Lindsay city officials are facing some hard financial decisions involving cutbacks, spending freezes and potential layoffs after receiving news last week that the city’s two main operating accounts may be nearly depleted.
Accountant Frank Crawford, of Crawford and Associates, P.C., told Lindsay city council members during a special budget workshop May 25 the city’s bank accounts have not been reconciled in more than 18 months and carryover amounts used to plan budgets for the last two years were inflated and inaccurate.
Crawford explained his firm has served as the contract auditor for the city’s financial statements for several years. In that role, they keep financial records updated during the year, reconcile cash accounts on a monthly basis, provide accurate financial information to city officials for decision making and generally make it easier for the city to pass its required annual audit.
Crawford told council members his firm was contacted in November of 2020 by someone with the city who advised them the city would be handling its own record keeping for the foreseeable future.
However, there appears to have been no follow through, and after Crawford and Associates stepped away, those records were not properly managed. Crawford said City Manager Rebecca Niernberger reached out to Crawford and Associates a little more than a month ago to let them know bank reconciliations, journal entries and other bookkeeping items the firm has handled in the past were behind and were possibly as far behind as November of 2020.
The city is also behind on the audit of financial statements it is required to conduct each year. The last audit completed was for the fiscal year ending June 30, 2020. The audit for FY2021 was due to be completed by December of 2021, and an audit of the current year’s financial statements (FY2022) will be required to be completed by the end of this year. Those audits cannot be done until the financial records are caught up and in order.
Crawford said Niernberger asked them to come in and try to clean up the financial records and get them back in order so the annual audits can be completed.
“We began what I would call a forensic accounting examination, where we’re literally digging, right now, through records, file cabinets, drawers, everything, to try to figure out what hasn’t been done, what hasn’t been caught up, so we can get the numbers accurate so we can then give them to you, and you can have them in order to make decisions, based on accurate numbers. Whatever you’ve been getting, if anything, over the last 18-24 months – I’m not sure what you’ve seen, but I can tell you it’s not right. So, you’ve been making decisions blindly, in essence, because the record keeping is woefully behind at city hall,” Crawford said.
Crawford said his team has been working over the last month and a half or so to get enough of the records caught up that they can at least talk to the city council about the city’s financial status as they prepare to wrap up FY2022 and adopt a bud get for FY2023.
“We’re not done. We’re not even remotely done, but we’re to the point where we think we’ve captured enough information from the big-picture perspective that we can have this conversation,” Crawford said.
He explained the city has two main operating accounts, its General Fund and the Lindsay Public Works Authority account. Most of the city’s money flows in and out of those accounts, which are used for normal operations and day-to-day expenses. They represent 80 to 85% of the city’s expenditures.
There are also 17 to 20 other accounts that are considered restricted accounts, Crawford said. Those accounts are designated for specific things and the money in many of them cannot be used for normal, day-to-day operations. These would include things like voter-approved sales taxes dedicated to specific uses such as emergency services or roads and bridges.
Right now, Crawford said the city is having issues with the two main operating accounts running low on cash. He suspects part of that may be because everything has been paid out of those two main accounts, instead of pulling allowable or designated expenses from the appropriate restricted accounts.
“What we’re starting to see, what we’re piecing together is we’ve paid for a lot of things out of those two operating pockets that maybe we should have used other funds for.”
Crawford’s team is currently analyzing expenses from the last two years to identify any items that should have been paid out of restricted accounts but instead were paid from the General Fund or LPWA accounts so those funds can be reimbursed to the two main accounts.
The city’s budget projections in the last two fiscal years have also been problematic, Crawford said, with inflated carryover projections that led city officials to believe there was more money to work with than was actually there.
Crawford said the budget adopted for FY2022 projected the General Fund starting with $600,000 in carryover from the previous year. It also projected $4 million in new revenue coming in during the year, with spending or expenses projected at $4.6 million for the year.
“You just basically said, ‘We are planning to be relatively broke in the General Fund if everything goes according to this plan in Fiscal ’22,’” Crawford said. “It’s balanced. It works. But it’s not without its problems. It also doesn’t give you much room to be wrong if we’re off a little in the revenue or the expenses, or we’re off a little bit on the beginning carryover. Remember that carryover is an estimate, because you’re adopting that budget in May or June and the carryover’s not going to be ready until June 30, when you know exactly what it is.”
The FY2022 budget for LPWA shows a similar situation. The estimated carryover was $500,000, with projected revenue of $6.5 million, and an expense or spending budget of $7 million.
“At best, we think your beginning number of carryover for the budget year you are in right now (FY2022), instead of being $600,000, was closer to zero – no carryover.” Crawford said. “It could be less than zero by the time we’re done catching all this up. I don’t know.”
He said he suspects the projected carryover for LPWA is also inaccurate, with the actual amount closer to zero rather than $500,000.
If the city spent what it was planning to spend, and if revenue for the year was what was projected, without the projected beginning carryover they would be looking at a combined $1.1 million deficit in those two main operating accounts, Crawford said.
The actual numbers for FY2022, with a month left to go, are not as bleak as the budget projections, but only slightly. As of May 20, the city is only on pace to col lect $3.1 million in revenue in the General Fund – less than the $4 million projected. Spending has been less than projected, as well, and is currently sitting at $3.7 million. Crawford said he believes the General Fund is about $600,000 in the hole as of the end of May.
The LPWA account is projected to collect $5.5 million in FY2022 as of May 20, and it is currently on pace to only spend $5.3 million, leaving it $200,000 in the black.
Crawford estimates the two accounts combined are currently at a $400,000 deficit, with a month to go in FY2022.
