Are Financial Statements Really Necessary? Yes!

SB 172 of the 2019 Kentucky General Assembly clarified city requirements for submitting city audit and financial statements to the Kentucky Department for Local Government to secure the receipt of municipal aid road fund dollars and to allow the release of other funds held by the state for cities. But what about financial statements? What gives? Well, in regard to the annual preparation of financial statements, nothing has changed since at least 1958. What has changed are the nature and severity of penalties a city could face for the failure to submit these financial statements.

All cities with a population under 20,000 must have each public officer that has “the custody, control, or disbursement of any funds collected from the public in any form” prepare annual financial statements as described by KRS 424.220. Financial statements are simply formal records showing a city’s crucial financial information.  Pursuant to KRS 424.220, financial statements must show the total funds collected during the fiscal year from each source, the total amount disbursed by individual payee, amounts to vendors exceeding $1,000 even if the total is in multiple payments throughout the fiscal year, a certificate from each bank in which funds are or have been deposited during the year showing the balance, and the totals of amounts paid to employees as salary or commission and public utility bills. In lieu of preparing an annual financial statement, cities may opt to prepare quarterly financial statements instead.

Publication requirements for financial statements are straight-forward. A city officer whose city has a full audit performed in a fiscal year must publish the results of the city audit pursuant to KRS 91A.040 (9) and does not also have to publish the annual financial statement. Those cities that do not have an audit performed in an even-numbered fiscal year under an exception in KRS 91A.040 (2), (3), or (4), must publish the annual financial statement. These are cities with a population of 2,000 or less, or that receives and expends from all sources less than $75,000 with no long-term debt. Procedurally, financial statements must be published by placing a legal advertisement at least 6 column inches and in a newspaper that meets the qualifications contained in KRS 424.120. The advertisement must state that the financial statement has been prepared, copies have been provided to each local newspaper of general circulation and other media outlets, and it must be published within 90-days of the close of the fiscal year. To preserve the receipt of any funds from the state, cities must also submit audits and financial statements to Department for Local Government.

Cities that conduct an audit in a fiscal year must forward an electronic copy of the audit to Department for Local Government, by March 1 immediately following the fiscal year being audited. In even-numbered years, cities that publish a financial statement in lieu of an annual audit must forward an electronic copy to the Department for Local Government by October 1 after the close of the fiscal year. Since 2018, the Department for Local Government is required to forward to the Finance and Administration Cabinet the names of any cities that fail to submit the required audit or financial statement. The notice shall state that any funds in possession of any agency, entity, or branch of state government shall be withheld from the city until further notice. KRS 91A.040(12). These penalties are in addition to civil fines and penalties to individual officers that can be imposed by a court of competent jurisdiction under KRS 91A.040 (10).

Please contact Morgain M. Patterson, Director of Municipal Law and Training, with any questions at (859) 977-4212.