Twinsburgs 2012 Audit and Management Letter-A 'Citizen Auditor' Summary Report

             Twinsburg 2012 Audit & Management Letter Summary by Loren Sengstock, Citizen Auditor

The 2012 Annual Audited Financial Report and an accompanying Management Letter for the City of Twinsburg were released on October 8, 2013 by State Auditor, David Yost’s office.

The following is a review and summary of these documents from a 'Citizen Auditors' perspective.

The audited financial report received an 'unqualified opinion' that indicates it presents fairly, in all material aspects, the financial position of the City as of 12/31/2012, which is positive.  The City increased its assets by $5.7 million with $4.67 million in cash and cash equivalents, which is both positive and cause for questions.  Governmental operations resulted in a $5.3 million positive change in Net Position--revenues exceeded expenditures by that amount.  The Cities outstanding debt is $16.2 million with economic development summarized as a year of progress.  Without monetary measurement of economic development results offset by tax abatements and other incentives provided to obtain the results, this is more or less political posturing.  In business, only things that get measured get accomplished, so this is a great idea to include in the report but it should be substantiated by the financial impact on the community, not just a ‘look what we did summary’.

 

The Governmental Funds (all major and minor operating funds of the City) reports an unassigned fund balance of $24.2 million in spendable resources with a total fund balance surplus of $30.8 million up from $26.1 million in 2011.  The surplus represents 120% of total annual expenditures.  The Mayor recently referred to this $30.8 million as a ‘nice’ balance; however, it represents 279% more than the Government Finance Officers Association recommended minimum balance of 25%.  Why does the City require $30.8 million in Governmental Funds Balance carryover?  The Chrysler plant closing was the largest financial impact estimated at $2.4 million annually?  $30.8 million dollars cannot be justified to offset a revenue risk of even $2.4 million?  $10-$12 million or 40-50% of annual operating expenditures would be a very conservative carryover balance.  City Council should demand answers to these simple financial planning questions from the Mayor and Finance Director.  Residents should know what project(s) the City is planning that would require this excessive surplus?  Perhaps Ohio needs a “full disclosure Law” regarding any unreserved fund balances exceeding 50% of annual expenditures?  A 'Fund Balance Policy' and a ‘Five Year Budget Plan’ has been proposed by Mr. Sengstock on multiple occasions to address financial planning!  This idea has not been taken up by City Hall.

Overall the report shows governmental expenditures under the core rate of inflation with a 2.6% average increase over ten years.  However, the costs of General Government (Mayor, City Council, Finance/Treasurer, Building/Zoning Administration, Engineering, Law Director, etc)  are up $1.9 million over ten years--a 48% increase and an annual total of $5.8 million.  This is not a good trend!  City Council should assess every department and each full and part time position in the City, to determine how General Government costs doubled?   Why is Capital Outlay for equipment, buildings, roads, etc down 47.8 percent over ten years and  Capital Outlay underfunded by 61% over ten years-- $4 million less?  The Mayor and Finance Director should address these cost shifts from Capital Outlay (infrastructure/equipment/buildings) to General Government which is primarily administrative.

Taxpayers sacrifice and provide hard earned tax dollars to provide for the public health, safety, and welfare of our community.  The City of Twinsburg has moved the Money Magazine rankings from #30 in 2009 to #38 in 2013 and the Mayor and Council celebrate as if this is a fantastic piece of good news for Twinsburg.  Moving DOWN the list means you are not performing to the same level as before.  There is an old adage about politicians putting lipstick on ‘pig’; you still have just a pig!  This is not a financially correct statement, but my father loved it, so in memory of my father, so be it.  When the residents provide the Mayor and City Council unlimited funding and a tax increase in 2009 to boot, we expect our services to reflect our commitment and desire to achieve excellence.  We should move up the ladder, not down the ladder.  City Council honored its commitment by placing the 2009 income tax increase repeal option on the ballot in November and for that decision the taxpayers acknowledge their doing the right thing on this issue. 

The audited financial report had a ‘Summary of Auditor’s Results’ indicating ‘Material Weakness’, as follows:

(1)        Police Pension Fund not initially properly determined to be a Major Fund;

(2)       Property Taxes Receivable and Deferred Revenue were understated by a little over $96K;

(3)       Capital Assets donated by Developers were understated by a reported $2.3 million. 

A question for the Mayor and Finance Director:  Do the ‘Capital Assets’ reported in the audited financial report include the Land and Building known as the ‘Old School’?  According to property tax records, it should be approximately $2.4 million.  Summit County records show Twinsburg is the owner of 112 parcels of property.  Are they all listed as 'Capital Assets' on the Cities records?  If they aren’t, why not and if they should be then have them listed correctly on the master Capital Asset listing report with a detailed explanation for future auditor evaluation and reporting. 

