Oxnard’s auditor pulls out, fiscal policy task force meets

By George Miller

City struggles with still unfinished, badly overdue 2014-15 financial audit

Yes, Eadie + Payne, the City of Oxnard’s auditor, pulled out its staff two weeks ago, per Asst. City Manager Maria Hurtado. No, they didn’t quit, but until the Finance Dept. gives them more information to work with, they see no point in being there. A modified contract for them to complete work will be presented to City Council on 2-23-16. The auditors and top consultants such as Dave Millican, now here as a Senior Financial advisor, had been working feverishly to straighten out the city’s sloppy bookkeeping and complete the audit successfully in order to file the annual CAFR (Comprehensive Annual Financial Report) with the state. This has not happened, months after the deadline for state filing.

OXFiscal2-10-16

At meeting- (L-R): City Attorney Stephen Fischer, Councilmen Bert Perello and Bryan MacDonald (task force Chair), City Manager Greg Nyhoff, Consultant/Sr. Financial Advisor Dave Millican, Controller Christine Williams, Assistant City Mgr. Maria Hurtado (facing away), resigning CFO John Lillio. Not shown: Asst City Mgr. Scott Whitney. There were also other employees, members of the public and Oxnard Fire Dept union President Jeff Donabedian. Photo: George Miller/CitizensJournal.us

There has been a big management shakeup since Greg Nyhoff became City Manager in June, 2014. The former Director of Finance left under a cloud in December, 2014 and retired. Consultants were retained to buttress and advise Finance Department staff. A new CFO (Chief Financial Officer), John Lillio, came aboard last year and was immediately immersed in a struggle to reorganize his department and clean up what was described as poor adherence to systems, policies and procedures. He also had to manage day-to-day business, upcoming budgets and reporting.  Recently, he decided that he had had enough and couldn’t put up with two more years of 70 hour weeks and driving back and forth from his Santa Clarita home to downtown Oxnard. So, versatile and experienced consultant Dave Millican is now acting as the “Senior Financial Advisor” until an Interim CFO is put in place in the next few weeks.

State Controller demanding answers

So far, the combined audit team has identified over $90 million in discrepancies, including large liabilities. The State Controller has not reacted favorably to this, demanding quick answers to a list of 18 hard questions, asking for clarification of postings and explanations of apparent discrepancies. Evidently, the letter ( State Controller’s Letter ) was received on 1-28-16 with a demand for answers by 2-1-16, a significant undertaking in a very short time. The city negotiated an extension to this to Friday, 2-12-16, still a tall order. Councilmen Bert Perello and Bryan MacDonald were irritated to be blindsided by not being told about it initially. It is unclear how he did finally discover it. Copies of the letter were distributed at the meeting with a City Manager cover letter dated 2-9-16.

It is unclear whether the state might step in with a full audit, or even take control of the city. The combination of unreliable record-keeping and worsening financial condition could trigger this. All this could in turn trigger bond rating downgrades. The city is already on a watchlist. A quarterly financial report presented at the 2-9-16 Council meeting suggested that isn’t imminent. Revenues vs expenses were said to be pretty good. However, cuts aren’t meeting targets. (The report is covered later in this article.)

Recent task force meetings had focused on the audit. At the 1-13-16 meeting, the auditors announced that they were unable to locate some transactions and therefore not able to resolve or even detect some discrepancies. Therefore they could not complete the audit.

This meeting had no auditors present, since they have departed. The agenda was to review the status of policies

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and procedures and adherence thereto (which has been cited as a primary cause of the Oxnard Financial records meltdown) and to review the audit status.

The public safety unions banded together to challenge the city on its financial condition, claiming it’s better than claimed and that staff and compensation cuts are uncalled for. So far, their forensic auditor has been unable to establish that and can’t even get audited financials to attempt it. Firefighters Association President Jeff Donabedian has been the lead challenger. We caught him in possession of the book shown here (right).

When asked about it, CFO John Lillio said that training is also weak in financial system user departments which provide data to the system. He said that department administration capabilities to do so need to be upgraded.

 

Fiscal Policy Task Force Meeting 2-10-16

Here are the meeting documents….

