FOLLOW UP THE CITY AUDITOR’S REPORT OF 2018
Last year the Finance Director of El Cerrito, Mark Rasiah, hired a new auditor to ensure that the city had a thorough review of the finances. In November of 2018 the City Council received a report from this auditor that raised concern among council members as well as residents in attendance. The ECP initial blog post on that presentation can be found here.
The auditor’s findings raised quite a few questions for us, and we submitted questions in a letter sent to the Finance Director soon after the meeting. We met with the Finance Director and the new City Manager, Karen Pinkos, on January 24, 2019. Both the City Manager and Finance Director were eager to clarify what they felt were misrepresentations by the auditor when he spoke at the city council meeting. We also had a follow up phone call with the Finance Director on February 6, 2019.
What We Learned
The City Manager and Finance Director explained that the “transfer” of funds is actually a common practice for continuous operating costs.For example, the Integrated Waste Management (IWM) (Recycling Center) continuously generates revenue into the general fund and continues to expend those funds on a revolving basis.What is not part of a continuously operating budget is the debt that began to accumulate in 2012 due to the statewide shutdowns of redevelopment agencies. According to Mr. Rasiah, the city completed several projects that were never repaid as anticipated, when our Redevelopment Agency ceased to exist. According to the City Manager, the city is involved in litigating the taking of redevelopment money to pay down state debts. We link to several articles on that below. The Finance Director explained all of this to the city council on January 15, 2018. The presentation can be found here and his slides can be found on page 174 here.
Currently, the city plans to comply with the audit findings by selling several properties previously purchased by Redevelopment. The Finance Director aims to eliminate the loan from the Recycling Center in the 18/19 Fiscal Year through a mid-year budget modification. If he cannot pay it all off then the balance will carryover into FY 19/20 for repayment. The balance of the loan as of June 30, 2018 is $317,966.
Timing and the Audit – Who Knew What and When
The entire audit was done much later than usual due to the availability of the new auditor. The Finance Director received the initial report in August, and the document required a thorough review by him before release. The former City Manager, Scott Hanin in his report to Council on September 6, 2018, stated that the audit had been released but only made an very vague reference to the issues raised by the auditor. He stated “This was the first year that the new auditors audited the City’s financial records and as a result they made several prior period adjustments in accordance with auditing standards that had not been applied before by the previous auditors, Maze and Associates.” The link to that report is here. He also stated that the council would be getting their copies of the CAFR that week which is earlier than the Finance Director told us they received it. There is a question as to why none of the city council members asked staff about the issues after reading the CAFR (which is admittedly a difficult document to read and understand.)
The Finance Director reported that City Council received a hard copy of the Comprehensive Financial Report (CAFR) in October and it went online as public information in early to mid October.
In mid-October, with the report finalized, the Finance Director made the decision to bring the auditor to the city council to provide further explanation. The Finance Director said it is atypical that the auditor report the findings to council and this is the first time for a city council presentation in recent memory. The presentation occurred on November 20, 2018.
Although some community members speculated that the timing of the report was intentionally delayed given the Measure V election, the City Manager and Finance Director both stated that the presentation after the election was a coincidence and that the CAFR was online prior to the election. In regards to the Financial Advisory Board (FAB) The Finance Director stated that FAB did not see any issues with the auditors report that required further review.
The issue of fund transfers alarmed the auditor as well as the staff and city council. The presentation, which the City Manager thought to be more alarming than necessary, did shed light on the need for the Finance Department to be more transparent and create a paper trail. The Finance Director commented on the lack of documents or even notes to explain some of the earlier practices of the fund transfers conducted by the Finance Department. The Finance Director stated that the city will continue to budget continuous operating funds like IWM, but these would be handled differently than what the auditor called loans. When asked if there would be a written policy, the Finance Director stated that the Financial Advisory Board (FAB) reviews the policies of the city annually. The FAB is just finishing up this years review. This item will be addressed during the 2019 review which occurs at the end of the calendar year. FAB also reviews the CAFR annually. The review happened as part of a budget review this year (because the CAFR was not completed until August). This past year the review happened in June 2018 and the minutes are linked to here.
The City Manager did agree that the city could do a better job of getting information to the public in a more accessible way. She did point out that the city budget is now easily accessible online via a contract with Open Government. That can be accessed here.