Fiscal 'anomalies' explanation forthcoming, Robertson says
An explanation regarding Crestwood's financial "anomalies'' and why the city has to borrow money to meet payroll and operating expenses is forthcoming, according to Mayor Jim Robertson.
Robertson's comments were made last week during an "interactive seminar'' on redevelopment that was attended by more than 65 residents. The Oct. 21 forum, the first of three planned by the city, primarily focused on Crestwood's finances.
The financial "anomalies'' were discovered by City Administrator Don Greer and Director of Finance Diana Madrid during the preparation of an end-of-the-year bud-get adjustment ordinance designed to close out the city's fiscal 2003 books.
After the "anomalies'' were discovered in July, Greer said he believed the city would have to borrow money this fall to meet operating expenses.
The Board of Aldermen voted in September to borrow up to $1.25 million from Southwest Bank.
During last week's seminar, a resident asked why the city is borrowing money.
After explaining that the debt must be completely paid by June 30, Greer said, "Now, the real part of your question has to do with what we've been going through for a number of months ...''
Robertson interjected, "It's 18 (months) for me, 10 for you (Greer) and seven for her (Madrid) ... If there's one thing I learned when I ran for office is when you're a candidate, you'd say anything. I didn't. I tried not to, but you can. When you hold an elected office, there's some things you can't talk about, but they're precious few. The real problem is there are some things that you can't talk about now, but you will be able to talk about in the relatively near-term future.
"The answer to your question is coming, but I can't give it to you tonight — but it's coming because we're just now getting a total handle on the events that brought us to the situation where we have to borrow money. That's the best answer I can give you this evening. I'm sorry, but you will get a better one ...,'' Robertson said.
The Board of Aldermen voted unanimously Oct. 14 to approve an ordinance selecting Brown Smith Wallace as the city's independent auditing firm.
Brown Smith Wallace is the same auditing firm that has been researching the city's financial anomalies for the past several months. Besides performing an audit for fiscal 2003, the firm will restate the city's financial statements for fiscal 2001 and 2002.
Under the City Charter, the Board of Aldermen is re-quired to provide for an independent audit of the city's books annually. "No certified public accountant or firm shall conduct the audit for more than five consecutive years,'' the charter states.
Because of that provision, Hochschild, Bloom & Co., which has audited Crestwood's books for the past five years, was ineligible to respond to the request for proposals.
In response to another residents' question at the seminar, Greer provided some specifics about the financial anomalies.
Greer said, "... In December, I was appointed city administrator for the city of Crestwood. One of the first things I did was to begin building some historical financial data with regard to our cash-flow situation ...''
Because the city's revenue stream primarily is comprised of sales tax, the amount of revenue the city receives fluctuates throughout the year, Greer said.
"Our expenses, because they're predominantly personnel related and utilities are very consistent expenses, are very stable through the year, they're very predictable. We have little control, little immediate control over our revenues. We have a lot of control, within certain limits, on our expenses because they're very consistent again. In a given year in a perfect world, assume we had more money in the bank than we knew what to do with, starting in October, where we're at today, up until about January, our expenses will exceed the revenues for that period of time because it's just a really bad time for collecting sales tax,'' he explained.
"Again, remember sales tax is 53 percent of our entire general fund (revenue). The idea, the concept, is to have money in the bank ... enough money in the bank to cover that time because by the end of the fiscal year the revenues have caught up and by June 30 of any given year, we balanced. Hopefully we've done more than balance, but at least balanced,'' he continued.
"... What I discovered in the late winter were some questionable journal entries in our financial package and questioned where we were and what was going on with that. I found that a number of revenues were grossly overstated, over anticipated,'' Greer said, noting that revenue projections in the current budget are "conservative.'' "I can't say that that was the same approach that was used. They were anticipated to be much higher than I personally believe was reasonable ... If you have a million dollars worth of expenses and you are anticipating a million dollars worth of revenue, the expenses, again remember, are very fixed and very consistent. So the chances are very good that if you believe that you're going to have a million dollars worth of expenses, you have a million dollars in expenses.
"If, on the other hand, you had to stretch that revenue projection to get it to a million dollars, let's say it only comes in at $800,000, there's $200,000 there somewhere. There was a pattern of that. There were some, some what I call 'anomalies' in some of our historical data,'' Greer said.
"I took that information to the board and asked them to authorize the hiring of forensic auditors to come in and take a look at our books. They've been here for the last several months. The books are in bad shape,'' he added.
But the city administrator said city officials are close to knowing exactly what transpired and a public report soon should be issued.
"We believe that we are very near the point of knowing exactly what happened and how and what,'' Greer said. "The board will be making that report public or some portions of that report public so that you do have that information, but, in essence, we had some bad accounting practices ...''
Greer informed members of the Ways and Means Committee in January that while the Board of Aldermen was led to believe the city's general fund was balanced at the end of fiscal 2002, that was not the case.
"I have been led to believe that there were journal entries made to balance the general fund. By that I just simply mean that expenses were transferred into another fund to give an inaccurate ending fund balance. There's no money missing or anything,'' Greer said Jan. 18.
Under the City Charter, the city administrator is authorized to transfer all or any part of unencumbered revenues among accounts within a department after the budget is adopted. However, the approval of the Board of Aldermen is required to transfer unencumbered revenues from one department to another and "monies held in reserve, contingency or undesignated funds shall be transferred or encumbered by motion of the Board of Aldermen,'' the charter states.
Though the Board of Aldermen adopted a balanced fiscal 2004 operating budget in July, preparation of an end-of-the-year budget adjustment ordinance designed to close out the city's fiscal 2003 books led to a revised fiscal 2004 general fund budget that projects a shortfall of $112,010.
During the preparation of the budget adjustment ordinance, which has yet to be presented to the board, city officials discovered that fiscal 2003 general fund expenses were slightly more than anticipated, while revenues, particularly those from merchant licenses, were far less than projected. Greer first reported these anomalies to the city's Ways and Means Com-mittee July 7.
The financial anomalies have been researched by the forensic auditors and have led to a need to restate the city's fiscal 2001 and 2002 previously audited statements.
In response to a question about the qualifications of the forensic auditors, Greer said, "... They're forensic auditors, they have quite a bit of experience in doing exactly what we hired them to do and they are CPAs, yes. The lead auditor (has) over 22 years of forensic auditing experience. One of the partners is a fraud auditor and he's got 25 or more years of fraud experience.''
In response to a question, the city administrator acknowledged that nonresidents were prohibited from attending the interactive seminar and will not be allowed to attend future forums.
"If there's grief about it, understand that it's my call. This is not a public meeting, not a public meeting,'' Greer said. "This is not a public meeting. If there's any grief about the fact that I excluded people from this meeting, it's my grief, OK.''
Asked who was excluded from attending, Greer said, "If you were not a resident of the city of Crestwood, you were not invited to this meeting. There were several people who were turned away ...''
One of those nonresidents who was "turned away'' was Kelley Isherwood of Oakville, chairman of the Crestwood Smart Growth Alliance.
But during a Sept. 12 interview with the Call, when asked if he planned to attend the interactive seminars, Isherwood said, "No I don't. I want to see what they do. I mean I don't plan to attend and the reason is, it's their show.
"You know, I mean I'm glad they're doing it and that's what we say here, we commend them right up front,'' he said, referring to a press release in which the alliance commended city officials for placing a moratorium on redevelopment.
"We commend you for what you're doing. We hope you do it right,'' he added.