The city of Mercedes continues to walk a fine line financially, as upside down utility funds and a pandemic-fueled slump in sales taxes had lasting repercussions on the city’s liquidity, according to the findings of the city’s annual financial audit.
One of the biggest takeaways from Monday evening’s presentation of the fiscal year 2019-20 audit is that the city’s ailing water and sewer fund continues to strangle Mercedes’ access to liquid assets as the general fund is forced to subsidize what should be a money-generating service.
As a result, the city’s liquid reserves — the funds it can call upon in the event of a “rainy day” — have dwindled to a mere two weeks’ worth of operational expenses.
“You have an unassigned amount of $5,502,000 — but again, $4.9 million of that is tied up in the ‘due from other funds,’” explained Aaron Rios, the certified public accountant with Carr, Riggs & Ingram who delivered the audit presentation to the Mercedes City Commission during a special meeting Monday evening.
“When you take that $4.9 million away, there’s about $500,000 in unassigned fund balance, which, that could be a little bit low. … Generally, you want to have about the equivalent of three months expenses in your fund balance,” Rios added, referring to the widely accepted practice for governmental entities to maintain enough cash on hand to fund at least 90 days of operations.
However, Mercedes has been using its general fund to underwrite the non-profitable water and sewer fund for years. And that burden has only continued to grow, despite the city instituting an 11% rate increase each year since 2018.
A year ago, the city pumped over $3 million into the water and sewer fund, also known as the utility fund. Those contributions increased by more than a million dollars in fiscal year 2020.
So much of the city’s unreserved fund balance is tied into keeping the utility fund solvent that Mercedes has been left with only about a half a million dollars for its rainy day fund.
With an annual operating budget of just over $11 million, Mercedes would need to have approximately $2.75 million in cash in order to fund 90 days of operation should all sources of revenue cease.
Nor is the potential loss of revenue an idle concern.
Over the course of 2020, Mercedes lost hundreds of thousands of dollars in sales tax revenues during the COVID-19 pandemic.
“The big decrease — which was expected — was in non-property taxes, which is basically your sales taxes. And why? Because COVID-19; stores were shut down. Nobody’s buying stuff, so (the) city’s collecting less in sales taxes,” Rios said.
That trend lies in contrast with some of the Queen City’s neighbors, such as Weslaco and Donna, which both recorded increases in sales tax revenues during the pandemic. Weslaco, in particular, saw those revenues increase by 3%, or about $1 million last year, according to its fiscal audit, which was performed by the same firm.
“There was a variance of $731,000, and that’s expected because of the sales tax decrease,” Rios said of the sales tax revenue plummet in Mercedes.
Despite that loss of revenue, as well as the increased operational costs for water and sewer service, Mercedes actually came out ahead at the end of the fiscal year.
Conservative spending throughout 2020, lower public safety costs compared to 2019, and other incremental reductions in expenditures left the city with a modest surplus by Sept. 30, 2020, when the fiscal year ended.
“Expenses were budgeted right at about $12 million and you only had $10,778,000,” Rios said.
“The general fund made $92,100 at your end of year. It performed better than budget,” he said.