2-10-16 Oxnard Fiscal Policy Presentation

FPTF staff report

State Controller’s Letter

Meeting video, by Dan Pinedo/CitizensJournal.us: 

Review of Financial Management Policies

Most of the meeting was focused on the work to review, upgrade and implement Systems and Procedures. Financial management shortcomings are at the heart of the problem with bookkeeping and financial execution.

Last year’s operational audit of the City revealed some 128 deficiencies in various area. Quite a few were in the Finance Department. We were told that the work encompassed 60 policies in 19 areas, with 34 (57%) in compliance, 25 (42%) out of compliance and 1 which could not currently  be complied with (reserve requirements). Mr. Lillio’s staff report summarizes the situation here: FPTF staff report

Just some highlights (and lowlights) follow…..

John Lillio stated that General Fund reserve policy is to hold 18% of estimated annual expenses and 25% for utility enterprise funds. The City is currently below that for most funds.

The policy to have a two year balanced budget can’t currently be met. Jeff Donabedian said that GAASP policies superceded city ones. Dave Millican says the Government Finance Association publishes best practices, recommending 16 2/3%, but it could vary, depending on known risks  and liabilities. The Oxnard General Fund is at 12.6% now. Previous violations of leave time policy, and amounts for workman’s comp and self insurance have all affected liabilities considerably. He said adequate reserves are needed for all liabilities.

In answer to a question about what percentage of policy problems were adherence vs no policies or rewrites needed, Mr. Lillio says it was all adherence problems. This wa seeming contradicted by Ms. Hurtado later, who said that “lack of written policies and procedure,” lack of investment in professional development and training were significant issues. She later told me that she has been augmenting management in the Finance Dept.

Millican said some maintenance work was treated as capital projects (incorrectly).

Indirect cost allocation system will be implemented in the next budget.

Bert Perello said the City needs a financial “dashboard,” providing ready access to key data about financial health. He also said that contracts in general need better, clearer, specific  scope, schedule and budget definition and that this has been a problem.

It was pointed out that Finance/policies aren’t just about bookkeeping, but also address: revenue opportunities, financial safeguards, cost control, debt management, project management, asset management, risk management and more

Financial policies will be brought to City Council for review, discussion and approval next month.

Audit status

A lesser amount of time was spent describing the status of the audit. Previous meetings have covered this in great detail. This is covered within the first section at the beginning of this article.  The bottom lone is that the auditors threw up their hands in frustration about not being able to access the transactions/documents they needed and left two weeks ago until needed information can be supplied by Finance. The City has attracted the attention of the state Controller, not a good sign. Weak computer systems were also cited as a problem. The antiquated system is said not to provide “as of” reports and is not easy to extract information from. An IT strategic plan identifies weaknesses and needs, but resources to do it are in short supply.  The summary plan we saw looks pretty god and was covered in a previous CJ article.

Per Maria Hurtado: Rumors of a $400,000 bank wire sent with no backup information are said to be false. We were told at the meeting that it was actually $2.6 million and that it consisted of multiple wires. Documentation was found.

 

Public Comment

Steve Nash, Planning Commission member and perennial watchdog,  said the Treasurer isn’t doing her job and requested a Council vote of no confidence. He also said that the position should be eliminated. He also objected to a lack of Task Force recommendations on needed cust and other specific spending policy decisions. He complained that some CIP’s (Capital Improvement Plans) haven’t been reconciled after 8 years. Someone else said that are even older ones. He also called for a review on transferring public safety to the County. He called on a report on how to transfer Measure O items when it sunsets. Finally, he wondered how will the General Fund absorb the loss of “Carman Override (special tax for public safety pensions) and Measure O funding.

Jim Lavery, a former South Bay municipal Financial Director, expressed concern about the effect of a downgrade n bond covenants. He also reiterated his offer to help the city- FREE.

George Miller said the Treasurer position should not be eliminated, but that the job description and adherence thereto should be reviewed and whether the job description incorporated traditional duties of  a Treasurer.

Phil Molina shared Nash’s concern about the CIP’s, said he had closed them out when he became Financial Director (in the 1990’s) and had it reversed. He said previous auditors, including KPMG)  have flagged that. Molina has previously offered the City help, with no takers. He also wanted to know where were the employees/whistleblowers to inform us of all these problems? H e noted that public health and safety were missing from capital budget priorities (sec. 6).

