Finance Commission | Disclosure Questions Raised

 

South Pasadena’s Finance Commission will hold a special meeting Thursday morning to consider whether to affirm its May 26 recommendation to the City Council to approve the draft $45 million 2020-2021 budget, including its $27 million general fund. The general fund budget for the fiscal year starting July 1 is being reduced $3.5 million due to lower projected revenue attributable to the ongoing pandemic.

The City Council, which is scheduled to take up the budget June 24, asked for the second look last week after discussing demands from at least four groups of citizens to instead adopt a “continuing appropriation” pending finalization of an outstanding audit, clarification of budget process issues and disparities, and demands for changes in the police department budget.

The call for a continuing appropriation comes from former South Pasadena Finance Director Josh Betta, whose 56-page critique of the draft budget has created a firestorm; Stephen and Sheila Rossi, who were the first to point out the budget presented to the Council was different from the one reviewed by the Commission; and William Kelly, who says the whole budget process “has been hurried and opaque” and gathered over 1,200 signatures from people supporting a pause, at least 130 of whom are South Pasadenans, including at least two city council candidates and seven current members of city commissions.

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In her report to the Finance Commission, Finance Director Karen Aceves said several changes have been made to the budget “because of updated information and in response to the pandemic. The updates have no bearing on the projected loss of revenue, magnitude of budget reductions necessary or the recommended reduction,” she added.

Rejecting the notion of a continuation appropriation, Aceves is asking the Commission to approve the budget instead with a plan for quarterly budget reviews and amendments.

Aceves wrote there have been two principal changes to the budget since May 26. One was to update revenue and expenses due the effects of the evolving Safer at Home order, reducing the operating budget by just over $50,000.

The other was a change to “fund balance,” also due to the effects of the pandemic order but also to correct “a long-standing accounting error” regarding transfers to the water and street funds. “Balances in the budget were also being carried forward from previous budgets and staff corrected that practice in the budget presented to Council” last week she added, noting the changes won’t “impact the overall scale of revenue loss or the reductions necessary to achieve a balanced budget.”

Aceves said in 2017 staff identified other deficiencies in the department’s practices and procedures resulting in fund balances being “incorrectly reported over many years.” Since that time, the department has been completely reorganized and made improvements to strengthen controls and practices. A presentation on those improvements is on the agenda for the Finance Commission meeting.

Questions have been raised as to how transparent the city has been about the discovery of these deficiencies. Last week, City Manager Stephanie DeWolfe told the South Pasadenan News that the discoveries were made largely in connection with two confidential audits that were undertaken in connection with a personnel matter, limiting the city’s ability to share the information.

She said the audits, which were provided Council members, led to the full reorganization of the Finance Department that the Council approved during a public meeting on November 7 2018, and so “it was fairly obvious to the public” what was happening, especially as it was discussed in the staff report for the reorganization item and during the public meeting.

There would have been no need for a document outlining the accounting issues, she added. “The legislative history is our agenda reports to the City Council. That is where all the information is documented and reported to the public and Council.”

The Nov. 7 staff report (Item 18) states an analysis and review was done of the department leading to the recognition of a need for “greater breadth, depth and a higher level of professional expertise,” but does not mention the “pattern of inappropriate accounting practices and internal control deficiencies” the city disclosed last week in response to the Betta report. No such language was used during the meeting itself; when then-Councilmember Robert Joe sought to raise the issue of the audits, DeWolfe warned him against doing so, noting they related to a personnel matter.

Nor does the City’s Finance Commission appear to have been briefed in any detail on the audits or accounting irregularities. Told in April 2018 the city was contracting with Citygate Associates “to provide a review of the City’s finance department operations,” Commissioner Edward Corey asked if it would be made public. According to the minutes, then Finance Director Miriam Lee Ko “responded that all of the report, except for personnel matters, will be presented and made available to the public,” but Corey, who this week said “I recall no substantive discussion of irregularities in the budget,” said he never saw the CityGate report.

Moreover, the Commission was asked to offer its reflections on the reorganization of the Finance Department, but only after the City Council had approved it — causing the commissioners to ask then Chairman Frank Catania to “draft a memo to Council outlining their dissatisfaction” with the timing.

Catania, a former assistant city manager who left the South Pasadena Finance Commission to help the city work on the financial clean up, said he did not know about the inappropriate accounting practices. He said he was aware the City was trying to replace the late David Batt, the ex-finance director who had recently retired, but said “if it involves personnel, that’s internal and [the Finance Commission] would not be involved.”

Ellen Wood, currently the senior member of the Finance Commission and herself a CPA and certified fraud examiner, said she recalls Aceves bringing the problem of accounting irregularities to the attention of the Commission. She said prior to the arrival of Aceves and DeWolfe, the Finance Department was “very old school” in that things were not computerized or done efficiency. “It needed to be modernized.”
Nevertheless, she says, “things were not as transparent as they should have been” and the commission “didn’t get enough information.” She said that may have been during the time the city was trying to get a handle on the extent of the problem and trying to fix things before coming out publicly.

As for the push for a continuing appropriation, she is “on the fence. We can’t take last year’s budget and continue it because the revenue will be so different, and we don’t know the expenditures.” She said seeing audits before adopting new budgets is a best practice but believes the city could adopt a “budget that would be flexible. Anything we do needs to be assessed and reassessed on a regular basis.”

Wood also said she is wary of Betta’s motives. “He seems to have an agenda, but I don’t know what it is.” She said Betta presents his report “as though he has done a real financial analysis. It is in the framework of what an audit report would look like without having the necessary facts” to make the conclusions he makes. But she said both Betta and the Rossi’s analyses “raise issues that should be raised and addressed.”

In her message to the Finance Commission this week, Finance Director Aceves said the small, 5-member finance department staff has been working to clean up the accounting issues, though it has been slowed by the “unanticipated need to contract with a new water billing agency and with the revelation of additional procedural deficiencies in payroll as result of the transition to an automatic system,” which was one of the improvements made as part of the reorganization. She said the department expects to complete the work by the second quarter budget review.