City Finance Problems | Credentialed Finance Experts Cross-Examination of the Betta Report

Experts agree with Betta that the city is very unlikely to get the GFAO’s Certificate of Achievement for Excellence in Financial Reporting, as it did for 30 consecutive years prior.

REPORT: Experts respond to the South Pasadenan about an alarming report from Municipal Financial Expert Josh Betta

Former South Pasadena Finance Director Josh Betta started a firestorm last week when he released his 56-page critique of the city’s proposed 2020-2021 budget. Betta said the city has based its recent budgeting on “blatantly incorrect” information about its reserves, called the proposed 2020-2021 budget “astonishingly incomplete” and laid out over two dozen concerns about the city’s budgeting process and disclosure practices.

The report raised questions about the oversight of city management and the City Council, led to a petition signed by nearly 150 South Pasadenans calling on the city to delay adoption of the new budget until its long overdue audit is complete, and the convening of formal and informal meetings among interested constituents across the city.

It also coincided with a completely separate citizen analysis calling attention to the dozens of differences between in the draft budget approved May 26 by the city’s Finance Commission and the one placed for review on City Council agenda five days later, as well as with a protest set for Wednesday evening by South Pasadena Youth who want the city to consider changes in the budget to address their concerns about police department practices. 

Budget issues can be complicated and require special expertise to assess. The California Society of Municipal Finance Officers is the state’s “preeminent resource for promoting excellence in government finance.” To provide additional third-party expert perspective, the South Pasadenan News asked two officials connected to CSMFO to look over and comment on the Betta report. Two agreed to do so: William Statler and Kofi Antobam.

Statler has over 30 years’ experience as a senior municipal finance manager and ten years as a consultant, trainer and author, is a former president of the CSMFO and co-author of a textbook on local government finance in California. He said Betta is a “well-respected local government finance professional” and the concerns he raises “deserve serious responses from the city.”

Statler said he could not speak to the accuracy of Betta’s findings. “There may well be good, reasonable explanations in response to all of 27 observations in his report,” the common thread of which is “the perceived need for greater disclosure and transparency.”

He said the report raises five top concerns: reserves, late audits, interim financial reports, budget deferral and budget process. On reserves, Betta pointed to a $4.5 million discrepancy in audited 2017-18 and budgeted 2020-21 unassigned reserves. On this, Statler underscored the comments of the national Government Finance Officers Association, which earlier this week told the South Pasadenan News that absent a full audit, it is impossible to say whether the discrepancy Betta points to “necessarily means that something is wrong” and that the question should be put to the city’s Finance Director. “If this is easily reconciled and explained, then there should be an easy response by the Finance Director,” Statler said.

As for the late audits—the city’s 2017-18 audit was issued almost a year after it closed its books and its 2018-19 audit has not yet been completed— “sometimes this happens and is not a cause for alarm per se. A city may face unusual challenges internally.” But he said it is “important for a city to articulate why this happened (especially when it’s late two years in a row) and its plan for getting timely audit issuance back on track.”

Statler said he does not know how well the City has been reporting on its financial condition between audits and nor may Betta, but “the concern is valid. In many ways, timely, accurate interim reporting is more important than annual audited financial statements.” Even when audits are produced within the California standard of 180 days after close of books, 18 months will have gone by during which serious financial issues can emerge. “Timely response to adverse circumstances requires timely knowledge about when they occur.”

As for the need to defer approval of the budget until the audit is issued and questions about the City’s starting reserve position are answered, that too will depend on the City’s response to the report’s concerns. Again, he said, “it’s very possible there is no ‘there’ there: that concerns have been mitigated, don’t exist or there is a different story to tell.”

Statler said the “most disconcerting—if true” concern about the city’s budget process as relayed by Betta is the lack of a budget message from the City Manager. “This is a key ‘best practice’ where the city manager presents the budget from a policy perspective, transcending the numbers.” What are the key challenges the city faces, how does the budget respond to them and what are its key assumptions?

Both the version of the budget approved by the Finance Commission and the one presented to the City Council include a 12-page agenda item report that, in a subsequent review, Statler said covers “many of the areas one would expect in a budget message.” But he said this would normally be in the budget document itself, as there is no guarantee that a future reader of the budget will have access to the agenda report.

Statler did not review the differences between the commission approved budget and the one presented to the City Council five days later, but said that in general, if any substantive changes are made, the city should highlight them.

In summary, “the City may have a much better fiscal story to tell than the one presented in Mr. Betta’s report. If that’s the case, then the City needs to tell that story.”

Kofi Antobam, CPA, CFE, CIA, is the CSMFO Coachella Valley Chapter Chair. He is Director of Administrative Services at the City of Rancho Mirage where he oversees finance, human resources and risk management. In reacting to the report, Antobam focused on Betta’s lead assertion that for two consecutive years, the city has adopted annual budgets premised upon “blatantly incorrect” information about its reserve position. Betta compares the audited, 2017-18 spendable undesignated reserve figure of $11.2 million to the $6.7 million figure for the same line item in the 2019-20 adopted budget and discerns a “budgeting error” of $4.5 million.

But the audit for the intervening 2018-19 fiscal year has not been completed, nor the non-audited numbers presented, Antobam points out. “You have a whole one year in between these two periods where the information is missing. It could be the city spent $4.5 million of its reserves. To say this is inaccurate is not the correct conclusion to draw without the 2018-19 information.” Antobam said the change might simply reflect differences in projected and actual revenues and/or expenses. “The budget is an estimate,” he emphasized.

But Antobam agrees with Betta that even without the audit, city management ought to have some way to account for the differences. The information should be available even if it is not audited– for example, if the Council authorized an unbudgeted expenditure, or some revenues or expenditures are coming in more or less than budgeted. This year’s dramatic impact of Covid-19 is an example. “Updates to Council on actual results of operations versus budgets or any unexpected events impacting city finances should be discussed with Council during the mid-year budget updates or at year-end.” The lack of midyear, quarterly or other regular budget updates by South Pasadena’s management is another of Betta’s criticisms.

Although recommended by Betta as “best practice,” most of the points he raises relate to management preferences, Antobam said. Some things “you should not have to be told to do,” but are nevertheless the prerogative of the city management and City Council. “It’s a choice. That they are not written or required, however, that does not mean something is wrong.”

Antobam said the most relevant question to ask is: “why are the audits not getting done?” It could be a staffing problem, staff turnover, the lack of an auditor or some other logistic matter. “The lack of an audit does not mean someone is doing something wrong.” But it is a problem that can and should be resolved, because until it is, the reliability of the financial information the city is working with is in question. The reasons for why the problems which led to the delays also must also be addressed.

Both Statler and Antobam agreed with Betta that the late audits mean the city is very unlikely to get the GFOA’s Certificate of Achievement for Excellence in Financial Reporting, as it did for 30 consecutive years prior to fiscal 2017-18.