EXTRA CONTENT: Audit shows Arena construction costs had big impact on city

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An oft-delayed audit of the city of Corbin’s financial activities for the 2009 fiscal year shows the city’s finances are in good health despite some unexpected expenses and the cost of finishing a 5,000-seat arena.

Wallace Smallwood, with the accounting firm of Cloyd and Associates, PSC presented the audit to commissioners during their regular monthly meeting Monday. His firm gave the city an "unqualified opinion" for almost the entirety of city government which is the cleanest opinion a government entity can get during its annual audit.

"To make a long story short, everything is in pretty good shape," said City Manager Bill Ed Cannon following the audit presentation.

The city had an ending cash balance of $3,056,534, over $2 million less than the previous fiscal year when the city finished with $5,454,090. The decrease, Smallwood explained, was due mostly to expenses regarding the Southeast Kentucky Agriculture and Exposition Center (The Arena) and an unanticipated mud slide behind the Corbin Center for Technology and Community Activities that cost about $400,000 to repair.

The city’s General Fund had approximately $11 million in revenue, but there was a decrease of $2,792,869 – again due to The Arena.

The city’s long-term debt increased by $7,640,673 representing money borrowed to finish The Arena. Auditors estimate the project’s total cost at $30 million. Though the city borrowed $8 million during the 2009 fiscal year, it was loaned another $3 million this current fiscal year to finish construction.

The city has an overall indebtedness of $10,668,650 which included pension obligations, a bank note for improvements to the city’s recreation facilities, a loan for a new fire truck, bonds on the new Corbin City Hall, and loans from the Kentucky League of Cities for Arena construction.

Normally completed and approved by the commission by the November following the end of the fiscal year, this time around leaders say the audit was delayed by financial records regarding The Arena. The fiscal year ended June 30, 2009.

Earlier this year, SMG Worldwide Event and Convention Venue Management had an audit performed that showed the company had realized $81,365 in net profit for The Arena. That figure represents a four-month period when the facility opened in March 2009 until the end of June. $40,000 of the "profit" was fees paid to SMG directly from the city. The city gives $10,000 to the company to operated The Arena.

According to the city’s audit, The Arena actually lost $262,459 during the four-month period. Smallwood noted that the audit conducted by SMG did not take into account depreciation of the building and fixtures, which amounted to $200,794, and interest and debt cost amortization that amounted to $103,030.

A feasibility study, conducted in 2005, estimated The Arena would lose about $300,000 in its first year of operation. The study did not take into consideration depreciation and debt cost either.

"To me, it’s questionable how you could have a $300,000 loss over that period of time, but that’s what the contract says, that’s what the feasibility study says," Smallwood told the commission.

Commissioner Bruce Farris, who is the only Certified Public Accountant on the board, said the net loss figures contained in the audit were somewhat misleading because of the $200,794 of depreciation expense added to the loss by the  auditors.

Farris noted that the city was given approximately $15 million in grants for site work and construction of the facility.

"We are really showing a loss on something we didn’t pay for to begin with," Farris said. "To me, that’s misleading to say that The Arena lost this money when somebody else footed the bill."

Initial plans for the facility called for it to have about half the number of seats it does currently, and estimate the cost to be about $15 million.

Construction costs increased after city leaders chose to increase the size of the facility, and added features the management firm contended were necessary to make it successful in the long run.

The city’s contract with SMG gives the management company bonuses for operating The Arena at better than a $300,000 net loss for it’s first year.

Smallwood said the terms of the contract seemed odd because it did not take into account depreciation or debt cost.

Farris said at the time the contract was negotiated, city leaders did not anticipate any debt cost since the state was expected to fund all of the construction.

Smallwood said the fact that The Arena’s finances are mingled with those of general city government it makes it difficult to audit the facility. He suggested that it may be best if The Arena were operated out of a separate fund. Cannon said city leaders would study the suggestion.

Farris also pointed out that the only thing that prevented the city audit  from being a totally unqualified opinion was the fact that the Corbin Public Library was not audited for the 2009 fiscal year. The city is only required, by state law, to audit the library once every four years. Smallwood agreed and said told commissioners the city audit could be totally unqualified if the Library were audited annually.

Auditors had small, but recurring, criticisms of city financial practices, most of which were insignificant. One point, having adequate controls over fixed assets, is an area Cannon said the city may try to improve in the coming year. The city may purchase software and a type of scanner that would allow for more strict accounting of those assets. He said the software has been prohibitively expensive in the past but is becoming more reasonably priced.