted laws and rule. Because of the deficiencies in the BCC’s tangible personal property records and the lack of a complete physical inventory, as discussed in paragraph 110, the reliability of the BCC’s property records as a source of property disposals was diminished. Accordingly, our sample consisted of 15 items selected from the subsidiary ledger that had been identified as having been deleted and 15 items selected from the general ledger account used to record revenues from the sale of equipment. Our test disclosed the following deficiencies regarding tangible personal property disposals:

· The 15 items selected from the general ledger account consisting of heavy equipment sold by the BCC either by public auction or request for bids had a total cumulative cost of $566,864. None of these items had been identified as disposed in the property records contrary to Section 10.470(2), Rules of the Auditor General, which requires that full particulars of dispositions be recorded in the property records.

· Two items selected from the subsidiary ledger had been sold or traded-in but the disposal had not been recorded in the property records in a timely manner. One item costing $3,183 was sold on March 8, 1991, but not identified as disposed in the property records until March 25, 1997. The other item costing $81,344 was approved by the BCC on January 25, 1994, to be traded-in and the trade took place on March 8, 1994; however, the item was not identified as disposed in the property records until March 14, 1997.

· Twenty items tested costing a total of $561,290 were disposed of without first obtaining BCC approval. Two of these items were approved for disposal by the BCC 23 days after their disposal, while the remaining 18 items were approved for disposal by the BCC on May 26, 1998, from seven to ten months after their actual disposal.

· Two items tested were traded-in for new equipment of similar nature; however, the new equipment was recorded in the property records at the total cash value less the trade-in value of the old assets resulting in a net $62,000 understatement of the costs of the new items. In one instance, an item costing $81,344 was traded in for $50,000 on a new item costing $104,108; however, instead of being recorded at its actual cost, the new item was recorded on the property records at $54,108 (the actual cost less the trade in allowance). In the other instance, an item costing $63,927 was traded in for $12,000 on a new item costing $116,790; however, instead of being recorded at its actual cost, the new item was recorded on the property records at $104,790 (the actual cost less the trade in allowance).

(115) Section 274.06, Florida Statutes, requires that any sale of property the value of which the governmental unit estimates to be $5,000 or more shall be sold only to the highest responsible bidder, or by public auction, after publication of notice not less than one week nor more than two weeks prior to sale in a newspaper having a general circulation in the county in which is located the official office of the governmental unit. During the period October 1996 through March 1998, the BCC commissioned a private auction company to auction a total of 22 heavy equipment items owned by the BCC on three different occasions. Total proceeds of $364,280 (net of 5 percent commissions paid to the auctioneer) were received by the BCC as a result of the auctions held. All three auctions were held outside of Walton County geographical boundaries. Contrary to Section 274.06, Florida Statutes, two of the auctions were not advertised within Walton County (they were only advertised outside Walton County).

(116) We recommend that the BCC and the Clerk implement appropriate controls to ensure that future disposals of tangible personal property are accurately recorded to the accounting records, approved in advance by the BCC, promptly recorded to the subsidiary property records, and accomplished in accordance with Chapter 274, Florida Statutes, and Chapter 10.400, Rules of the Auditor General.

(117) Several heavy equipment items were disposed of after having been owned for a relatively short period of time. The BCC did not, of record, document the need for these items to be disposed of, nor did they demonstrate the economic feasibility of such disposals given the long-term useful lives of these assets.

(118) The BCC’s audited financial statements reported total equipment deletions of $2,901,254 for the period October 1995 through September 1997. These deletions included the sale of 23 heavy equipment items (including 16 dump trucks, 4 motor graders, 2 pickup trucks, and 1 backhoe) costing a total of $1,689,405.33, by means of bid requests or public auction. As shown in the following tabulation, these items were only held from 3 months to 1 year and 10 months before being disposed of:

(119) In response to our inquiry as to why these long-lived assets were disposed of after having been owned for a relatively short period of time, the BCC’s Administrative Supervisor provided us with numerous excerpts from the BCC minutes and various other documents and stated that such documentation included a purchase plan for trucks and other equipment that resulted in County savings. However, our examination of this documentation disclosed no explanations as to why the above-noted equipment items were disposed of. Furthermore, although requested, we were not provided with documentation indicating whether these items were replaced and the costs associated with their replacement. Absent such information in the BCC’s public records, it was not apparent, of record, how the BCC determined the economic feasibility of disposing of these assets given their typical long-term useful lives and the relatively short time they were owned by the BCC prior to disposal.

(120) We recommend, for future heavy equipment disposals, that the BCC document the necessity and economic feasibility for such disposals.

(121) The Chairman, in his written response to this finding, stated a belief that the audit revealed that the County actually saved money as a result of the heavy equipment dispositions. He further stated that "an extensive and detailed explanation of the bidding procedure for the disposal of heavy equipment and the reasons for doing so" had been provided. As indicated in the finding, the documentation provided did not identify which equipment items had been replaced, the costs of any replacements, and the reasons for disposition of the items. Absent this information, a determination as to the extent of savings, if any, could not be made.

Bond Issues

(122) Pursuant to Article VII, Section 12 of the Constitution of the State of Florida, counties with taxing powers may issue bonds, certificates of indebtedness, or any form of tax anticipation certificates, payable from ad valorem taxation and maturing more than 12 months after issuance only: (1) to finance or refinance capital projects authorized by law and only when approved by vote of the electors who are owners of freeholds therein not wholly exempt from taxation or (2) to refund outstanding bonds and interest and redemption premium thereon at a lower net average interest cost rate. Section 125.013 and Chapters 130, 131, 132, and 159, Florida Statutes, also grant authority for counties to issue long-term debt.

(123) Our audit included an examination of the $1,500,000 Series 1995 Taxable Transportation Facility Revenue Obligations issued on November 8, 1995, to help finance the construction of a truck stop facility, and the $2,525,000 Series 1996 General Obligation Refunding Bonds issued on January 8, 1997, to advance refund the outstanding Series 1988 General Obligation. Refunding Bonds. Note 12 to the BCC’s 1996-97 fiscal year audited financial statements states that the advance refunding resulted in an economic gain of $276,426. Our detailed findings as to these long-term debt issues are discussed below.

Transportation Facility Revenue Obligations

(124) The County issued $1,500,000 Series 1995 Taxable Transportation Facility Revenue Obligations to help finance the construction of a truck stop facility owned and operated by D & H Oil Company (D & H Oil). Although the County is required to apply the proceeds of special fuel tax revenues received pursuant to Section 206.875, Florida Statutes, to pay debt service on the obligations, it had only paid $40,577.96 towards the $753,728.30 of principal and interest due through September 1998. The remaining $713,150.34 of principal and interest due was paid by D & H Oil, which has filed a petition requesting that the Court order the County to use special fuel revenues generated by the truck stop to repay the principal and interest paid by D & H Oil.

(125) At a May 15, 1995, BCC meeting, the Comptroller for D & H Oil Company, Inc. (D & H Oil), a private corporation, presented to the BCC a feasibility study and information on a proposed truck stop facility. The Comptroller made a request that the BCC issue $1,500,000 of revenue obligations to partially finance the truck stop facility and to pledge certain revenues levied upon special fuels pursuant to Chapter 206, Florida Statutes, to secure payment of the obligations. The feasibility study provided economic estimates on fuel volume and traffic counts and other information such as the estimated total investment of the project and a seven-year projection of new taxes to be generated by the truck stop.

(126) According to the feasibility study, the total project cost was $3,135,000 with a total projected benefit to the County of $5,456,724 from motor and special fuel taxes after seven years. Purportedly, this amount would be sufficient to pay off the $1,500,000 of principal and related interest for the obligations, which were to be payable over seven years in 84 monthly installments. Although the feasibility study did not include an estimate of interest payable over that period, based on information we obtained from the County, the estimated $5,456,724 would be sufficient to cover interest and principal payments due during the seven-year period. Additionally, the County would continue to benefit from motor and special fuel taxes collected subsequent to the payoff of the obligations. According to the County Attorney, he reviewed the study at the time it was presented; however, he made no attempt to verify the data presented in the feasibility study because there was no financial risk to the County since the financial institution to which the debt service payments are payable agreed that in the event of default by D & H Oil, the County would have no responsibility or liability to pay the obligations.

(127) The Series 1995 obligations were issued pursuant to Resolution No. 95-37 to help finance the construction of the truck stop facility to be owned and operated by D & H Oil. According to Resolution No. 95-37, the truck stop facility was to provide gainful employment for the residents of the County; make a significant contribution to the economic growth of the County; expand the tax base of the County; and advance the economic prosperity and general welfare of the citizens and residents of the County. Benefits to D & H Oil included the use of the County as a means of obtaining additional financing necessary to construct the truck stop facility and obtaining Federal Community Development Block Grant funds needed to construct road access from existing County roads to the truck stop facility.

(128) Resolution No. 95-37 further provided that the County was to acquire a leasehold interest in the truck stop facility and provided that the debt was to be secured by amounts levied and collected under the provisions of Section 206.87, Florida Statutes, and received by the County pursuant to Section 206.875, Florida Statutes. Prior to issuance, the Series 1995 Obligations were validated by the Circuit Court of the First Judicial Circuit.

(129) Details of the agreement between the County and D & H Oil were established by County Resolution No. 95-60, which provided that D & H Oil was to lease the truck stop facility to the County and the County was to sublease the facility back to D & H Oil. Accordingly, the County and D & H Oil entered into a lease agreement and sublease agreement.

(130) Pursuant to section 3 of the lease agreement, the County is to apply the proceeds of the pledged special fuel tax revenues to pay the debt service on the obligations as provided for in Schedule 1 of Resolution No. 95-60. Pursuant to section 2 of the sublease agreement, D & H Oil must pay rent to the County in the amount necessary to pay the debt service on the obligations, to the extent that amounts received by the County from motor and special fuel taxes are not sufficient to pay the debt service. Resolution No. 95-60, Section 2, establishes D & H Oil as the guarantor of the payment of debt service on the obligations. Resolution No. 95-60 provides that the principal installment payments shall commence on the first day of the month following the month in which the issuer receives the first proceeds of the special fuels revenues attributable to the project, but in no event later than July 1, 1996.

(131) According to information provided to us by the financial institution to which the debt service is payable, a total of $753,728.30 of principal and interest was due and paid through September 1998. As noted above, the County, pursuant to section 3 of the lease agreement, was required to pay the debt service on these obligations; however, as of September 1998, the County had only made two debt service payments totaling $91,230.26. One payment was made on November 18, 1996, in the amount of $50,652.30 after the County received that amount from D & H Oil. Another payment was made on January 24, 1997, in the amount of $40,577.96. The net effect is that the County has paid $40,577.96 towards retirement of the principal and interest with the remaining $713,150.34 of principal and interest being paid by D & H Oil. In April 1998, D & H Oil filed a " Petition for Declaratory Judgement" with the Clerk of the Circuit Court asking that the Court order the County to use special fuel revenues generated by the truck stop to repay D & H Oil the amount of principal and interest paid by D & H Oil during the time that the County was not making such payments. A final hearing on the matter was scheduled for November 20, 1998.

(132) The Florida Department of Revenue (FDOR) distributes special fuel tax revenue to the County pursuant to Section 206.875, Florida Statutes. According to the above-noted petition, there was some question as to the amounts of special fuel revenues received by the County that were directly attributable to the truck stop. Based on correspondence from the FDOR dated in November 1997 and February 1998, it appears that the FDOR has been able to make calculations as to the amount of special fuel tax revenues attributable to the truck stop. However, according to the Clerk, there remained some confusion as to how the revenues attributable to the truck stop were to be calculated. The Clerk further advised that a priority has not been placed on resolving the problem or calculating the amount of pledged revenue and no further payments have been made pending the outcome of the litigation.

(133) We recommend that the BCC and the Clerk continue their efforts to determine a method for tracking the pledged tax revenues and determine the extent to which special fuel tax revenues received by the County attributable to the truck stop exceed, or are less than, the $40,577.96 of principal and interest paid by the County as of September 1998. We also recommend that the BCC and the Clerk, as provided for in the lease and sublease agreements, either make any additionally required debt service payments or, if sufficient pledged taxes have not been received, initiate proceedings to recover such amounts as are necessary from D & H Oil to cover the deficiency. Subsequently, on February 5, 1999, the Circuit Court of the First Judicial Circuit issued a Modified Final Order providing that the County was to reimburse D & H Oil $461,566.24 relating to fuel sold between January 1997 and December 1998. The Modified Final Order further provided that the County was to apply to debt service payments four cents of the revenues attributable to every gallon of diesel fuel sold at the truck stop facility until the indebtedness was paid in full.

Bond Issuance Method

(134) The BCC did not, of record, demonstrate that a financial or market analysis was done prior to the issuance of the $1,500,000 Series 1995 Taxable Transportation Facility Revenue Obligations (issued on November 8, 1995) and the $2,525,000 Series 1996 General Obligation Refunding Bonds (issued on January 8, 1997), and did not, for either of these debt issues, utilize an independent financial advisor. Use of a financial advisor can help assure that informed and objective decisions are made by County officials, particularly as to the most appropriate method of issuance.

