A former South Pasadena finance director whose trademark combines a dramatic flair with a sharp eye for detail has a warning for the city:
“For the last two consecutive years, the City Council has adopted annual budgets premised upon blatantly incorrect information about its reserve positions.” In addition, the fiscal year 2020-21 budget — poised for adoption this month after staff scrambled to rework it in response to plunging revenues and rising uncertainty imposed by measures to slow the coronavirus — is “astonishingly incomplete, a representation of intellectual dishonesty.”
Josh Betta, a retiree who served as the city’s finance director from 2001 to 2008, says the budget proposed by Finance Director Karen Aceves and unanimously approved on May 26 by the city’s Finance Commission, also fails to provide any reference to growing pension and other expensive post-retirement benefits. He accuses the city of foregoing technical disclosure in the proposal for the “uninformed opinion” generated by the city’s interpretation of the results of last month’s online public engagement survey.
Betta’s report comes as several groups of citizens are raising new questions about the budget, which the South Pasadena City Council was scheduled to review Wednesday evening June 3. Six hours before it was to begin, the meeting was cancelled in response to the countywide curfew and postponed until June 10 — a week before the Council is scheduled to vote on the $27.4 million budget.
Betta, whose 30-plus year municipal finance career includes stints as finance director in San Marino, Glendora and other cities, most famously was tapped to lead the reform and transparency program for the City of Bell’s finance department in the aftermath of that city’s notorious scandal over the misappropriation of public funds.
Betta says he “twice petitioned the city to review” his report before publishing it but was turned down by South Pasadena City Manager Stephanie DeWolfe. On Thursday, DeWolfe declined to confirm or deny Betta’s account. After obtaining a copy of the report, which Betta sent out late Thursday, DeWolfe promised to provide a response sometime Friday.
In the 56-page document, about half of which is composed of exhibits, Betta details some two dozen “observations” on infirmaries he sees in the city’s budget and finance practices. For each he offers recommendations and reforms, most of which call for a range of new reporting and transparency procedures.
Betta’s key complaint, and the finding that moved him to take a deep dive into the city’s public financial documents, is a $4.5 million “disclosure error” he identified in the city’s FY 2019-20 budget. The audited spendable reserves for FY 2017-18 total $16.99 million, he notes, while the same item in the FY 2019-20 budget is $12.48 million, a “budgeting error” that totals $4,488,963. From this he concludes the “FY 2017-18 General Fund audit information was misapplied to the FY 2019-20 adopted budget.” He goes on to identify a similar reserve disparity between the FY 2016-17 audit and FY 2018-19 budget totaling $3,737,708.
“Similar errors are evidenced [for] most other funds,” he continues, including hundreds of thousands of dollars in differences between the audit and budget for items such as Proposition A, Measures R and M, the Water Fund and Street Lighting. He says similarly incorrect information was provided to the city’s Finance Commission.
“The inability of city leaders to apply correct reserve amounts to the data included in their last two budgets…creates questions about the city’s competence in managing the integrated relationship between its audit, budget and other financial plans. Errors suggesting deficiencies in professional judgment of this magnitude can have dangerous consequences” that may not find remedy merely through new policies, he writes.
Misstatements of this order to a city’s reserve position also suggest a likelihood of additional misstatements, he told the South Pasadenan News in an interview.
A representative of the national Government Finance Officers Association 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.” It said the question should be put to the city’s finance director.
Terry Shea, the city’s auditor and a partner at Rogers, Anderson, Malody & Scott LLP (“RAMS”), which is in second of a three-year contract to supply South Pasadena’s auditing services, did not return calls seeking comment. Betta said he did not seek to contact Shea because it would be a violation of Shea’s “professional privacy.”
Based on his conversations with the city’s finance director, Betta said the audit of the city’s 2018-19 books is significantly behind schedule and while city staff may see a draft sometime this month, the published final audit is not expected until July at the earliest — well after the scheduled date for approval of the new 2020-21 budget. Such timing is not unprecedented, Betta said, but it is “unusual.” The State Controller, he added, generally expects the filing of the audits 180 days after the close of the books, which in South Pasadena’s case would have been Dec. 31, 2019.
While RAMS identified three “material weaknesses” and three “significant deficiencies” in its audit of the city’s 2017-18 financial records, it nevertheless gave the city a clean audit. The city’s previous auditor, Moss Levy & Hartzheim, gave the city a clean audit for its 2016-2017 financial records.
Betta said he fully expects the delinquent 2018-19 audit to also be clean but said the scope of the auditor’s review does not include the city’s budget. “They have very little idea, if any, that the city has misstated those amounts. The audit firm is not responsible for the use of the information it creates” on behalf of the client or for the financial conduct of the client, he explains. “They have a scope of review that limits their liability.”
Betta said he was not paid for his analysis and produced it on his own after being approached by community members he would not identify. But as he watched recent City Council meetings, he realized the “deeper problem was a high level of confusion” over the lack of facts about contractual matters and payment authorizations. “When I saw disparaging treatment between the City Council over matters that are facts, that had not been presented in the public forum,” that is what set him off, along with allegations he’d heard over the last couple years that “the city was purchasing, contracting and engaging services inappropriately.”
The report comes not only as the city is rushing to adopt a new budget under a tight schedule, but as other citizens and some City Council members have raised other questions about the city’s financial management. Councilmember Michael Cacciotti has asked about specific line items in the city’s monthly prepaid reports and recently demanded a list of the contracts the city manager has approved under her unilateral authority to approve contracts less than $25,000. The list disclosed 22 contracts since DeWolfe joined the city, half of which were for amounts between $24,375 and $25,000, for an assortment of tasks such as completing work assigned to vacant positions, polling, permit processing, audit prep and communication services.
There are also citizens concerned the proposed budget submitted for this week’s postponed City Council meeting is “significantly different” from the one approved by the Finance Commission. Local resident and management consultant Sheila Rossi said “the biggest issue of all is that it is an incomplete budget and doesn’t provide details for non-general fund revenues and expenses. Legal bills are well in excess of the $270K reported in the budget. Allocation methodologies have also changed repeatedly over the course of the last three years making it difficult for the average person (or trained financial analyst such as myself) to evaluate trends.”
The city has also failed for two years to post its annual Comprehensive Annual Financial Reports. Last year it also failed to timely file audited financial statements required pursuant to its $37.8 million water bond. The city promised to file them by March but did not do so until August.
The city is also set to receive a petition, signed by nearly a 1,000 persons so far, asking it to freeze the city police department’s budget, ”until a serious conversation about how SPPD can change its professional practices in line with progressive changes within the profession of policing.” SPPD is the only department city staff has recommended an increase for, arguing it is needed to comply with recently negotiated salary increases. After department heads, police officers are among the highest paid city employees.
Mr. Betta urges the public to read through the report, which he’s made available to the public, the City of South Pasadena via eMails to council members & staff, & various news organizations: CLICK HERE for the PDF Report from Mr. Josh Betta