Guest Post: Grand Forks Alerus Center Had a Net Operating Loss of $3,777,692 in 2018

Alerus Center Building Grand Forks Herald Photo

This guest post was submitted by a Grand Forks resident, and long-time SAB contributor, who uses the nom-de-plume of The Whistler

On Monday the Grand Forks City Council had the most exciting item of the year on the agenda.  The Comprehensive Annual Financial Report (CAFR) was set for discussion and approval. The CAFR  is the independent audit of the entire city’s operation. Despite the importance of the audit the council passed it with no discussion in an omnibus motion of a dozen or more mundane (and one not so mundane) line items.

Maybe the audit committee covered some of the important stuff, but if they did, they certainly didn’t bring anything up in front of the entire council.  I think someone should have gone on record that they’d reviewed it and that the city was performing their fiduciary responsibilities.

The approved 2018 CAFR was uploaded on Friday.  The first thing I looked up was the Alerus’s annual income or loss.  The relevant income statement is on page 29 and 30. That’s where I found the Net Operating Loss for the Alerus as determined by the auditing team in 2018 to be $3,777,692.  That’s a staggering sum of money for the city to lose and keep quiet about.

The city leaders are apparently in denial about just how bad things are going at the Alerus.  Also on Monday the Grand Forks Herald had an article about the Alerus Center.  It claimed that rather than a huge loss the  Alerus had made “income” but it was going to make less of this “income” next year:

The center’s total income is expected to drop from $245,000 in 2019 to $140,000 in 2020, according to preliminary budget documents presented this week to members of the city’s Event Center Commission.

The audit showed year end results over four million dollars worse than the what the city leaders are telling the public.  So who are you going to believe, the politicians or the auditors?

A very large part of the total expenses was the depreciation.   Bankers look at depreciation expense a bit different than other expenses  but owners shouldn’t. If our asset keeps going down in value we’ve got a big problem.  We either have an asset that we’ll have to throw more money into or we’ll eventually have to shut it down.  If we don’t cover depreciation with revenue it’s a loss, a real loss.

This year the depreciation total was $3,155,016.  Even ignoring the depreciation expense the Alerus had a large loss of $622,676.  That’s still a huge difference between reality and the profit of a quarter million dollars they told us they’d made.

In the nine years that data is available the city has lost a staggering $24,462,063. What’s worse is that the losses have been getting worse every single year since 2013.

So what could be the discrepancy between the truth and the false number they’re telling the public?  First of all they obviously aren’t counting the depreciation. I imagine they are also counting some of the sales tax revenue as operating revenue.  The auditor can’t do that, because they recognize that as non operating income. I’ve suspected in the past that they count the quarter percent hospitality tax as income.  If that’s what they’re doing it’s wrong for two reasons. The first is that it’s an expense to the public, not a revenue item. The second is that they promised when that tax was authorized that it would be used to keep the facility up to date.  In other words it would be used to offset the depreciation expense. Instead I imagine they’ve decided that using the money to clean the toilets and pay for the snow removal is close enough. So if they’re not using it to keep up the facility then they are expecting the public to pay another time.

This operating loss isn’t all the Alerus is costing the public  I didn’t include the non operating net interest expense of $1,188,897.  While that’s an expense to the citizens of Grand Forks it is an expense that the public agreed to pay when they approved the project.  If you remember the public approved two sales taxes. One was to pay off the bonds used to build the original building. When the original building bonds were paid for the tax would go away.  The other quarter percent hospitality tax was meant to provide funds to keep the facility up to date,

When the Alerus project was up for approval the city leaders said to trust them.  They held themselves out as the experts and any skeptics were painted as not knowing what they were talking about.  Even when some of us expressed our doubts they could build it for the price they promised we were told not to question them.  For what it’s worth the original construction bill came in nearly double the lower range they originally promised us. Now it looks like if we leave it as is they’re will be losses every year.

The demands for more money never stop.   Ever since the Alerus was built the city leaders have been spending money from the bond payment fund on upgrades.  In fact it looks to me from the balance sheet on 28 and 29 that somehow we’ve invested around $110,000,000 into the Alerus.   Originally it was to cost 43 to 49 million dollars. When they couldn’t make it come in for the original estimates there was a second vote where it was approved for $57 million.  The city leaders didn’t find that figure very binding so they spent over $80 million by the time it was opened in 2001 and now it looks like we’re up to $110 million.

About a dozen years ago, then Herald Reporter Tu Uyen Tran had a story where he’d interviewed then city finance chief John Schmisek which speculated  that the sales tax fund might have enough money in it to pay off the bonds in 2019. Going by the current balance sheet we’re quite a bit short of that goal.  We seem to have less than thirteen million dollars in the bond payment account with over thirty eight million dollars left to pay. It’s possible that the projections that Schmisek were overly optimistic but it also looks to me that they’ve spent a lot of money which should have gone to pay off the debt.

Some might say that one bad year doesn’t make a bad investment.  That’s a reasonable position but how many bad years can we stand?  There are eight nine years of the CAFR report on the cities website.  The net operating loss has been terrible every single year.

  • 2018: $3,777,692
  • 2017:  $3,641,548
  • 2016:  $3,135,504
  • 2015:  $2,772,513
  • 2014: $2,314,394
  • 2013: $1,796,257
  • 2012: Link doesn’t work UPDATE:  Per the comments, the loss was $1,798,632
  • 2011: $2,638,619
  • 2010: $2,586,364.

In the eight nine years that data is available the city has lost a staggering $22,663,431 $24,462,063. What’s worse is that the losses have been getting worse every single year since 2013.  There certainly doesn’t seem to be any urgency to make any changes at all. Instead they seem to want to do more of the same.

It’s time for the city to be honest with us and quit telling us that things are going well.  We need to stop the bleeding. Stop spending money that’s meant to be paying off the bonds. The Alerus was a questionable idea but the dishonesty around the Alerus has negated any good that may have come out of the event center.   Build us the center they said and we’ll take it from there. Well we did and now it’s time for them to operate the center in a business like way where the people using the center are paying to keep the center up to date.

Rob Port is the editor of SayAnythingBlog.com, a columnist for the Forum News Service, and host of the Plain Talk Podcast which you can subscribe to by clicking here.

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