After a conspicuous false start in June, the South Pasadena City Council at its Aug. 17 meeting took on the volatile recommendations of its Finance Ad Hoc Committee (FAHC), charged two years ago in response to the major crisis in the city’s financial management. But citing improvements and changes made since then, council rejected the ad hoc’s controversial recommendation for a forensic audit, adopted a rump variation of its call for an internal auditor, and put off a decision about whether to seek legal services from a new law firm until at least late December, when a new council is seated.
The matter last came up after midnight on the June 15 agenda, when council members took turns deriding the report’s alleged formatting and structural weakness, and dismissed it without discussing its content or recommendations.
Chagrined by the response, Council Member Evelyn Zneimer led the effort to revisit the report, ultimately with support from Mayor Pro Tem Jon Primuth and Mayor Michael Cacciotti.
“We dropped the ball,” said Primuth, who along with Council Member Jack Donovan served as the council’s representatives on the FAHC. “I dropped the ball in presenting it to the public. We focused on the negative instead of the positive.”
Primuth thanked the FAHC’s citizen members, most of whom were financial professionals. “The report provided important history of the magnitude of significant problems in the city’s financial reporting. It was a crisis.” He also thanked former Finance Director Josh Betta, whose unsolicited report “exposed in a comprehensive way the deficiencies in the finance reporting,” and former Council Member Steven Rossi and his wife Sheila, “for their role in compiling and identifying the significant number” and amounts of changes staff was making to the budget without disclosure. “It was a huge lack of transparency.”
“The city has gone through a financial reporting crisis stemming from some long-standing deficiencies and weaknesses that at first were not understood at all levels and then, once understood, were not addressed in a timely, transparent way. That was a mistake.”
“The work is not done in recovering from the crisis,” he added. “While there’s been a lot of progress, there is a lot of room for improvement.”
Mayor Cacciotti agreed. “We’ve come a long way” but have “farther to go.” He too thanked Betta and Steve Rossi, both of whom were present. Without their work, “we may not be here today; it may have taken a couple more years” to discover the problems.
Prior to the discussion, Interim Finance Director Ken Louie offered a review of the FAHC report and, unlike in June, provided staff responses. Staff recommended against all five of the substantive recommendations, including: creation of an internal auditor position, which staff estimated would cost $150,000; issuing, for now, a request for proposals (RFP) for a new legal services firm; bidding separately for city legal services and city litigation services; estimating the city’s legal liability, as legal and risk management staff already do that; and expanding financial reporting on legal, consulting, and lobbying costs. Staff accepted FAHC’s recommendation for quarterly reports on it progress implementing the recommendations, though given their wholesale rejection it was unclear what information such reports would contain.
Still, staff “affirmed” the FAHC’s findings that there was of a lack of: policies and procedures, transparency, recording of legal liability, financial reporting, and procurement guideline compliance. It said these concerns either have been or are in the process of being addressed, and argued this will “erode the need” for an internal auditor or forensic audit.
The improvements include the new Sept. 7 target date for the adoption of financial policies and procedures (the previous target was July); adoption of signature approvals for accounting; hiring a grants analyst; filing of the first mid-year fiscal report in many years; submission of monthly Treasurer reports; booking accrued liability; completion of the 2-year actuarial study and ’19-20 audit; and adoption of the ’22-23 budget. Bank reconciliations are now only about a month behind, and the city has brought payroll back in-house with a full-time accountant.
City Manager Arminé Chaparyan also promised to provide regular fiscal reports, first quarterly and, once the finance department is fully staffed in January, monthly. She said a great deal of new regular training is taking place; there’s been greater public engagement in the budget process; a review of “internal policies” is underway; and thorough evaluations of all departments are being undertaken.
South Pasadena hasn’t had a permanent finance director since October 2020 and the finance department remains severely understaffed and its workers overburdened. “It’s tough honestly, just to get the basic things done,” Louie conceded. “To get warrants and payroll out, it’s a battle.”
Moreover, Chaparyan does not intend to conduct the planned evaluation of the Finance Department until the finance director and the new deputy director positions are filled. Recruiting a director has been especially tough. On Aug. 16, the city began a “nation-wide” search that may not result in the hiring of director until as late as December, after the next audit is set to commence.
There was tension on this, as the city’s outside auditor recommended the hiring of at least two new accountants, and Armine Trashian, a critical member of the finance department, recently took a controller job with the City of Pasadena.
Louie, himself slated to leave the city in December, told the Finance Commission June 30 that within two months he and Chaparyan would present a plan “to add the optimal amount of staff.” But so far, the only changes have been three upward reclassifications of two management assistants to analysts, and of the position Trashian held to Deputy Director/Controller.
Chaparyan told the council she “agrees with the notion that we need additional staff” but said the department’s director and deputy director, both of whom have yet to be recruited, should make those and other resource-related decisions.
Mayor Cacciotti pressed this point, asking if savings from the current vacancies couldn’t be allocated to the provision of temporary assistance. Chaparyan said she is working on that, too.
Internal Auditor Alternatives
But Rossi told the council the litany of improvements do not address all the FAHC’s findings, such as conflicts of interest. “While there were frankly sufficient policies and procedures to have allowed us to understand long before the city council ever found out how badly a situation the finance department was in, had those policies been followed we could have discovered this situation much earlier and dealt with it before it became a crisis. The reality is people weren’t following the policies.”
He said under the former city manager, policies were “thrown in the waste bin and ignored. No one was raising this issue to council because there was a concern that if they spoke up, they would get fired.” An internal auditor reporting only to the council would “protect the city from a potentially future rogue city manager.”
Council asked for details about how an independent auditor would work and offered an array of alternatives. Council Member Diana Mahmud suggested the city could instead just “enhance” the duties of the city treasurer.
Rossi replied that part of the problem was the city treasurer wasn’t following city investment policy on certifying liquidity, the city attorney wasn’t reviewing the investment policy to see if it complied, and neither city staff nor the council knew the policy wasn’t being followed. Moreover, due to their rotating nature, council members are unlikely to know all the city’s policies or whether they are being followed.
Primuth, arguing an internal auditor would threaten employee morale, suggested adding policy compliance tests to the annual work of city’s outside auditor. He wanted to combine this with a monthly “operational integrity review” designed by the council that would include performance measures to replace the six “key performance indicators” the city manager introduced in the new finance budget, but which he said don’t offer ongoing monitoring of operations. “We need to beef up what we ask from the city manager.”
He referred to a prototype checklist of finance department “performance measurements” fashioned by former Finance Director Josh Betta, which lists 34 measures in 11 categories that, once established, could be quickly updated and reported each month.
Rossi said assigning policy compliance reviews to the city’s outside auditor wouldn’t work. “By the time you got that information it would be so stale, it wouldn’t be unusable.” The operational checklist, meantime, assumes that staff reporting the data are not trying “to just do what their bosses tell them for fear of getting fired”—something he said was the case among staff under the previous city manager, and led to the termination of one staffer who went on to sue the city.
Council Member Mahmud said it would be more cost-effective simply to add a policy inventory and compliance review to the department evaluations the city manager is already undertaking. The list of policies would be given to council members so they can ensure “the proper things are being done.”
Such an evaluation was recently completed for the public works department and others are in the works for community services, human resources and risk, the fire and police departments. Chaparyan is withholding the finance department evaluation pending the hiring of new finance management.
The council voted 4-0 to forego a forensic review, with Council Member Zneimer abstaining, and then 5-0 for the plan to add policy reviews to department evaluations.
Chaparyan also committed to monthly operational status reports that are not along the lines Betta recommended, but will include the finance department, department assessments, and major updates from departments on matters such as recruitment efforts—though when these reports will commence is unknown.
Legal Services RFP
Council then turned to the RFP legal services question. Council Member Zneimer, who has been pushing since her 2020 election to replace the city’s outside law firm, Colantuono, Highsmith & Whatley (CHW), moved to renew her Sept. 1, 2021 motion for the RFP, the need and timing for which the council at that time left to the discretion of the city manager. The June 4 FAHC report recommended an RFP be issued “immediately.”
“I had severe concerns about the prior city attorney, like a lot of people,” Mayor Cacciotti said, apparently referring to Teresa Highsmith who, though no longer attending council sessions, remains the city’s assistant city attorney. But he has confidence in Andrew Jared, another CHW attorney who now serves as city attorney.
The Mayor also worried an RFP would result in considerably higher rates, and wanted both to wait until December and receive a recommendation from the city manager. The winners of the two council seats now held by Cacciotti and Mahmud will be decided then, leaving the decision to the new council.
Cacciotti is seeking re-election in November but Mahmud, a strong supporter of CHW, is not.
Zneimer agreed to the Mayor’s terms and the council voted 4-0 to approve it, with Mahmud abstaining.
Zneimer, an attorney, also wanted a policy enabling council members to dispute billings from the city’s law firm. Chaparyan shot that down quickly, saying she knew of no city doing that. She reviews and verifies the bills, and council members are welcome to review them, but it is “not a best practice to dispute the work that a city’s attorney has done.”
Mahmud, also an attorney, agreed, saying that would be “micro-managing.” Primuth, also an attorney, said he’d support the policy, but had no sense he could not provide negative feedback about legal billings.
The council took no action on question.