Good news/bad news at Oxnard Fiscal Policy Task Force meeting- $89 million in discovered liabilities, no bank reconciliation yet and ….

By George Miller

First the bad news: $89 million dollars in previously undiscovered liabilities; failure to reconcile bank statements for a year; no CAFR until February 2016 (best estimate); $10 million in golf course losses, $40 million in deferred compensation liabilities not shown; weak internal controls; antiquated systems

The City Council formed the Fiscal Policy Task Force to address financial problems and help guide activities for improvement. This was the third meeting we know about, held 12-8-15.  In attendance were some of the top City of Oxnard general and financial staff officials, plus the external auditors, consultants, some Citizens who have regularly shown an interest and have some expertise in financial affairs, and news media organizations.

The main purpose of this meeting was to discuss that the audit is late, has significant problems, will delay the CAFR (Comprehensive Annual Financial Report), what is being done and should be done about it. Some of this will be discussed at the 12-15-15 City Council meeting.

 

Watch event video by Dan Pinedo/CitizensJournal.us:

 

Task Force Chair/Councilman Bryan McDonald ran the meeting in a manner which facilitated very free open dialogue- and there was plenty, among all wishing to engage.

Lead Edie+Payne Auditor Eden Casareno and Managing Director Don Ecker did the Auditor’s presentation (download).

Summary of major audit points:

“This is a difficult audit, to say the least…. history and records are missing, in some cases…. trial balance is done…need to roll forward trial balance to do the audit trial balance… prior period adjustments need to be completed… posting errors found….we have spend hundreds of staff hours and auditor hours so far… it’s up to the city if they want to restate prior periods… the complete audit would affect “flush through” trial balance… gonna be significant internal control comments… I can’t really tell you when this is gonna end” (best estimate is February…. 2016).

OxAuditProgress12-9-15

At that point, former Oxnard Finance director (from the 1990’s) Phil Molina suggested that staff/auditors ask questions of former employees. Joseph Lillio said he had instructed staff to do that, but he didn’t inform us what, if anything, had been learned in that exercise.

Audit Managing Director Don Ecker: “It’s a little bit like a needle in a haystack- all the answers aren’t there.”

CasarenoMacDonald12-9-15

(L-R): Oxnard Fiscal Task Force Leader/Councilman Bryan MacDonald and Lead Auditor Eden Casareno at Fiscal Policy Task Force session 12-9-15. Photo: George Miller/CitizensJournal.us

Advertisement- 740 South B Street, Oxnard, (805) 486-6878

Advertisement- 740 South B Street, Oxnard, (805) 486-6878

 

The trial balance has been completed.

Bank reconciliations are still not complete and in fact had not been completed since November, 2014. In fact, the discrepancies identified have grown from $125 thousand in October to over $1 million. Lack of or failure to adhere to internal controls, antiquated software and inadequate resources were all cited as factors contributing to the problem.

Needed prior period adjustments have mostly been identified. More may be still required.

Numerous procedural and training changes have been identified.  39 of the previously identified 128 deficiency findings have been completed or are in progress, leaving nearly a hundred still unaddresssed.

Major problems with the golf course and deferred compensation fund accounting have been identified and addressed. deficits total $10 million since 2010.

The auditor believes that the audit report can be released by February, 2016.

Prior auditors and prior finance team did not report approximately $89m of liabilities. Auditor recommends that the prior auditor be contacted- in fact this is legally required. Oxnard must file discrepancies identified with The CA Board of Accountancy. Deferred compensation liabilities account for about $40 million. These would not impact the balance sheet, but should be accounted for and tracked off-balance sheet.

Auditor feels that the IT (Information Technology) Master Plan may address many of the City’s systems shortcomings.

Auditors will hold bi-weekly meetings with City management until the report is issued.