The Audit Management Letter non-compliance findings, as follows:

(1)   System for Award Management Documentation, indicating the administration did not apparently check to make sure that contracts being awarded were not excluded or disqualified on the Excluded Parties List System.  This is a common easily corrected issue;

(2)  Fiscal Officer Certificates where in question as detailed in the letter (this is a common issue, however, it should be addressed by the administration);

(3)  Timely Deposits from GlenEagle Golf Course were an issue.  Does the administration have cash handling policies designed to safeguard the deposits to comply with the Law? 

(4)  Original Appropriations Exceeding Original Estimated Resources were cited in the Police and Fire Pension Funds.  On a GAAP basis both the Fire and Police Pension funds had negative fund balances which are easily resolved with transfers from the General Fund!  [If the Mayor and City Council remember back in July 2013, Mr. Sengstock found mathematical errors and incorrect fund balances on the ‘Tax Budget’ for 2014.  Now is the time to consider policies to address these budget issues, mathematical errors, and incorrect cross footing issues(s) for future audits].

There were six (6) auditor recommendations, as follows:

(1)       Disaster Recovery Plan, this is a common recommendation, however, with a multiple employee IT department, this should be addressed in short order;

(2)       Co-mingled Federal Funds should be placed in a separate fund which should include any local matching funds, this is basic government fund accounting 101 knowledge, perhaps some accounting training is warranted for the finance department; 

(3)       Sewer Fund Charges for Services, several customers were overcharged one for $11 and $1,830, if these were isolated errors, this is not a common problem reported by auditors and because the bills do not contain adequate information for the customer to calculate or verify their bills according to the auditors, this is a serious internal control and billing system problem.  It would be incumbent upon City Council to consider a ‘Special Audit Investigation’ of the sewer billing system by independent auditors and not internal staff?  If the system and internal controls were not adequate to find these errors, then the internal system controls and operations should be audited, especially when dealing with overpayment of customers.  If City Council is not willing to provide an independent special audit by the State Auditor’s office verifying the sewer system is not compromised, then customers should be provided information on how they verify their accounts to make sure they were not over-billed also?  Any sewer customers receiving bills from the City should audit their bills for accuracy and potential over-billing; refunds could be the result for their efforts.  If City Council fails to request a 'special audit or investigation' of this issue raised by the auditors, it would indicate either lack of basic stewardship concerns or common business accounting/auditing/operating principles; 

(4)       Posting Budgetary Information indicated that the accounting system did not agree with the Official and Amended Certificate of Estimated Resources from the County Budget Commission, this is basic budgeting and impacts the accuracy of and value of any budget reports generated and attention to accounting details which is negative.  This issue should be resolved immediately and in future audits [This again reminds me of issue(s) regarding mathematical errors reported to the Mayor and City Council in July of 2013 by Mr. Sengstock];

(5)       Budgetary Statements pertaining to the General Fund, Police and Fire Pension Funds again points to issue(s) in the finance department that could indicate misinformed or untrained staff easily remedied with additional training;

(6)       Financial Statement Adjustments, this reported multiple posting issue(s) totaling approximately $1,000,000 dollars which also included various mathematical errors that did not foot and cross-foot which is negative and indicative of inattention to basic bookkeeping principles, debits must equal credits.  This is disturbing and City Council address this with a 'special audit investigation' and additional internal control tests that are warranted.  We will await City Councils decision on these basic bookkeeping and accounting issue(s), if any.

The City of Twinsburg has an average Governmental Funds annual expenditures totaling $25-$28 million and these issues reported by the auditors are not just 'minor infractions' as some have referred to the findings, non-compliance issues and auditor recommendations in the audit and management letter.  As a citizen of the City of Twinsburg and Citizen Auditor, it is my professional opinion, that the Mayor and the Finance Director have a responsibility to publicly present an annual report containing all the financial issue(s) reported in the audited financial report and management letter, both the positive and negative issue(s). 

When only positive financial data is reported publicly by a City or if no public report is provided annually (other than stating the availability of the audited report at the State Auditor website) without addressing the negative issue(s) reported and the plan for resolution of those issues; the result is confusion, misunderstanding, and a misinformed public perception regarding the financial condition of a City.  Sound financial planning and policies are required to prevent political posturing concerning financial reporting.  Financial disclosure is best achieved by independent and unbiased reporting and public presentation of the annual audited financial report and the audit management letter associated therewith as audited by independent auditors.

As our forefather Patrick Henry said “The liberties of a people never were, nor ever will be, secure, when the transactions of their rulers may be concealed from them … To cover with the veil of secrecy the common routine of business, is an abomination in the eyes of every intelligent man.”    

Any questions or comments on this summary report please visit the 'Citizen Auditors of Ohio' website at http://www.citizenauditorohio.com and visit the 'Contact Us' tab or call me.

Citizen Auditors of Ohio

Loren Sengstock, Citizen Auditor

2704 Arbor Glen Drive, Suite 105

Twinsburg, OH 44087

Phone: 330-888-9459

November 19, 2013