Audit of City Finances Arrives at Last

The City Council got some welcome news this week when it finally was able to review the long-awaited audit of the 2018-19 fiscal year, the delay of which factored at least peripherally into the departures of three public officials in the past three months.
Councilman Stephen Rossi also used the discussion as a chance to escalate his deepening rift with City Attorney Teresa Highsmith, with the recent addition to the panel casting the sole nay vote on the usually routine receive-and-file motion for the audit. Highsmith had emphasized repeatedly at Monday’s special meeting that attorney-client privilege prevented her from divulging details of the city’s litigation issues to Rossi prior to his Sept. 2 appointment, details that Rossi insists he is entitled to as part of his decision-making process as a councilman.

“In order for me to receive and file this document, I need to have sufficient information on all of the financial information included within the document,” Rossi said Monday. “I have been asking for six weeks for information on our litigation to understand what the potential liabilities are for the city for the litigation that’s outstanding.”
The Comprehensive Annual Financial Report, or CAFR, indicated that South Pasadena at that fiscal year’s end on June 30, 2019, had a net position of $81.48 million in assets against liabilities, an increase from $77.65 million at the conclusion of the previous year. This was achieved largely through the bolstering of the value of its physical assets, including land, infrastructure and buildings, per the CAFR.
The city brought in $15.37 million in property taxes, more than $1 million more than in the prior year, but income from other taxes totaled $7.59 million, a drop of more than $1 million. Charges for services remained mostly even at around $17.35 million, and operating contributions and grants significantly increased to $4.23 million that year, up from $1.17 million the previous year.
Total revenues were at $47.42 million for 2018-19, after being $44.04 million the year before. Against expenditures of $42.22 million (an increase from the $39.08 million spent the prior year), the city netted out at $5.2 million in excess revenue for the year.
Hearing it from Terry Shea, a partner with the city’s auditing firm Rogers, Anderson, Malody and Scott, the municipality “at 6/30/19” was in good financial shape.
“I think overall, it was a good year,” he said.
The CAFR included a number of findings, an industry term for material weaknesses and deficiencies in the city’s accounting practices. These included untimely bank reconciliation; capital assets missing from records or completed projects continuing to be listed as active; failure to reconcile all budgets during the year-end process; improper segregation of duties; errors in other post-employment benefits, or OPEB, data; outdated or nonexistent accounting procedures that were not readily available; and noncompliance with debt reporting.
Significant deficiencies included poor grant management, noncompliance with budget policy and noncompliance with purchasing policy.
Rossi pointed out that these findings were likely to show up again when the 2019-20 audit is completed, not least because the city ostensibly is only learning about the old deficiencies with this new report. Shea concurred, adding that he felt the city was “on the right track” to fixing the problems.
“I think you’re heading in the right direction,” Shea said. “I think [Rossi is] right: You may see some of these same findings [in the 2019-20 audit], but you definitely won’t see any of them in the 2020-21 audit.”
Rossi voted against filing the CAFR, in spite of the urging of other city officials, because he said he felt he lacked the information necessary for him, as an accountant, to approve the document. Though a range of legal liability had been provided, Rossi contends that he needs to review the documents backing up that range.
In prior meetings, in response to Rossi’s requests, Highsmith has said that this sort of information would be made available as it relates to an agenda item.
“There has been a refusal to provide with that information by our city attorney because it was ‘not relevant to any items in front of the City Council,’ based on her opinion,” Rossi said.
On Monday, Highsmith told the council what she said she told auditors while they compiled the report: that there were seven cases of litigation that, thanks to insurance, each exposed the city to no more than $100,000 in liability.
“That possible maximum $700,000 does not all hit in one year, therefore it was the auditor’s opinion that it was not a material issue,” she said. “That’s an issue for the auditor.”
Cutting Highsmith off, Rossi retorted that it was actually an issue for the council, which holds the purse strings for the city. He added that, in his mind, Shea had in effect indicated it was relevant to consider this potential liability.
“The fact of the matter is, if you want any council member to vote on a topic, the council members should decide what information is relevant to their decision-making process,” Rossi said. “Your independent auditor acknowledged that that information would be relevant, so [if] you want to make the determination that you know better than I do what’s relevant to my understanding of a financial audit — when I’ve been in finance for 23 years — feel free to tell me that.
“I am the only person on this council who actually has spent the last two decades reviewing financial statements and audits and actually preparing audits,” he added. “I hate to tell you guys, but auditors ain’t always freakin’ right.”
Though Councilman Richard Schneider said he wanted a unanimous approval for the item and was willing to table the vote to a later date, other officials stressed the need to approve a document that, by this point, was nearly a year late.
“The state controller’s office is pestering us,” said interim Assistant City Manager Elaine Aguilar, who is de facto finance director. “We received notice just today from the bond rating agency that if they don’t receive it soon, they’re going to put us in default to providing the information, which could have some impact on us. It’s already tardy, and if it doesn’t get approved in the near future, there could be some consequences.”
Added interim City Manager Sean Joyce: “I would beg the indulgence of council member Rossi. I make no editorial on his request for that information or his need for that information at all. I just really believe that we need to get this approved so we can move on to the next audit. We shouldn’t take lightly Elaine’s earlier comment on our bond rating.”
Councilman Michael Cacciotti seemed to support Rossi’s endeavor but nevertheless called for filing the report.
“He’s got legitimate concerns and we’ll try to resolve them, but I agree with Sean and Elaine,” Cacciotti said. “We’ve got to move forward on the CAFR tonight.”