“Meaning we’re not going to be able to carryover any number to next year, in fact we’ve got to try to make that difference up next year,” he told council members. “Just as you’ve dug the hole a step at a time, you’ll climb out a step at a time. It may take you multiple years or multiple steps to get out of this. But we have an issue, and I think it actually might be worse than this. I think there are unpaid invoices that still need to be paid. There are sales taxes that need to be transferred. And I think this may actually end up being a little bit worse than what we see right now.”
City management is already making cutbacks, adjusting expenses and taking action to stop or reduce that projected deficit, Crawford said, but added with only a month left to go, there’s not a lot of room to salvage FY2022. Instead, the city is facing having to make corrections in FY2023 and FY2024 to get back on track and dig themselves out of the hole.
He did offer the council a sliver of hope, saying all of the restricted accounts are mostly untouched, which may help restore some funding to the main operating accounts as they go back through expenses to see what was paid out of the General Fund and LPWA that should have come from another account.
“We’re going to try to identify as much of that as we can and get that cash flow over there. If that doesn’t occur, you will have trouble making payroll in a month. You will have trouble paying vendors in a month. You might have trouble paying them right now,” Crawford said.
Crawford said they are also working to figure out which accounts are truly restricted by law and which simply contain money set aside by the council or city management over the years for specific purposes. Accounts that are not restricted by law may be able to be accessed or reappropriated back to the General Fund or LPWA by the council.
Another issue Crawford raised was the use of purchase cards, or p-cards, by city employees. P-cards are commonly used by governments to streamline the ability for employees or department heads to purchase items necessary for day-to-day operations.
As of April, Crawford said his team has summarized about a year and a half of p-card purchases and have identified $52,000 in unsupported expenses – expenses with no receipts to document the purchase as a valid governmental expenditure.
He said department heads have already been notified and directed to try to find the receipts for those expenses, but he expects there will be some receipts that just don’t exist or can’t be collected for whatever reason.
“So, if you were to ask me if there was something criminal, I can’t really say anything yet, because I don’t know. If you don’t document those p-card receipts, that’s pretty much like an invalid or unauthorized expenditure,” Crawford said. “So far, and I’ll be clear about this, I’ve been asked about criminality and whether we have noticed anything criminal yet. And the answer is, not really. The only thing I would say is ‘criminal’ is you let the books get behind by two years – but that’s not criminal, as in punishable by law – just criminal in the fact now we have to go clean up not just one year, but two years. And work on a third year at the same time.”
Crawford said while he has a good idea of what is going on the city’s main operating accounts at this point, they won’t know for sure until the city’s audit for FY2021 is completed, and that can’t be done until the bookkeeping is caught up.
In the meantime, Crawford said the council needs to redetermine the city’s budget priorities for the month remaining in FY2022 and for FY2023. That will likely entail spending freezes and other budgetary cutbacks.
“And it won’t just be a month of cutbacks. This is going to be in play for quite some time until we can reverse the negative outflow of cash,” Crawford said.
The budget adopted for FY2023, which city officials are currently working to formulate, will need to be built on more realistic revenue and expenditure estimates with revenue outpacing expenses, Crawford said. He also suggested the council reserve around 10% of their expected revenue for the year to create some savings carryover for emergencies.
“You shouldn’t be ending the year on zero reserves,” Crawford said.
Moving forward, Crawford recommended the city council add a simple budget report or update to the financial statements they see at their regular meetings, so they can make informed decisions or course corrections to the budget as needed throughout the year.
“Are the revenues on target? Are the expenses on target? Are the department heads controlling their budgets? It doesn’t have to be something complicated, just a simple one page or so report,” Crawford said.
Crawford said he is aiming to be done with he forensic examination in time for the FY2021 and FY2022 audits to be completed by the end of the year, but the work is extensive and could conceivably push into the first part of 2023.
Council member Anthony Hernandez asked Crawford if an investigative audit by the State Auditor’s office would be more appropriate at this point and if criminal charges may need to be pursued.
“I haven’t really seen anything, we haven’t seen anything, yet that rises to that level. But again, we’re not at that real granular level, we’re still at the big picture level,” Crawford said, reminding the council the State Auditor’s office will not come in and look at everything, they work on a much narrower scope, and they won’t update bookkeeping. An investigative audit by the state typically costs $60,000-$80,000, depending on the scope of the audit. That would be in addition to any cost the city is already incurring to have Crawford and Associates bring everything up-to-date.
“There’s a lot of money tied up in going that route, unless you’re confident it’s going to yield you something back. And right now, obviously, we’re not anywhere close to that call. If I think something is wrong to a criminal extent, something that’s significant like that, we’ll call the state auditor’s office ourselves,” Crawford said. “We’ve got bigger fish to fry right now than trying to chase down why certain things weren’t done and who in particular did this. Right now, we’ve got to get this stuff fixed so you have this information going forward and focusing on this process going forward.”
Hernandez and Mayor Tom Inman asked Crawford if he knew who communicated the city’s intention to keep its own records to Crawford & Associates in November of 2020. Inman, who was serving as interim city manager at the time, said he was not aware of any such directive.
Crawford refrained from publicly naming a specific contact, saying only, “The positions that would be responsible for a lot of those things, I believe, felt they could do it themselves and save the city money.”
Council member Robin Staggs asked if the city is likely to have to cut jobs. Crawford said that decision is obviously up to city management, but payroll, including benefits, accounts for the bulk of city expenses. As they look to find ways to reduce expenditures, job cuts would seem to be on the table.
“It’s horrible to have to cut anybody’s job. Nobody wants to do that, but the check not to be good when you go to cash it is worse,” Inman said. “I hope nobody loses their job. But that’s a fact. I hate that.”
The City of Lindsay will hold a public hearing to consider the proposed budget for FY2022-2023 June 9 at 2 p.m. in the council chambers at 204 W. Creek.
