Oxnard’s late, troubled audit shows progress, but unsatisfactory for many- emotions run high

Contentious, emotional session on delays, errors, who is at fault

By George MillerAudit2

Tuesday’s (5-24-16) tumultuous, emotional Oxnard City Council meeting’s main topic was the status of the long, long delayed and troubled audit status. Normally, audits for the fiscal year ending in June are fully completed and CAFR’s (Comprehensive Annual Financial Reports) all settled with the state by calendar year-end. But here it is, almost June again, and the previous year’s preliminary numbers aren’t ready yet, based on what we saw on Tuesday.

Name Date Duration Agenda Minutes Video
City Council Meeting May 24, 2016 04h 57m Agenda 20160524 Video

Here are the relevant meeting materials:

1.
SUBJECT: Status Update and Discussion of Budget Impacts of Significant Audit Related Adjustments. (20/60)
RECOMMENDATION: That City Council receive a report describing corrected entries affecting the General Fund cash balances and net assets.
Legislative Body: CC Contact: Maria A. Hurtado Phone: 385-7430

Document: M-1 Budget Impact

Document: Adjustment Impacts Powerpoint Presentation (pdf 291KB)

 

Attendees came to the meeting expecting/hoping to see preliminary statements of the City’s financial condition as of the 6-30-15 end of the last fiscal year (14/15), now nearly a year ago. Instead, they were presented, by Interim CFO and Assistant City Manager Maria Hurtado, along with Consultant/Advisor Dave Millican, a summary of 190 adjustments made by staff and auditors, and a laundry list of problems and further areas of investigation required, to a document which was supposed to be pretty clean. When asked what a normal number of adjustments are at this point, Millican said “zero.”

Several regular followers of city financial affairs, such as Jim Lavery, Larry Stein and Phil Molina, felt that it fell considerably short of that goal.

City staff and Council members have pointed out that this is way more than a regular audit. It is a major scrubbing of financial records and procedures going back many years. In some cases, problems date back to the early 1990’s, when improper treatment of employee pensions and ancient construction projects, assessment districts, have now come back to haunt the City in 2016.

The City is refusing to release preliminary trial balance/statements, which is a clue that they have little confidence in the numbers yet.

Because this is such a big deal, CitizensJournal.us has been attending and covering meetings of the Financial Policy Task Force for months. The regular May monthly meeting was canceled, we were told, because there was nothing new to report and staff/auditors need to focus on getting something done. Well, on Tuesday we learned that there is plenty to report and not enough got done to produce a CAFR, or even a fairly credible preliminary statement of financial condition. But it did seem as if they are much closer and that probable remaining errors/adjustments errors are much lower. Some regular watchers of City affairs know that there is more to be learned at these lower key, more freewheeling meetings than the more circus-like, politicized City Council meetings.

 


 

Read our Tuesday, May 24 report on this subject:

Oxnard audit effort finds $3.7 million more bad news, but clarifies situation

Oxnard audit effort finds $3.7 million more bad news, but clarifies situation

By George Miller-  There have been many months of painful struggle over Oxnard’s error-plagued financial control/accounting system, under three Finance Directors/CFO’s. there have been endless, embarrassing and dangerous delays in trying to complete a successful audit and CAFR (Comprehensive annual Financial Report). Now, the City will be announcing its penultimate results at tonight’s City Council meeting. We say […]


There are still some unexplained things. For example, if the City ended up with a $13 million General Fund balance on 6/30/15 after loans and transfers, then why is it still supposedly $13 million even after another $3.7 in unfavorable adjustments? What exactly are the obstacles to finishing the work? 

 

Too little, too late?

Just about everyone, from Mayor/City Council members, City Manager, consultant Dave Millican, auditors, admits that the problem was grossly underestimated, that insufficient resources were brought to bear in time, that management changes and key hires should have been done far more expeditiously.

After lengthy delays, City Manager Ed Sotelo was put on leave in January, 2012, Assistant City Manager Karen Burnham was made “Interim City Manager,” never a good place to be when major changes are needed and a mandate is lacking. The Council did not make her permanent, failed to hire a permanent City Manager, until Jun, 2014, when Greg Nyhoff was installed. Nyhoff and former Finance Director James Cameron parted ways after a few months, when it became evident that longtime problems predating Cameron were not being solved  and new ones surfaced.

A city operational audit, then a financial audit revealed many problems. But more and more kept being discovered, even recently and still more may be uncovered. While previous auditors discovered some of these problems, the aforementioned audits discovered all sorts of things they did not note.

But even Millican and Nyhoff later admitted that they had no idea how bad things were. Then months later, they again conceded that even their revised assessment of the city’s financial system and records was too optimistic.

At this point the CAFR is a half year late, the audit isn’t done and there is still a fair amount of work to be accomplished. We are told that things are on track for the revised, revised schedule, but that has been said before.

The public, Police & fire unions and Councilman Perello’s (on the Fiscal Policy Task Force) reaction to the situation was brutal. Part of working in a high level public service position is enduring such abuse, which was dished out in abundance. Jim Lavery, Larry Stein,  Martin Jones, Al Velasquez criticized lengthy delays, made accusations of cover-ups, criticized the extensive use of consultants and very high accompanying costs, high legal fees, some of which are for questionable or or unnecessary activities, incompetence, belated discovery of irregularities.

The lack of a full-time professional CFO was again noted. Two days later, City Manager Nyhoff announced that Oxnard now has one:

Oxnard City Manager appoints David Millican as new Chief Financial Officer May 26, 2016

Oxnard City Manager appoints David Millican as new Chief Financial Officer May 26, 2016

OXNARD, Calif.–City Manager Greg Nyhoff announced the appointment of David Millican as the City’s new chief financial officer on Thursday, May 26, 2016. Millican will be responsible for establishing and implementing sound financial policies and standards for the City. He will also oversee the preparation of quality financial reports and projections. He will begin his […]

 

The Auditors

Oxnard switched auditors last year bringing in Eadie +Payne to take a fresh look at the City’s finances. At the time, we thought that their bid seemed low and said so, considering the magnitude of the task, which even then appeared to be formidable. Unsurprisingly, they were forced to revise their assessment and come back to ask for more time and money to complete the job. At this point, they are doing more than just auditing and are also helping to do some of the work and even provide some training.

We were told that the auditors’ field work is now complete and is in review.  Work will begin on ad

Interestingly, the auditors were not at the Tuesday meeting to talk about the audit item on the agenda.

 

Budget Process Adversely Impacted

The delays in and expanded scope of the audit and CAFR with the resulting heavy workload imposed on staff have distracted them from pursuing the budget process on schedule. In addition, balances carried forwarded and even actual revenue and expenditures history are uncertain.

 

Public Safety Unions Weigh In

The Fire and Police unions had the following questions, some of which were addressed during Tuesday’s meeting. Mike Johnson of the police union read a list prepared by Jeff Donabedian of the Firefighters association:

Questions for City Council on Item M-1

  1. Please explain in detail what makes up the $346,000 entry for the Internal Service Fund and what specifically makes up the $549,000 entry for the Golf Course?

 

  1. Please explain in detail the $3,347,000 correction for the Sales Tax accrual? This sounds like an accounting change in accrual methods? Explain how this entry affects the city’s draw down of sales tax revenue for FY 15 and how much total sales tax revenue was received for FY15? Is there a report from HDL consultants, our sales tax specialist to back this finding up? In the past we based accruals on when sales taxes were due to the State. This would not impact cash. If the problem is because the State estimated a higher payment than actuals, you would likely see adjustments, but there should be supporting documentation provided with this claim. They mention the triple flip, which would be a different issue. Basically there is not enough information here to make heads or tails of this item.

 

Mr. Lillio stated in his presentation last fall that sales revenues were up! There is absolutely no mention of this accrual error that has ever surfaced. HDL is the only group dealing with the city’s sales tax. That’s what they are paid to do. This issue should have been known long before now, if all of a sudden in May 2016 they notice a problem with the accruals from FY 15. It appears there may only be some accrual changes with no supporting documentation.

 

  1. The leave balance adjustment for $1,180,000 is an issue that should have been anticipated for and planned for when the City changed the city’s leave policy at the end of 2014. These funds are not payable until employees leave or cash out leave. Please explain how you will plan for this in the next year, since it appears more employees will be leaving? This is typically done as a transfer to the payroll trust fund then charged to the corresponding department.

 

  1. We were told several months ago that were serious problems in the Capital Projects and/or depreciation. Why is there no mention of this issue in this report? Was it a concern or not?

 

  1. Post Employment Benefits (OPEB)- This had been identified as a shortage in late 2014, which was reported to the City Manager and financial consultants. We were waiting on a new actuary before taking action. This looks like the amount that had been estimated in late 2014. Has no action been taken prior to the end of Fiscal Year 2015? It is also not true that OPEB was not expensed in the past, as it was part of payroll charges to the corresponding departments.

 

  1. IRS FICA – The City started looking at this issue in late 2014. At that time we did not have enough information to make a determination of the impact, which was apparently not taken care of since 2014. The amount shown is possible, but no supporting documentation is provided to back up these claims.

 

  1. Fund Cash deficits – It is not uncommon to cover cash deficits in other funds from General Fund (GF) cash. The question(s) is in the intent to have those funds repaid. Some of the smaller items are not a surprise nor uncommon such as City Corp (which can be seen in past financial documents). CUPA fees should be adjusted to cover the shortfall and a transfer could be treated as a loan (offsetting decrease in net assets). Internal Service Funds deficit should be treated as a loan. The question is, are these true cash deficits or fund deficits? Golf is an ongoing problem. A GF loan might be possible at the end of FY2015, as we know that bonds will be paid off at the close of this FY2016, which will free up future cash flow. Again it may still reduce GF cash, but needs to add a receivable to offset.

 

  1. All LMD funds are not a part of the General Fund. LMD 41 would just be a transfer. This City acts as an “escrow agent” in these types of funds.

 

  1. In February’s Mid-Year Budget update, Mr. Nyhoff stated we had a $14.6 GF balance which was used to justify increasing his non-departmental budget by $5 million. The majority of that line item is to pay for the consultants. Remove that one item, and that alone would cover the cash adjustments and then some.

 

  1. After issuing contracts for consultants and subject-matter experts in the $9-$10 million range, how much more is the City willing to spend given the extremely limited resources? How much longer will we need all these consultants/subject matter experts? In other words, when will the internal structure in the Administrative side of the city be fixed?

 

  1. Have the new policies been put in place in order for staff to have directions to guide them on how to do their job correctly, or is it still status quo from the past? Where is the change? Updating purchasing manual, personnel manual, finance manual, IT manual…..where are those promised changes? For what this City is paying subject-matter experts, it does not seem that difficult that these issues were not fixed in almost 2 years time.

 


George Miller is Publisher of Citizensjournal.us and a “retired” operations management consultant, active in civic affairs, living in Oxnard.

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Debbie
Debbie
4 years ago

Thank you so much for this reporting!

Eileen Tracy
Eileen Tracy
4 years ago

I would have liked to see the list of 190 journal enries