Where Virginia placed $3.7 million of sales tax funds is raising tensions among city leaders, who are already navigating a precarious financial situation, with few easy answers on either front.

The city earlier this month approved staff to talk with firms about a forensic audit to track down how the sales tax money went into the general fund and apparently spent without council approval. 

City Administrator Britt See-Benes provided the council with a list of companies she contacted and their status. Some wanted a request for proposal to understand the scope of the audit, others did not respond and one outright declined.

But the involvement of the city administrator and Finance Director Maegen Bothwell in the process raised an issue for Councilor Liz Motley, who questioned if it might be a conflict of interest.

“I don’t know how comfortable I am with our city administrator and finance director being the ones looking for a firm for us to do a forensic audit when there’s a misplacement of funds,” she said. “I want this to be as most open and transparent as possible when we’re looking into the depth of our financial atrocity, as far as I’m concerned.”

See-Benes said City Attorney Bryan Lindsay was present for all the communications, and that his being there should give the council reassurance. 

Councilor Annie Bachshneider asked staff if they knew with “100% certainty” where the sales tax dollars are now. They declined to answer, but noted the funds have been discussed in working sessions and at one earlier Tuesday.

“That’s a conversation I want to have not on TV right now,” See-Benes said. “It’s only because of the accusations that have already been going on today.”

She added the city staff is doing the same work that an auditing firm would do, but are still working through it. 

“The answer to that question is we think we know, but we aren’t with 100% certainty,” Bachschneider said. “And that is why we need a forensic audit.”

Councilor Steve Johnson said while he has concerns about the fund movement, it is the city council’s responsibility to read the financials and ask questions, and they should carry that burden if not all the information is there.

His comment sparked the ire of Councilor Julianne Paulsen.

“If any councilor wants to take personal accountability that’s no problem, but for a councilor to blatantly give accountability across the board, I will not take that at all,” she said. “It is my responsibility to the taxpayers to find out what happened to $3.7 million of sales tax overage, and that’s what I intend to do.”

Councilors ultimately directed city staff to complete a request for proposal on a forensic audit within a week’s time and have it ready to send out. Mayor Larry Cuffe Jr. said he was not in support of a private firm doing the audit, because of cost, and said St. Louis County could perform it for cheaper. He supported the motion for an RFP, with only Johnson opposing.

Paulsen said she believed the city had sufficient funds in a professional services account, of which an audit would be a proper use from that bucket.

Larger budget issues loom over talks

The larger financial situation for the city was an inescapable theme Tuesday night. 

In recent months, the council has implemented a non-essential spending freeze and councilors expressed concerns over some purchases made on the regular schedule of bills approved that night. 

Virginia spends more than $1 million a month on payroll, according to city records, and staffing makes up about 75% of its operating budget. The city has seen its credit rating and forecast go on a downward trajectory in recent years

“The city is not going belly up financially,” Cuffe said. “We have challenges. No question about that.”

Part of those challenges are a decreasing tax base, a common thread for many Iron Range cities. In updated data from the Center for Rural Policy and Development, St. Louis County lost about 20% of its population who would be aged 25-29 between 2010 and 2020, and 28% aged 30-34. Comparatively, between 2000 and 2010, the county lost 26% and 27% from the same groups, respectively.

The 2020 Census put Virginia at more than 8,421 and its 2022 population estimate was down to 8,332. In a separate report, the CRPD estimates that St. Louis County will lose 11% of its 1990 population by 2050.

Combine that with a housing crunch, heavy layoffs at local mines and expired extended benefits for those miners, and the picture isn’t exactly rose-colored. 

At a working session last week, the city reported it could run out of money in September. It’s also straddled with $77 million in long-term debt and paid $3 million last year just on interest.

Adding to that, due to the mine idles, production taxes that flow into the Department of Iron Range Resources and Rehabilitation on a three-year rolling average will reduce in the near future. Some of those funds are sent out to the cities.

“We’re running out of money and our tax base is declining,” Motley said. “People are leaving. I mean, look at this city. It’s not good.”

Virginia declined to seek RFPs for its ambulance and police services. Same with a restructuring of the fire department. The prospect of a new hotel near the Iron Trail Motors Event Center (ITMEC) is fading, and the city has yet to solve its riddle of taking massive annual losses on operations at the ITMEC. 

Still, Johnson said, the Range is an attractive area for people leaving the metro due to lower tax rates and housing prices. New housing additions in the area have also helped. 

Both he and Cuffe said the city has not increased its tax levy enough in recent years to keep up with expenditures. Johnson added he hasn’t voted for levies in recent years, citing the unsustainable rate. 

“We had auditors in here several years telling us you can’t keep doing what you’re doing, and that keeps getting said in this room,” he said. “And part of that is not raising the levy appropriately.”

Over the last 20 years, according to St. Louis County, Virginia has had the highest levy increase in the northern half at a rate of 223.6% since 2005. Eveleth (223.1%), Aurora (222.8%) and Babbitt (218.6%) were the only other cities higher than 155% during that span.

Councilor Justin Skalko, who proposed the public safety discussion Tuesday, said the city can’t levy its way out of the financial situation. He estimated a 30% tax increase would be needed to keep up with current spending. 

Doing so, he said, would encourage more people to move across the Range and discourage business development in Virginia. 

“The taxpayers are crying for us to do something different,” he said. “We have to turn the page to a new direction in this city. How do we do it? I don’t know the answer to that. I don’t think anyone here knows the answer to that … It’s a reality we have to face and it sucks.”

Accessing the Virginia City Council

Virginia City Council agenda, minutes and packets can be found on the city’s website. Recordings of the meetings can be found on YouTube.