More on the Oxnard Accounting meltdown

By George MillerKeyboard

Ever since operational audits were initiated by Oxnard City Manager Greg Nyhoff a few months after he came aboard on 6-1-14, the city has been aware of glaring deficiencies. 128 were identified, in multiple departments, possibly worst and certainly most visible, in the Finance Department. Months after Finance Director James Cameron retired in late 2014, a new CFO, James Lillio, was brought in. But months later, he has now resigned too. Consultant Dave Millican, who has done extensive work for the City since Nyhoff arrived, is now Interim CFO.

Finance staff and consultants have so far been unable to satisfactorily deliver “audit-ready” documentation. Hence, the audit cannot be completed, nor the CAFR (Comprehensive Annual Financial Report) and report to the State Controller, be delivered. It is now months late and has been delayed again and again. The latest estimate (no more promises) could be as late as 5-31-16.

Although whistleblowers and City Council meeting resident critics have been pointing out deficiencies for years, it seems that they weren’t taken seriously. Previous auditors have also pointed out deficiencies too, but nowhere near as much as have been unearthed by consultants and the new auditors working with staff.

At Tuesday’s City Council meeting, Eadie + Payne auditors Eden Casareno and Don Ecker, as well as Interim CFO Dave Millican, summarized  a laundry list of deficiencies which should make any competent financial professional cringe.

Along the line it was clarified that the auditors report ONLY to City Council and the “audit committee.” We’re not aware of such a committee, so someone asked if the Fiscal Policy Task Force is the equivalent of it. If that question was answered, we didn’t hear it.

It is disturbing that the accounting nightmare has still not been resolved 21 months into Mr. Nyhoff’s tenure.  This may be attributable to greatly underestimating the magnitude of the problem and overestimating the resources available to resolve it. It’s probable that Nyhoff, staff and consultants will move heaven and earth to get it resolved now, though. It is possible that a state audit and bond covenant violations may be triggered though, adding greatly to city woes.

The Eadie + Payne auditors told us that this is proving to be a very difficult audit. Eden Casareno said this is the third time she has been before City Council and that this had never happened before in her career.

Interim CFO Dave Millican said many staff and auditors are new to the city, three key Finance staff members left and took with  them tremendous knowledge of the city’s finances, reconciliations were not being done on a routine basis and that analysis revealed deep problems. He said the additional funds requested would be used for testing and analysis, dealing with State Controller’s questions, communication and coordination, contingencies and expediting the completion of the audit.

At the meeting, Mayor Pro-Tem Carmen Ramirez said they knew the records were bad, now they know how bad. She said there is no reasonable choice but to proceed with what they are now doing (as costly and painful as that might be). She told attendees that Oxnard lacks its own people to do the job, so it must seek additional help. Other Council Members expressed similar sentiments, then voted unanimously to approve staff’s plan and appropriated the funds.

 

Symptoms and Problems

The problem is that Oxnard’s financial management was a mess, as we’ve outlined in previous articles and was stated by Dave Millican and the auditors at the meeting. This resulted in staffing deficiencies, employee training/education deficiencies, unenforced policies, numerous records errors and omissions, opportunities lost and more.

The symptoms of this were (examples) dozens of accounts with negative balances, construction projects open as long as 16 years ($255 million spent, but with no depreciation or writeoffs booked), expenses and capitalization used interchangeably (Fire Station 8 is “Exhibit A”) , $113 million in fully depreciated assets still on the books, failure to track pension liabilities, poor discipline in large cash disbursements, such as $2.6 million in wire transfers without proper approvals and backup data. The last one is a great example, since it suggests that multiple participants in this transaction all the way up the line to Treasurer may have failed to ensure that proper approvals and backup paperwork were in place before initiating the next step. This is an indictment on not following City procedures and good financial practices.

There were $3mm in negative balances in Maintenance Assessment Districts alone, which impacted the General Fund greatly. There may be more nasty surprises in outstanding construction projects. There is a $50 MILLION discrepancy between the total asset balance of about $1.9 billion and supporting details, which is said to be “irreconcilable.”  There are about $500 thousand in cash discrepancies not reconciled. Millican thinks that much of that resides in the “Successor Agency” formed when redevelopment agencies were outlawed by the state legislators.

Millican pointed out to critics that very little uncommitted cash will be discovered, because it’s not there.

 

What’s being done

Recently, City management and staff asked for and Council approved the emergency hire of several employees and temps to work in finance on the audit preparation and catching up on regular work, which has been neglected during the crisis period. Multiple firms- MuniServices, Urban Futures and MV Cheng & Assoc.-  are already working on selected portions such as capital assets, which have shown neglect for back as long as 16 years.

On Tuesday, staff asked for and Council approved another $194,000 for accounting/audit assistance from Eadie + Payne

Dave Millican has been retained as Interim CFO. Another one may be on the way and a “permanent” one is being recruited.

Enterprise funds (which include utilities) will be reviewed in late March. This may also shed light on the need for rate increases, when true financial condition is better known.

City Manager Nyhoff and Assistant City Manager Maria Hurtado will be watching very closely and helping to ensure that the situation is resoled as quickly and well as possible, making regular reports to the Council along the way.

 

An Assessment

While it is very bad that the city cannot close its books, has badly mishandled bookkeeping and is behind on current postings and statements, the affect on operations is not really as bad as it sounds right now. Granted that the lateness and glaring discrepancies will attract  the attention- or worse from the State Controller and could leave the City in default of bond covenants, as well as jeopardize future grants. But the City isn’t in danger of collapsing because of this. It is expenses vs. revenues, infrastructure maintenance and public safety which need the most attention.

The discrepancies do make it harder to put together new budgets and account for project costs, but the total cash discrepancies are in the $500,000 range. While that sounds huge compared to most peoples’ household budgets, it’s definitely not a city-breaker and does not prevent the city from conducting and accounting for day- to-day business and even tracking revenue vs. expenses. We’re seeing quarterly reports still produced and presented at Council meetings.

The $90-100 million dollar discrepancies we have been hearing about are mostly in the assets category and many of those are not even on the books, but are pension liabilities that the City is supposed to track. Some of these are just because state bureaucrats changed the rules and the city hasn’t caught up. That didn’t cause any real, material financial problems. There are also a lot of old construction projects which should have closed long ago, many likely harboring significant variances, There were many Maintenance Assessment Districts carrying negative balances, which have all been charged to the General Fund.

What the City doesn’t know for sure is whether the bookkeeping woes might be masking/facilitating undetected fraud.

 

Meeting documents and video can be found here:

Name Date Duration Agenda Minutes Video
City Council Meeting February 23, 2016 07h 22m Agenda Video

 

Oxnard memo on   Use of Consultants

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One Response to More on the Oxnard Accounting meltdown

  1. William "Bill" Hicks February 26, 2016 at 3:33 pm

    I live in Newbury Park/Thousand Oaks and just received notice that my waste water fee’s are going up. Compared to how things are going in Oxnard, I’m glad that the fees are going up here before the cost becomes prohibitive and it affects my city government in the same way it’s affecting Oxnard.

    Reply

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