Faulty interest projections and financial mismanagement could leave the city shorthanded when it comes to paying for contamination cleanup at the former Farmland fertilizer plant.
The city recently discovered that millions of dollars sat un-invested — generating zero interest — for more than a year and a half without city staff realizing it.
The city’s accounting process and employee turnover are both cited for the oversight, and Assistant City Manager Casey Toomay said the city implemented improvements to its process as soon as it discovered the money had gone un-invested.
“I think it was a combination of employee turnover and some of our accounting procedures that were done on a yearly basis as opposed to a monthly basis,” Toomay said. “We have since corrected those.”
When the city took over the Farmland property in 2010, the cleanup was projected to cost at least $13 million. An $8.6 million trust fund was left to the city to pay for the cleanup. The city was counting on the trust fund dollars generating interest to help make up the difference.
But come to find out, the city inadvertently left about $4.6 million of the trust fund money in an account that didn't bear interest.
The approximately $4.6 million sat un-invested for all of 2016 and most of 2017, Finance Director Bryan Kidney said in an email to the Journal-World. A city memo states money was not re-invested after it reached maturity in December of 2015, which Kidney realized during the financial audit of fiscal year 2016.
The memo states that in 2015 investments were handled by a former assistant finance director, whom it appears Kidney directed to reinvest the funds. Kidney said that the city estimates the interest income for the 21-month period the money was not invested would have been about $48,000.
Financial reviews are now done monthly and, as of August 2017, Kidney is responsible for managing the city’s investments, according to the memo. Toomay said the city is also recruiting to fill the city’s senior accountant position that has been vacant since August 2016.
The uninvested funds, however, are only a small part of a potentially large shortfall in Farmland clean-up funds.
A larger factor is the projected interest rate the city would receive on the trust fund dollars was grossly overestimated. The interest rate projected in 2010 when the city was considering taking over Farmland is more than 10 times what the city is now estimating it will earn.
When the idea was being discussed, one of the major risks cited by the city at the time was the possibility of the cost of the cleanup exceeding the amount provided to the city via the trust. However, the 2010 interest projections indicated the cost would be covered.
Regarding the interest projections, City Manager Tom Markus recently told the Lawrence City Commission that he suspects that analysis was done internally instead of by a consultant. Markus, who replaced former City Manger Dave Corliss last year, said those actions were taken under Corliss and former Finance Director Ed Mullins, but noted that isn’t to point blame.
“To the extent of actually who put pen to paper and created that, you know I’m not going to go into details on employees in the operation beyond naming the management people,” Markus said. “And I think Dave Corliss would agree with me that, ultimately, if it’s on my watch, it’s my responsibility.”
The decision by the City Commission to take ownership of the Farmland property was a controversial one, as community members expressed concern about the city being responsible for large amounts of environmental cleanup. But commissioners were reassured that the city had a plan that would stretch the dollars in the environmental cleanup trust fund that came with the Farmland property.
The latest information from the city, however, creates questions about why city officials would use interest rate projections that were so much higher than what the market was paying at that time. For example, a recent city memo noted that a one-year certificate of deposit was paying 0.48 percent interest in 2010. The city's analysis completed at the time, however, predicted the city would earn an interest rate of more than 3 percent on the trust fund dollars.
The original projection made in 2010 assumed an interest rate of 3.35 percent, with $4.4 million in interest generated over 30 years. The next year that projection was reduced significantly, down to 2 percent and $2.6 million in interest generated over 30 years, according to the memo.
Toomay said it is unclear what caused the original projection to be revised so significantly in 2011, but that the factors and assumptions likely changed because different people did the projections at different times.
“A review of the records doesn’t have much justification or explanation,” Toomay said. “There is just, here is the projection at this point and here is the projection at this point.”
The city took ownership of the former Farmland Industries fertilizer plant with the plan of using part of the 467-acre site for its new business park, VenturePark. The city paid nothing for the property and received the $8.6 million trust fund to pay for remediating decades of nitrogen fertilizer spills that contaminated the groundwater. The city accepted full responsibility, via a contract with the Kansas Department of Health and Environment, for the cleanup.
Thus far, VenturePark, which has received several million dollars in street, sewer and other infrastructure improvements, has yet to attract its first business tenant.
Another aspect looming over the property is the rising cost for remediation. The city has been using a pipeline that runs from the site to the other side of the Kansas River to distribute the nitrogen-contaminated water to farmers north of Lawrence, where it can be added to fields as fertilizer. But recently, farmers have been using less water from the pipe, causing water storage on the Farmland site to approach capacity.
The city recently put out a request for proposals for a contract to transport the estimated 10-million-gallon water surplus to additional farmers. The cost is estimated to be approximately $40,000 for every one million gallons hauled, according to a report from Markus.
Correction: A previous version of this article misstated the amount of interest the city estimated would have been generated for the 21-month period the money was not invested.