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An Audit Report on the Engelman Irrigation District

December 2016

Report Number 17-017

Overall Conclusion

The Engelman Irrigation District (District) has not implemented sufficient controls to ensure that it can meet its financial obligations. A decrease in water sales revenue, coupled with no change in water sales rates since the District’s fiscal year 2012 and the discontinuation of the District’s maintenance tax as of that fiscal year, have increased the risk that the District may not be able to meet its financial obligations.

As of May 31, 2016, the District had a total of $477,783 available for operational and capital expenditures and a potential liability from a legal judgment that could total $2,499,683. The District had not made any financial arrangements to address that potential liability. In addition, the District’s expenditures exceeded total revenue for fiscal years 2014 through 2016.

The District also did not comply with certain requirements of Texas Water Code, Chapters 49 and 58; Title 30, Texas Administrative Code, Chapter 293; the Commission on Environmental Quality’s Water District Financial Management Guide; and the District’s policies. For example, it did not (1) determine what percentage of the District’s maintenance and operating expenses should be covered by its various rates, (2) develop written policies and procedures in most key business areas, (3) approve budgets in a timely manner, and (4) sufficiently bond its board members. Auditors communicated other, less significant issues separately in writing to District management.

The District Risks Being Unable to Meet Its Financial Obligations

The District’s water sales revenue decreased 60.5 percent between fiscal year 2014 and fiscal year 2016. Furthermore, the water delivery rates that the District paid to transport water from the Rio Grande River into the District’s reservoirs increased 130.1 percent from fiscal year 2012 to fiscal year 2015. However:

  • The rates the District charges its in-district customers for the water it sells have remained constant since fiscal year 2012.
  • The District eliminated its maintenance tax as of fiscal year 2012. While the District increased its flat fee 65.2 percent between fiscal year 2013 and fiscal year 2016 to make up for revenue lost, as of fiscal year 2016 the District assessed 8.6 percent less in revenue than it did in fiscal year 2012.

As of May 31, 2016, the District had $477,783 in all of its accounts from all revenue sources available for operational and capital expenditures. The District is not analyzing its revenue and expenditures and not adjusting the rates it charges, which increases the risk that it could deplete its financial reserves and be unable to meet its financial obligations.

The District’s budgeting process does not adequately project District revenues and expenditures. For fiscal years 2014 and 2016, the District’s board approved budget deficits and did not take measures to address the projected funding shortfalls. In addition, the District did not monitor and amend its budgets throughout the year to reflect actual revenue and expenditures. For fiscal years 2014 through 2016, actual expenditures exceeded revenues, which contributed to the depletion of the District’s reserve funds (see Figure 1 on the previous page for details). Approving budget deficits and not amending its budget to reflect its current financial status increases the risk that the District may not be able to implement measures in a timely manner to meet its financial obligations.

As of the end of fiscal year 2016, the District also had a potential legal liability totaling $2,499,683. While it recognized that potential legal liability in its financial statements, the District had not made financial arrangements to address it. As of fiscal year 2016, the District reported that, since 1995, it had spent approximately $431,516 litigating that matter. By not making appropriate arrangements to address the potential legal liability, the District may not be able to meet its financial obligations, which could place a significant financial burden on the District and its customers.

Auditors tested $46,595 (16.8 percent) of the $276,839 in water sale and flat fee revenues that the District collected in fiscal year 2016 and determined that the District correctly recorded payments it received and deposited those payments in a timely manner. Auditors also tested $83,663 (19.9 percent) of the $419,664 in fiscal year 2016 District expenditures and determined that, in general, those expenditures were properly supported, correctly recorded, allowable, reasonable, and approved by the Board. Two Board members or their designee signed all checks tested.

The District Did Not Comply with Certain Requirements

The District’s noncompliance with certain requirements has contributed to the increased risk of the District being unable to meet financial obligations. Specifically:

  • The District’s board did not determine what percentage of the District’s maintenance and operating expenses should be covered by its various rates, as Texas Water Code, Section 58.305, requires. Not making that determination on an annual basis, as statute requires, may have prevented the District from determining whether it needed to adjust its rates.
  • The District did not establish written policies and procedures to manage its budget process, as Texas Water Code, Section 49.199(6)(A), requires. In addition, the District’s board approved the budgets for fiscal years 2014 through 2016 from six to eight months after the start of the fiscal year, rather than prior to the start of the fiscal year, as Title 30, Texas Administrative Code, Chapter 293, requires. The District also did not comply with the Commission on Environmental Quality’s Water District Financial Management Guide, which diminished the effectiveness of the District’s budget as a financial tool to monitor revenues and expenditures. Specifically:
    • The District did not prepare reports comparing budgeted financial information to actual financial information (with monthly and year-to-date figures) on a monthly or quarterly basis to investigate and take necessary measures.
    • Minutes of the District’s board meetings did not include a copy of the approved budget.
    • The District did not make financial arrangements to address its $2,499,683 potential liability.
  • The District did not consistently enforce its policy on the water sales transactions that auditors tested. Specifically, in 4 (16 percent) of the 25 sales transactions tested, the District delivered water to purchasers that still owed the District funds for past purchases. For 9 (36 percent) of the 25 sales transactions tested, the purchasers did not pay for the water at the time they requested it. The District’s policy states that the District will refuse to accept applications for water for which there are delinquent water charges. The policy further states that “at the time of application for the water ticket, the applicant must make payment of water charge.”
  • Four members of the District’s board were bonded each for $5,000 less than the $10,000 amount that Texas Water Code, Section 49.055(c), required during fiscal years 2014 through 2016. Another board member was not bonded for any amount during that individual’s tenure on the board. The District did not establish written policies and procedures to address administrative bond requirements, as the Water District Financial Management Guide recommends.

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