(135) Bonds may be sold by competitive bid, negotiated sale, or by private placement (a type of negotiated sale). For competitive bid sales, the benefits achieved through competition, such as being able to justify that the bonds were sold at the lowest interest cost given the prevailing market conditions or demonstrating to the public that the bond sale process was conducted fairly, must be weighted against reduced opportunities to generate investor interest in the securities. For negotiated sales, the issuers should be aware that they have greater flexibility in structuring their offering or in developing a marketing plan to attract investors; however, they also face the risk that their bond sale process may be open to charges of favoritism or that the price negotiated for the bonds may not be as beneficial as would have been obtained in a competitive offering.

(136) According to the Government Finance Officers Association (GFOA)’s 1994 publication COMPETITIVE V. NEGOTIATED – HOW TO CHOOSE THE METHOD OF SALE FOR TAX-EXEMPT BONDS, the method of bond sale is one of the first decisions made by a local government in preparing to issue debt and is an important factor in determining the overall cost of financing, including both upfront issuance costs and debt service costs over the life of the bonds, and in ensuring public confidence in the sale process. Therefore, it is imperative that the County ensure that the most cost-effective method of sale is used when issuing long-term debt. The GFOA publication pointed out that disadvantages associated with negotiated sales can be mitigated, in part, by employing a financial advisor who is independent of the bond transaction to advise the issuer and assist in negotiating the award of the underwriting contact. The GFOA, in its March 1997 publication RECOMMENDED PRACTICES FOR STATE AND LOCAL GOVERNMENTS, recommends for bond sales that are not competitively bid that either an employee of the issuer or an outside professional other than the issue underwriter, who is familiar with and abreast of the condition of the municipal market, be available to assist in structuring the issue, pricing, and monitoring sales activities.

(137) Section 218.385, Florida Statutes, sets forth procedures for the sale of general obligation and revenue bonds, as defined in Section 218.369, Florida Statutes, at a public sale by competitive bid or by negotiated sale. Pursuant to Section 218.369, Florida Statutes, general obligation and revenue bonds include " general obligation bonds, revenue bonds, special assessment bonds, limited revenue bonds, special obligation bonds, debentures, and other similar instruments ...." If the local governing body decides to issue bonds by negotiated sale, it must provide specific findings as to the reasons requiring the negotiated sale in the resolution authorizing the sale.

(138) The Series 1995 obligations were issued by private placement and did not involve the use of an underwriter, whereas the Series 1996 bonds, issued pursuant to Resolution No. 96-45, were issued through a negotiated sale and the bonds were purchased by an underwriter on January 8, 1997. The BCC did not, of record, demonstrate that a financial or market analysis was done prior to the issuance of these debt issues and did not, for either the 1995 Series obligations or the 1996 Series bonds, utilize an independent financial advisor (i.e., independent from the underwriter).

(139) It is critical that the BCC be fully informed when making decisions with respect to debt issuance that will impact taxpayers now as well as in the future. Use of a financial advisor can help ensure that informed and objective decisions are made by County officials. Therefore, to promote public confidence in the long-term debt issuance process and ensure that an independent and adequate determination is made as to the best issuance method, we recommend that the County, for future long-term debt issues, maintain documentation evidencing the conditions (e.g., issuer characteristics, market conditions, and type of financing) favoring the selected type of issuance, including a financial or market analysis prepared by a qualified and independent financial advisor or equivalent local government staff.

Selection of Underwriter and Legal Counsel

(140) In acquiring the services of an underwriter, bond counsels, and other attorneys in connection with the $1,500,000 Series 1995 obligations and the $2,525,000 Series 1996 bonds, the County obtained such services without benefit of competitive selection procedures and written agreements. Documentation supporting issuance costs for these debt issues was generally not available or not in sufficient detail to allow a determination as to whether such costs were appropriate.

(141) For both the Series 1995 obligations and Series 1996 bonds, related issue costs were paid from proceeds generated by the issuance of long-term debt. As previously noted, the County, using special fuel tax revenues received pursuant to Section 206.875, Florida Statutes, is responsible for making principal and interest payments necessary to retire the Series 1995 debt. The Series 1996 bonds debt service is payable from ad valorem taxes.

(142) Pursuant to section 3 of the County’s lease agreement with D & H Oil, the County deposited the proceeds of the Series 1995 obligations with a financial institution, and a portion of the proceeds was applied to the costs of the issuance. Issuance costs associated with the Series 1996 bonds were paid by a paying agent. Issuance costs associated with the Series 1995 and 1996 debt issues are summarized in the following tabulation: