“RISK OF FRAUD” at City Hall

“RISK OF FRAUD” at City Hall

For several years, CAG has expressed concern about fiscal management (or mismanagement) at City Hall, but our concerns have been generally ignored by City Management.  Now as a result of reviewing City documents, we have learned that the City’s own auditors have expressed similar concerns.  In a letter to City Management and the Council dated May 5, 2011 the auditors expressed concern about the lack of checks and balances in the management and reporting of City finances.  The auditors identified “significant deficiencies in internal control over financial reporting” and summarized their concern with a concluding statement that the “limited segregation of duties increased the risk of fraud and error.  In spite of the seriousness of the matter, we are not aware of any effort by City Management or the Council to discuss the threat openly or candidly at any regular Council meeting.    

To bring CAG’s concerns up to date, and in order to affect transparency in City financial matters, CAG has invested considerable time in review of the City’s 2012 budget, and the 2010 audited Financial Statement (the 2011 Statement is not yet available).  The financial facts presented below are only a sampling of the kind of data that we believe deserves public awareness, the tip of the iceberg. 

Unfortunately this is not the kind of data that City Management presents at regular Council meetings for public discussion and deliberation, but it should be.  And of course this was not presented (or highlighted) in the Truth in Taxation Hearing in December 2011 when the 2012 budget was being finalized.   

2010 Year-End Debt (Total money owed on bonds):                          $36.1 M

Note: The largest single amount owed is $9.3 M for the City Hall/Police Station project.

2010 Year-end Unrestricted Assets (These are dollars distributed over various funds the City maintains.

These funds are available to be spent at Council discretion):              $21.0 M

Note:  In answer to an obvious question, yes these funds could be used to pay down the debt, but the funds would then no longer be available for spending at the discretion of the Council majority.

Total 2012 Budget (Includes all Budgeted Funds):

                                                        Spending                 Revenue                  Shortfall

                                                   $25.988 M              $23.291 M               $2.697 M         

Note:   The 2012 budget reflects declining reserves in all 8 Budgeted Funds managed by the City, the total drop equaling the $2.697 M shortfall noted above.    

2012 General Fund spending (excluding debt service) compared to 2010 actuals:

                                                       2010 Actual           2012 Budget            Percent increase

                                                     $9.819 M                $10.962 M                      12%

Note: Be reminded that because the City had not yet released 2011 actuals at the time this article was posted on this web site, any comparisons between budget and actual are based upon 2010 actuals.

Selected 2012 General Fund highlights:

1)  The 2012 budgeted level of spending will deplete General Fund reserves by $736,000.

2)  The General Fund includes a category labeled General Government (essentially overhead) that is scheduled for a 13% budget increase from the 2011 budget.  It includes major increase for numerous line items including Technology at a 36% increase, Finance 29%, Community Development/Natural Resources 18%, Legal 17%, etc.  The increases result primarily from expanding Staff, and wage and salary increases.

3)  The large spending increase for overhead is partially offset  by more modest increases in those areas that actually provide public services such as Safety (2% increase) and Public Works where the budget was reduced by 3% as compared to the 2011 budget.

4)  In addition to the 18% increase for Community Development/Natural Resources, an additional and separate $122,000 line item labeled Natural Resources was added, making a total 62% increase for Community Development and Natural Resources.

Other Eye Catching Budget Highlights:

1. Transit Spending (bus service):  Transit is budgeted for a 10% increase from 2011 to 2012, in spite of the fact that Prior Lake operates the most tax subsidized service in the Metro area, based upon subsidy per rider.  

            Note:  A related article on this website reports on the findings of State Auditors.

2. Training and Certification Expense:  The 2012 budget includes 22 different line items labeled Training and Certification for a total of $67,000, and another 4 line items simply labeled Training Expense, for an additional $28,000.  It is our understanding that these are out-of-pocket costs in addition to the wages, salaries, and overtime pay of those being trained or those City employees who are acting as trainers. 
3. Severance Expense (monies paid to departing employees):  At the end of 2010 the City had a liability of over one million dollars in accrued sick leave and vacation for current employees, scheduled to be paid as employees leave City employment.  Partially offsetting this liability was a $520,000 Employee Severance Fund, leaving an unfunded liability of about a half million dollars.  The liability is the result of City Policy that permits accumulation and payment of unused vacation plus 50% of unused sick leave for employees with 5 or more years of service.

The 2012 budget includes $28,486 of expense going into the Severance Fund.This of course is nowhere near adequate to address the unfunded liability, which in our opinion should never have occurred.

Note:Severance payments to public sector employees working for State and local governments have been receiving considerable attention in the news media recently. We’re not aware that this subject has been discussed at a regular Council meeting, but it should be.

Some Concluding Comments:

 Politicians and bureaucrats at all levels of government are guilty of selectively picking and choosing data points to make       themselves look good as compared to other political entities.  Our City Government is no exception, having spent significant tax dollars on reports and presentations that lead readers to believe that we tax less, borrow less, and spend less than our peers.  But data from the Auditor’s Letter referenced earlier, tells a different story.

When measured against its peers, Prior Lake spending for General Government/Culture/Recreation is 19% higher than average, our debt per capita is also 19 % higher than average, and we collect slightly more taxes per capita than average. While we are spending considerably more on overhead than our peer cities, we are spending 19% less than average on those services required of all residents such as Safety and Public Works. 

It is our opinion that the above data highlight the fact that there is considerable room for improvement in the fiscal management of our City.  However we don’t expect improvement to occur until there is willingness by City Staff to acknowledge and discuss shortcomings, and a commitment by a Council majority to address them.

Information Sources:  All data referenced above relative to FY 2010 was taken from the Auditor’s Management Letter referenced earlier and the City’s Financial Report, both of which are available on the City’s web site.  All data relative to 2012 was taken from the City’s Budget Summary 2012, also available on the web site.  The comparisons of Prior Lake to peer cities referenced above were taken from the Management Letter.