 

Subsequent written statements received from Phil Molina:

Many who attended the Fiscal Policy Task Force meeting yesterday remained afterward to discuss what happened and what we heard after the meeting concluded.
 
First we all agreed we weren’t told the truth. We all remembered the previous meeting  with the “power point” presentation by the city’s auditors identifying 3 major issues they had just found;
  1. A $400,000 wire transfer that had no documentation to show the purpose or reason for it;
  2. That the CAFR beginning balances were $90 million off from the ending balances; and
  3. That $19.9 million cash had been misplaced or lost in an IRS 457 plan.
 
(1) But yesterday  we were told by the Assistant City Manager that we are all wrong, that we were told the $400,000 wire transfer issues was identified only as “hypothetical” and not real. (This even though everyone else who attended including at least one Councilmember clearly recall we were not told this was a theoretical issue.) We were further told the real problem is a $2.9 million cumulative wire transfers that lack documentation, however,in very recent conversations with the City Treasurer, Daniel Navas, “she agreed to let the auditors look at the documentation in her offices”. This is incredible for so many reasons including why hadn’t the auditors already conducted a review of the Treasurer’s Office?
(2) Now we are told the CAFR/audit wasn’t in error, but rather staff’s submittal of a State Controller’s Report was incomplete and, therefore, short by $90,000,000 when the State compared that report to the city’s audit.
(3) Lastly I explained at the previous meeting that according to then new government accounting rules, and because the IRS 457 plan cash did not belong to the city, the city’s books could no longer show the cash as if it did belong to the general creditors of the city. Now the auditors agree and have decided to reinstate the footnotes that were entered back in 1998 to explain the reason for the change.
 
The public is getting tired of “the sky is falling” approach to fiscal matters and we want to be shown a check list of what needs to be done and  what has been completed instead.
 
I think the gist of what I heard people say can be condensed in this adage:
 
In our individual experience both in private and public positions organizations would hire consultants to FIX problems and to assist staff in FIXING the problems within the organization. What we have seen in Oxnard in the last 20 months, however, is that city executives have had to hire consultants to IDENTIFY the problems.  So now they need to hire MORE consultants or pay even more to current consultants to begin the process of directing staff on how to fix the problems.  BUT WHEN does anyone actually tackle the problems?
 
It sounds to us as though there is a new problem that begs the question: If the current executive staff isn’t experienced enough, or doesn’t have the acumen to find the problems much less fix them, why were they hired?
 
Just what I heard.
 
philllip m.
“““`
Attached is the report the City received from the California State Controller’s Office. According to the memo from the City Manager, Greg Nyhoff, the issue is that the city submitted a “controller’s report” with numbers that do not agree or match the numbers in the city’s CAFR/audit.
 
While this is an administrative error it isn’t unusual given the Controller’s report has an absolute deadline for submission but the CAFR does not.  What is unusual if the number and type of  clerical errors listed. For example the last page shows the Controller’s report required showing the Water Enterprise Income statement and it shows the city did not even complete one line of entry.
 
What this does NOT show is any “errors in the audit/CAFR”. In fact as the memo states the Controller is using the audit as the guide to check to see if the City filled out the “Controller’s Report” correctly.
 
The errors that I saw shouldn’t take one accountant more than one day to complete.
 
If the city had to hire a consultant to complete this report,  there is something wrong with the staff.
 
I have prepared the CAFR and the Controller’s report with the use of a mainframe printout and nothing more. I never made this number nor type of error report from the Controller.
 
Phillip Molina
 

City Manager Greg Nyhoff

Mr. Nyhoff told us that reflecting on occurrences during his 20 month tenure, he can understand peoples’ frustration with the situation. He drew sports analogies, saying this is like the 4th quarter of  a football game or well along a “20 mile marathon.” He’s pleased that the game plan is put together, pleased with the people he has surrounded himself with, vs. those he started with,. He further believes that “fixing the financial system is the last big piece …But, there’s still a long way to go.” He will accept criticism and continue to evaluate. He stepped into a disastrous situation. But it doesn’t change what we have to do. There have been tremendous mistakes. But, we can’t just say game over, we lost. Bad reports don’t mean we’re collapsing. He noted that the City now has a Whistleblower protection policy, which should help ferret out problems (which aren’t properly surfaced by the chain of command). He said that there is an RFP out for an internal auditor to run this.

