Tuesday, February 15, 2022

2.15.22 Meeting Summary

Tonight the council discussed two significant items:

- The first was receiving the FY21 audited financial statements.  Normally this is a perfunctory process where we get a read out of the results and accept them.  The audit is completed already and there isn't going to be anything that happens that changes that.  Tonight however, was a bit different.  

For a number of reasons, including staff turnover and generally poor financial practices, the City got some disappointing news.  In every audit, there are required communications from the independent auditor to the governing body, in this case the City Council. We were informed that during the course of the audit, there were four material weaknesses identified, and one significant deficiency in internal controls. 

These are industry terms - a material weakness is a a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

As an accountant, I'm very familiar with these terms.  Even a single material weakness could have severe consequences in a private corporation.  Four together is an indication of severe problems in an organization.

We discussed how subledgers in the City's accounting system don't reconcile to the main GL.  We discussed the fact that the ledger is not closed on a monthly basis, or that books are open for several months at a time.  We discussed that one of the key controls in any organization - reconciling bank accounts, was not being performed.  We discussed an instance of fraud where nearly $40K was stolen (mostly recovered through insurance) due to poor controls over financial systems.  And with the City receiving federal funding for ARPA, there will be even greater requirements over internal controls next year.

What we heard painted a bleak picture of the control environment at the City.  Rather than relitigate what happened, I felt it would be more productive to focus on how we can right the ship.  I requested a plan of action that identifies all the challenge areas, develops a game plan and timeline for remediation, a list of resources necessary to achieve those outcomes, and an identification of the biggest potential impediments to being successful.  I asked that more frequent updates are made so we can compare actual results to this established plan.  It's a tall order, and it will take dedicated effort over time to achieve these outcomes.

- Next we discussed whether to appropriate $30K to engage a consulting firm to perform research related to a potential tax measure for the November 2022 ballot.  The idea was to conduct polling to determine the amount and type of tax that people would generally support.  Because the required vote is actually 2/3 (we found that out tonight), there is this sentiment that the city should advance a tax measure that would fall within some acceptable range so people would support it.

I felt this approach was backwards.  Rather than trying to determine the most people would support, I suggested we determine what the minimum amount is that is necessary to fund critical government functions.  Ultimately the city is projected to be in deficit spending starting with FY23.  We can determine what is necessary to avoid that, and then place on the ballot that amount.  I did not think it was a prudent use of $30K in order to conduct polling on what would be palatable to our residents when the actual issue at hand is a budget shortfall that is orthogonal to what people are comfortable paying.  It's not about what is palatable, but rather what is necessary.  

If we are going to be asking residents to tighten their belts and contribute more to the City every year, it would behoove the city to do the same and demonstrate frugality.  Over the past year or so, the City has engaged more consultants than I am comfortable with and I've expressed opposition where appropriate.  It's difficult to go to the people hat in hand asking for money, while at the same time not use the people's money as judiciously as possible.

Unfortunately, as it has been with many other issues, the vote was 3-2 with myself and Councilmember Diaz voting no.  As a result, it looks like the City will be spending $30K to do this polling to determine how much additional taxes would be acceptable to residents.  In the grand scheme of things, $30K is not going to bankrupt the city.  And if the City is to maintain its current level of services it certainly needs more revenue (taxes).  But it's hard to say the City ought to get more money until the house is in order and the City acts responsibly with the money it already has.