|MSM has obtained an internal memo from Bill Brock, Acting City Manager and Jay Stewart acting City Finance Director.
This memo details alleged misstatements, overstatements, discrepancies, misuse of funds, and withholding of information to the city Council and Mayor by the former City Manager and City Treasurer.
An audit committee will be meeting for the first time this Thursday. The following people will be on the audit committee: Jay Stewart, William Brock, Neal Pemberton, Virgil Maines, Charles Gall, John Beagle and Shera Gullet.
It will be the goal of the committee to get to the bottom of these issues and to ensure that there is an adequate check and balance in the financial system of the city.
Below is the memo:
DATE: March 25, 2003
TO: MAYOR AND COUNCIL
FROM: WILLIAM J. BROCK, ACTING CITY MANAGER, JAY T. STEWART, DEVELOPMENT DIRECTOR
SUBJECT: REVIEW OF FINANCIAL INFORMATION
The information below is the result of our investigation to date. Jay and I have met with or spoken to the Auditors, Bond Holders, Bond Council, and Banks. All parties involved have proven cooperative in the gathering of information. We intend to start scheduling meetings with the Auditors beginning next week. We believe that answers to some of these questions will not be known without a formal investigation. Included with this information are the Auditorís letters from 2001 and 2002.
--Information provided to Council in the argument for pay raises in June of 2002 overstated Beginning General Fund Balance for 2001 by approximately 1.1 million dollars and overstated Beginning General Fund Balance for 2002 by approximately $100,000.
--Most all other funds were misstated in the information provided to you in the argument for pay raises. Police and Fire Funds were overstated and Enterprise Funds were overstated.
--Budget information provided to the County, as required by State, does not match information known from the audit in either accrual or budget basis numbers. I am not sure at this point where the numbers provided to the County came from.
--$700,000 has been taken from the Sanitary Sewer Fund in the beginning of 2001 to pay GO Debt. This was a direct misuse of funds. I do not have any concrete information that authorizes the use of these funds for the purpose of paying GO Debt.
--The information that was originally provided to you for the 2003 budget had no basis in reality with regard to beginning budget balances. When this was brought to the Finance Directorís and City Managerís attention the numbers were changed to Audit numbers with some argument. The City Manager seemed truly surprised that the original numbers were not accurate.
--Miscellaneous receipts were overstated in 2001 and 2002. Basically miscellaneous receipts were overstated by an amount that was actually funds moving from one bank account to another. This was due to not analyzing the information within our accounting software.
--Cash reconciliations were done in 2002, but were not provided to Council or the City Manager. The original cash reconciliations were changed after December when the decision was made to use real beginning balances. I still have differences with what is reported for some of the beginning fund balance at the beginning of 2003, especially the General Fund.
--Expenditures for 2001 and 2002 exceed revenues. 2002 exceeded revenue by close to $2 million.
--First Southwestern representatives indicate that massive amounts of overdrafts began occurring in mid to late 2002. They also indicate that they became concerned about our account over two years ago.
--It is the City Mangerís responsibility to prepare and present the budget to Council. It is the Finance Directorís to manage the accounts of the City and to ensure the funds are available. It is also his responsibility to ensure that funds from enterprise and trust funds are not used for expenditures other than those prescribed. It is quite evident that control of these accounts was not as it should have been. The Finance Director seems to cash for purposes as needed with no connection to any budget that he produced for the City Manager. It is apparent that neither the City Manager nor the Finance Director took it as their responsibility to control the budget. No budgets were given to Department Heads to control spending. The common answer given to any Department Head from the City Manager or the Finance Director when asked for funds was yes or no problem without reference to any budget procedure. Purchase Orders were commonly signed by both the City Manager and the Finance Director after the money had already been spent, equipment or products bought, or commitments made without any connection between cash balances and budgeted amounts.
-- According to BKD, the management letters to Council and the Audit Committee were hand-delivered to the Finance Director with the understanding that they were distributed to the City Manager and Council. The Finance Director indicates that the letters were given to the City Manager with understanding that they were put in the Council packets. At no time was there any indication that these items were given or explained to Council. We have not had an Audit Committee meet to review the audit since the State performed the audit. There has been no explanation of the CAFR to Council since the current Finance Director has started.
--The two amounts of $800,000 and $200,000 at the end of 2001 and beginning of 2002 was improperly used as operating capital. These amounts were represented as needed for water projects. These funds were to be used for such projects as paying off the Middletown Water Tower, the Salzman Road water line extension, and the Water Treatment Plant Improvements. None of these projects were under way at the time, so there was no need for short-term financing of these projects. The Middletown Tank has not been paid off to date; we continue to make our portion of the bond payments to Middletown.
--When the legislation was done for the short-term coverage of the two above amounts, the City Managerís report indicated that it was for overdraft protection, not operating capital. Operating capital from this source is use of enterprise funds for General use, which is strictly prohibited by State law.
--The existing line of credit of $150,000 is for operating purposes. There was no authorization for this amount prior to its existence. The Finance Director thought that the previous Ordinances that authorized the $1 million allowed him to procure this loan with no other approvals. Legal opinion for this line of credit was obtained after the fact resulting in high rates on the line of credit.