 

OxnardFinancial Heavyweights

Financial Heavyweights: L-R: Former Finance Director Phil Molina, Edie+Payne Audit Director Don Ecker, Consultant Dave Millican, CFO John Lillio, at Oxnard Fiscal Policy Task Force meeting 12-9-15. Photo: Dan Pinedo/CitizensJournal.us

The delay in the audit is also delaying the release of the CAFR (Comprehensive Annual Financials Report) which is similar to a corporate annual financial report, is legally required and is past due. Many decisions hinge upon these numbers, including, but not limited to, spending priorities, future programs, credit, bond ratings, and more.

Resident and retired municipal finance executive Jim Lavery, a frequent commenter at meetings, offered that the golf course has been getting city water for free, so the $10 million in accumulated losses since 2010 is actually significantly larger. Meanwhile, bonuses are paid to operators. He pointed out the huge financial burden of the refinancing and questionable actions that led to the need to do that. This can’t be attributed to the operator. Councilman MacDonald pointed out that the golf course now gets recycled water. This takes pressere off the potable water supply, but is quite expensive to make.

Phil Molina asked why City Treasurer Danielle Navas wasn’t present at the meeting. The Treasurer is supposed to reconcile cash, so why is there a problem there? He also said prior management signed the audit letters and asked if any legal action was taken or contemplated. Councilman MacDonald said attorneys will look into it. It appears that Treasurer’s bank reconciliations may not extend to the accounting reconciliations.

Molina also told CitizensJournal.us:

  • City staff was reconciling cash accounts twice a month every month until 2006. After a reassignment by the new CFO, we are now told that the cash reconciliations stopped. The HTE software system provided all the data and reports that were needed to perform a complete cash reconciliation.
  • The Deferred Compensation fund that was taken “off-books” is the money, which is deducted from staff’s pay and turned over to one of three retirement plans providers: Northwest, ICMA, and The Hartford. That money is the amount each employee volunteers to be deducted from their regular salary as provide for by  IRC 457. That money is then paid by the City to one of the providers. Mr. Lillio acknowledged that the city is responsible from the time payroll is issued and only until the payments are made to the providers, which should be less than one week. Because of these legal, tax, and accounting regulations the auditors in 1998 along with the attorneys and staff agreed that those funds are not legally available to general creditors of the city, so as required by GASB 32 (Government Accounting Standards Bulletin)that fund was taken “off the books”. But staff continued until 2006 to maintain the details of the payments in order to provide the fiduciary duties required.

Local activist/accountant Larry Stein expressed concern about previous auditor’s reputation and their failure to report material problems.

Councilman Bert Perello wanted to know what was being done about possible employee culpability for financial/accounting missteps. City Manager Greg Nyhoff noted that this is a personnel matter (he did not want to address it in such a public forum).

CFO Joseph Lillio mentioned the Measure O funding of $16 million borrowed to address the General Fund deficit. Phil Molina said that Measure O funding is legally equivalent to General Fund money because the Measure did not receive the required 66% vote to make it a special fund. Therefore it can legally be used for anything the General Fund can be used for. Moving it is the equivalent of taking money out of one pocket and putting it into another, but does take that money away from what it was intended for,.

CitizensJournal.us  asked if the audit results could affect the deficit situation. Dave Millican said probably not. We also asked if it would affect the $4 million in requested employee concessions and were told that it was confidential information which could potentially affect negotiations. In response to Oxnard’s HTE software being blamed as an obstacle to bank reconciliation, we commented that if it could handle bank reconciliations 17 years ago, that it should be able to do it now. There was some dispute in the room about that, but finally consultant Dave Millican offered that the problem was in part due to management systems/employees.

The meeting participants did not explore the Performing Arts Center, which generates deficits twice as large as its revenues, nor CityCorps.

City Manager Nyhoff is very concerned about the situation, not only for the General Fund, but for the Wastewater enterprise fund. He said it is an embarrassment to the City. He exclaimed: “I did not see this when I came here … Am I still commited? Yes.” He said (only semi-jokingly) it was like a marriage vow. The criticism personally wears on me (or words to that effect). He expressed appreciation for the work by the auditors and staff and said “every time the auditors find something, they (pointing to the staff) are right on it.”