 

Significance of All of This

The situation reflects poor management oversight and control for many years, through multiple administrations and councils. It was the responsibility of financial/city management and councils to detect and correct the situation.  Nyhoff has replaced the entire top management since he was hired. Middle management still has not been acceptably staffed. The Council, on 2-9-16, authorized hiring five more consultants to reinforce/backfill the department until the bleeding stops.

Staff training is considered to be very deficient

The good news is that they now know what was wrong and have made progress in improvement of S&P’s., bringing in staff and recognizing and correcting many discrepancies.

But while these fires are still burning, the State Controller and bond raters are circling like sharks.

Three swap agreements, which are interest rate financial hedges, might be declared in default if Oxnard fails to meet covenants. This was said to be unlikely. One alone has a $4 million+ potential cost to the city.

The lack of good financial information puts in doubt the numbers being used for budgeting, reports to government and financial institutions. It also seems to put the utility enterprise funds in question.

The thought entered our minds that the missing transactions might not all be found and some other solution might be needed. This is analogous to giving up on your checkbook reconciliation and plugging in the bank statement numbers or using estimates.

What is done about this in the next 90 days will be critical.

 

2-9-16 City Council Budget Presentation, Budget and Additional Hiring Authorization

The night before the Fiscal Policy Task Force Meeting, the Council heard a quarterly budget status update, approved the budget changes and authorized hiring five more people in Finance, partially offset by vacant, funded positions.  The budget had to be adjusted upward, but so was revenue. The big problem is that spending reduction targets were missed significantly, so cuts may be mandated. It was also noted that revenues are growing quite slowly.

These cuts would hit public safety (Police and Fire) hardest, but these departments are already lean and have taken cuts recently. Mayor Flynn brought up moving to county fire and police services- which has pros and cons. There was also discussion on why bargaining units have refused to give up anything. The budget was approved with $4 million in employee concessions baked in, which hasn’t happened. We may write an article about this if readers want it.

Here is the relevant meeting agenda material:

L. REPORTS
  Finance Department
1. SUBJECT: Fiscal Year 2015-16 Mid-Year Budget Update.  (071)
RECOMMENDATION: That City Council: 1) Receive Fiscal Year 2015-16 Mid-Year General Fund Budget Update; 2) Approve the budget adjustments and appropriations to Fiscal Year 2015-16; and 3) Approve the Staff recommendation for temporary and permanent staffing needs of the Finance Department.
Legislative Body: CC Contact: Joseph Lillio Phone: 385-7475
1. SUBJECT: Fiscal Year 2015-16 Mid-Year Budget Update.  (071)
RECOMMENDATION: That City Council: 1) Receive Fiscal Year 2015-16 Mid-Year General Fund Budget Update; 2) Approve the budget adjustments and appropriations to Fiscal Year 2015-16; and 3) Approve the Staff recommendation for temporary and permanent staffing needs of the Finance Department.
Legislative Body: CC Contact: Joseph Lillio Phone: 385-7475

You can also view applicable video segment- click on agenda, then section

Name Date Duration Agenda Minutes Video
City Council Meeting February 9, 2016 06h 02m Agenda Minutes Video

 


 

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

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Jim Lavery

What we needed as City Manager was a hard-nosed financial disciplinarian who would impose the painful cuts necessary right away in order to ensure a better future for Oxnard residents in the long run.

But things are still the same, nobody on Council or in the City Manager’s office knows a damn thing about finance. That’s why the executive staff are always in crisis mode, at the mercy of outside forces instead of getting ahead of this overriding issue.

The City Manager we got, who I consider a wannabe “life coach”, is now hedging on his austerity budget message, thereby
confusing all of the stakeholders.

Erik H.

Yes. I for one would like to see an article why they would be considering cutting police and fire. I would like it to be researched why bargaining sides have refused to take cuts. Do they know something that we don’t? Why would police and fire be most effected? Interesting…

Steve Nash

Here is the full text of my FPTF meeting of 2-10-16 comments.

“As stated last night, some CIP’s still have not been financially reconciled, even after 8 years. Whose responsibility is this, the Treasurer’s?

I would like to see the two council members who sit on the FPTF to make a recommendation to the full city council to execute a vote of no confidence in the job performance of the Treasurer.

I would also suggest the city council eliminate the elected position of Treasurer, to be replaced by an auditor/controller. At a total compensation package of almost $156,000, we are not getting our money’s worth.

The FPTF is a standing committee. The primary purpose of standing committees shall be to consider and recommend actions and propose policies in the functional areas under their jurisdictions, subject to final approval by the Council. The FPTF needs to start actually doing something. Council member Padilla announced last night she is ready to make the tough decisions regarding discretionary spending. Where are the recommended actions and policy proposals from this committee? As far as I can tell, all you do is receive reports. That is not enough.

I would appreciate the FPTF agendizing a report on the potential cost savings of transitioning the police and fire functions, including lifeguards, to county operation.

The FPTF needs to receive a report on how the on-going costs funded by Measure O will be absorbed by the General Fund when Measure O sunsets.

How will the General Fund absorb the potential loss of Carmen Override and Measure O funding for police and fire?

At last night’s presentation, I heard a figure of 76% of non-enterprise funds go to police and fire. What is the dollar figure represented by this percentage? How does this compare with other similar-size cities?”

Here are my observations on the meeting itself.

“1. The accounting firm of Eadie/Payne, who were hired to conduct audits of certain aspects of the City’s financial business (from the Star, “Eadie and Payne LLP will audit the annual financial report as well as annual reports for the golf course operator and RiverPark joint powers authority. The three-year contract totals $317,175.”), have, in effect, thrown up their hands and (temporarily) surrendered. They have suspended their audit until the City staff is able to provide the documents that will allow the process to continue. Documents, mind you, that may or may not exist. Can you imagine the systemic dysfunction that allowed this, in the words of City Manager Greg Nyhoff, “disastrous” situation to develop? Can anyone point out specific individuals who have been held accountable? Let me tell you, no one has had to answer for this. In fact, a deputy city manager, in charge of fiscal matters, received a resolution (http://oxnard.granicus.com/MetaViewer.php…) from the City Council to “commend, recognize and extend its gratitude” to this individual. Really?

2. The City Manager gave an analogy in the meeting that, even with all that has been uncovered, “we are at half-time”. Well, if the score is tied, that may not be so bad. If your team is losing 49-0, however, and the other team refuses to call off its big dogs then the situation becomes frightening in its implications. Today, we heard the State Controller’s Office (SCO) is asking for information on the SCO report on Financial Transaction for Fiscal Year 2014-2015 and Reconciliation of the SCO Report to the Comprehensive Annual Financial Report (CAFR) for the Fiscal Year 2013-2014. This is another huge, red flag along with the impending departure of our CFO.

3. What, exactly, is the obligation of our elected Treasurer, who in 2014 pulled in over $155,000 in total compensation, to be a watchdog over the City’s financial matters. This individual claims her only obligation is the investment of the City’s cash in safe, financial instruments (which seems a ridiculously simple task for $155,000 per year). From her election bio, “As director for the Treasurer’s Office I manage the functions of Licensing, Utility Billing and the critical task of analyzing daily cash flows for the prudent investment and safekeeping of the City’s investment portfolio.” Perhaps this elected public servant might have contemplated safeguarding the public weal, as well. She has had ample opportunities to question the apparently almost total absence of financial checks and balances to the City Council and the public since she was first elected in 2008. To the best of my knowledge, she has not done this, not once.

4. Financial records and reconciliations are so unclear, the City Council will be asked to approve a one-year budget as opposed to our current two-year budget cycle.

5. How will the long-term costs currently funded by Measure O be absorbed by the General Fund when Measure O sunsets? There has not been any public discussion on this that I am aware of. This is analogous to a balloon payment coming due in 5 years on your mortgage and you have no idea it is your responsibility to deal with it.

6. How will the General Fund absorb the potential loss of the Carmen Override?”

Thanks to George Miller and Citizen’s Journal for their coverage of this incredible boondoggle of a situation. For those of us fortunate enough to attend these meetings, we have come to realize that the financial record-keeping is so horrendous and irreconcilable that the City may just have to wipe the slate clean, accept the bank’s figures and start fresh.

Yikes!