MANKATO — Nearly $1 million of expenses were omitted from cost estimates presented to the public, the Minnesota Department of Transportation and the Mankato City Council when the reconstruction of Riverfront Drive through Old Town was approved a year ago.
The misleading price tag was one of multiple flaws in the budget and approval process surrounding the improvements to Riverfront Drive from Main Street to Third Avenue, including a complete makeover of one of Mankato’s most prominent streets as it passes through the Old Town business district. Once projected to cost $9.1 million, the final price is now expected to be nearly 18% higher.
City Manager Susan Arntz laid out the problems discovered in recent weeks during a report to the City Council Monday night and during an interview with The Free Press separate from the meeting. While Arntz said she is confident that none of the project’s funds were misappropriated, the issues were serious enough that they’ve been reported to the city’s auditor and a firm has been brought in to provide independent scrutiny of how the project was handled.
“We have hired an outside investigator to bring conclusion to some of the outstanding items,” she told The Free Press.
Among the problems: the city’s engineering division underreported by $700,000 the amount of revenue available from assessments against property owners; incentive pay offered to the general contractor for completing the project early, which ultimately totaled $280,000, was not accounted for in the budget; and change orders reflecting increased construction expenses were still coming to Arntz’s desk in March — five months after work was completed.
But the largest concern was the realization that the city’s engineering division had placed a purchase order for $940,000 in traffic signal systems and street lights needed for the Riverfront project in March, 2024 without the knowledge or authorization of the council or city manager. The purchase was well beyond the $175,000 threshold requiring council approval. It was 94 times higher than the $10,000 level requiring the city manager’s authorization.
“I wasn’t aware the order had been placed until we started combing through the details,” Arntz said.
In addition to not being approved, the $940,000 expense for the semaphores, signal boxes and street lights was never listed in any of the budgets for the Riverfront Drive project.
First-term Council member Michael McLaughlin wondered if it was common in large projects for a $940,000 expense to go unmentioned or for assessment revenue to be misstated by such a large degree.
“In all of the years I’ve worked, I’ve never seen an error like that,” Arntz answered.
Council President Mike Laven, with more than 20 years of tenure, had a similar reaction, saying he hopes the results of the investigation are made public.
“I’m just perplexed by this,” Laven said, adding that he’s used to seeing some change orders that push up the final cost of a project. “But nothing to the point where process and procedure led us down this path.”
The process seemed relatively typical through the winter of 2023-24. A final feasibility report specifically described the signal systems and street lighting as components of the work while estimating that it would cost $7.17 million for construction — $9.1 million when engineering, contingency and administrative expenses were added.
Those were the numbers listed in the 2024 city budget. Final designs completed in the early months of 2024 pushed the construction portion of the project to $7.633 million, with a memo to the council attributing that to $490,000 in added work for water and sewer mains.
By April 2024, the engineer’s estimate for the construction costs had grown — without further explanation but at a time when infrastructure prices had been escalating due to high inflation — to $8.46 million. When four bids were submitted by private contractors, the lowest — $8.24 million from Dirt Merchant Inc. of Mankato — was an acceptable price to the council. The decision to provide final authorization for the project was so routine that it was approved unanimously without discussion as part of the “consent calendar” on April 22 of last year.
What the council didn’t realize was the city was already committed as well to paying another $940,000 for the purchase of the semaphores and street lights. Arntz, too, was under the impression that those costs were accounted for in the $8.24 million contract.
“Prior to March of 2025 I would have told you it was part of the bid,” she said Monday night.
The city’s engineering division had made the purchase by opening a reimbursable account with the State Aid Office of the Minnesota Department of Transportation and ordering the equipment through the state of Minnesota contract that provides low prices for government purchases statewide, according to a summary memo provided to the council.
The fact that those components had been ordered in advance of construction is not unusual or inappropriate because it often requires several months for them to be delivered by the manufacturer, Arntz said. The same thing was done when Madison Avenue was reconstructed more than a decade ago.
“Essentially, you do that because it takes 16-18 weeks to receive those,” she said.
Arntz said she can’t currently explain, however, why required authorization of city leaders wasn’t obtained prior to the purchase or why it wasn’t included in the project budget documents presented to the council the next month. Not only is approval mandatory, it also would have provided the council an opportunity to put the purchase on hold if elected officials were having doubts about moving forward with the street project.
“If they show up in June and we don’t have a project to do, that would have been problematic,” she said of the costly semaphore systems.
Arntz also doesn’t have an explanation for engineering staff, on three different documents presented to the council and the public, listing the total assessments to be charged to Riverfront Drive property owners as $1,034,700 when the amount should have been $1,742,222.
The three engineers involved in the project are not currently working in city hall. Public Works Director and City Engineer Jeff Johnson began a military deployment in October. Former Assistant City Engineer Michael McCarty was hired as Watonwan County Engineer in September. And Jon Nelson became assistant city engineer of Lakeville in the spring of 2024.
“None of them are here, and so that adds to the problematic investigation,” Arntz said.
Although she said she would have preferred to have more answers before bringing the issue to the council, Arntz said it wouldn’t have been appropriate to wait. As late as it is, council approval was still technically needed for the $940,000 purchase of lights and traffic signals. The $280,000 incentive pay bonus to Dirt Merchant for beating the original schedule, amended to reflect added work and weather delays, also needed the council’s blessing.
Other change orders were reported to the council as well Monday night, although those were within the range for the city manager to approve and were seen as typical of what arises in a large construction project involving aging infrastructure.
With the change orders approved at Monday’s meeting, the final cost of the Riverfront Drive project is $9.766 million for construction and $10.718 million in total, assuming the previous amounts budgeted for engineering ($433,000) and administration ($519,000) don’t change.
At the moment, it appears that the increase — despite being nearly 18% above what was in the 2024 budget — can be covered without tapping into property taxes.
“So far, in our initial review at least, it does not appear we have to take more from the general fund to put this together,” Arntz said.
The $706,000 error in the assessment roll, because it mistakenly underreported the revenue that would be available, helps make that possible. The preliminary assessment notices sent to property owners were accurate, and add up to $1.74 million, so the assessments can be collected at that level pending minor adjustments when they’re finalized later this year.
And the street lights and signal systems were designated to be financed through the city’s “municipal state aid fund” — Mankato’s share of the Minnesota gas tax and other state transportation funding streams.
Despite the numerical errors and apparent process violations, city staff say they have found no indication of misappropriated dollars after looking closely at all of the spending involved in the project.
“We have combed through the files, the records, the documentation, the invoices, the change orders — we are confident in the invoices that have been presented,” Arntz told The Free Press.
The city’s Administrative Services Department has also examined other construction projects, including those planned for 2026, to see if similar problems exist.
“We have not found any noncompliance issues with other projects,” Arntz said.
The city’s auditors have been made aware of the issues and were asked to identify flaws in Mankato’s administrative processes.
“They’ve assured us that our procedures are correct,” she said. “… Our team just didn’t follow the protocol.”
Retraining for city staff has been scheduled even as the work of the outside investigator continues. Arntz doesn’t know when the investigation will be complete but promised a final report will be made to the council.
“We will be back in front of you again,” she said.