OXNyhoffFiscal12-8-15

Oxnard City Manager Greg Nyhoff addresses attendees at 12-8-15 Fiscal Policy Task Force meeting. Source: Frame grab from meeting video.

 

Summary of the Good News

The trial balance has been completed.

Most importantly, Oxnard now has sufficient expertise, including staff, auditors and consultants, to get the job done. On 12-9-15, I asked City Manager Greg Nyhoff if there were now sufficient in-house resources in the Finance Department to operate satisfactorily. I did not get an affirmative response.

The team has made good progress on bank reconciliations, but this is still not complete.

Needed prior period adjustments have mostly been identified.

Needed procedural and training changes have been identified.  39 of the previously identified 128 deficiency findings have been completed or are in progress.

Accounting problems with the golf course and deferred compensation fund accounting have been identified and addressed.

The auditor believes that the audit report can be released by February, 2016.

PrecisionMotorWerxBackForSlider

Advertisement

From a  December 5 note from Oxnard Chief Financial Officer Joseph Lillio:

The main purpose of the auditors briefing is to inform you that the CAFR (financial statements) will not be completed until February, 2016 and to share some of the challenges the auditors and staff have encountered over the course of the last several months that have contributed to this delay. In short, during the course of performing the audit, they have identified numerous discrepancies in accounting practices and records. The following list is a summary of their findings so far with more detail to come during their presentation.

  1.  Trial Balance June 30, 2014 (Completed):  This is a major milestone as there were several incorrect accounting entries and prior auditor adjustments that were not entered or posted by previous administration.  The trial balance is now complete and the audit can continue moving forward.
  2. Bank Reconciliations (Contributing to delay in CAFR): Staff and the auditors found that a number of bank reconcilations had not been completed for almost a year, which was one of the major contributing factors for the delay in the CAFR.  Additionally, the audors noted that the antiquated and now, obsolete software is the main factor for the lack of reliable information provided to users.  Council briefly heard staff alute to this during the IT Master Plan presentation last Tuesday and I will be discussing this with Council in January as well, as a new ERP system is essential. Lastly, the Auditors noted that the lack of policies and procedures, as well as, the lack of staff training is a major concern.
  3. Prior Period Adjustments: The Auditors have confirmed Management Partners previous findings and anticipate more will be identified as they proceed with the audit.  The auditors informed Finance that the auditors will need to communicate with prior year auditors because prior period adjustments were identified during this process and will be noted in this Audit.  These prior period adjustments will be reported to the State Board of Accountancy.
  4. Internal Control Work & Enterprise Risk Project: A key finding as the Auditors completed their internal control work was that the last year’s State Controllers report had significant discrepancies due to several years of incorrect reporting on fair market value and valuation of assets.  This correction will likely trigger an audit by the State Controller’s office.
  5. Golf Course: After reviewing the golf course information, the Auditors expressed concerns and began an audit of the golf course.  They have reviewed the agreement with High Tide & Green Grass, and are currently comparing to other agreements.  Because the current auditors already began a Golf Course Audit, you will note that the audit for the Golf Course is not included in Tuesday’s Internal Audit Program recommendations.
  6. Deferred Compensation Fund (Fund not reported in 2014 CAFR): The general ledger included a fund that was not reported in the previous CAFR which the auditors will discuss with Council.  The fund noted cash and investment balances and also showed an offsetting in liability.
  7. The CAFR will be delayed until February 2016: The reasons behind the delay are a result of the numerous items discussed above.  As the auditors continue to conduct the audit, there may be additional findings brought to light.

____________________________________________

George Miller is Publisher of CitizensJournal.us and a “retired” operations management consultant residing in Oxnard

Get Citizensjournal.us Headlines free  SUBSCRIPTION. Keep us publishing – DONATE

 *Scroll down to post a comment

One Response to Good news/bad news at Oxnard Fiscal Policy Task Force meeting- $89 million in discovered liabilities, no bank reconciliation yet and ….

  1. William "Bill" Hicks December 10, 2015 at 1:07 pm

    What a cluster of a mess. This is what can be expected when citizens don’t keep a close eye on their political representatives.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *