The city spent more money than it made for nearly a decade, and during a period of rapid growth that saw its population nearly double, those at the wheel didn’t seem to be paying attention.
In a 173-page analysis of city finances released Tuesday, Houston-based public accounting firm McConnell & Jones boiled city financial problems down to two main struggles: a history of overspending spanning nearly a decade from fiscal years 2007-2016; and a parade of city managers and finance directors — six of each in a period going back to 1990.
Killeen’s population boomed from 86,911 in 2000 to 140,806 in July 2016, according to the report. Expenses are expected to rise in a budding city as it provides services to more residents, but in Killeen, the way city administrators kept track of and managed taxpayer and ratepayer funds ultimately affected the city’s financial health.
McConnell & Jones’ report tells a story of a city swelling at an exponential rate. Terms such as “convoluted” and “unwieldy” were used to describe the condition of some financial accounts, which was a result of lax oversight and poor management.
A lack of training or familiarity with the city’s electronic financial records system led to an environment where staff created “work-arounds” outside the system, including maintaining separate financial spreadsheets in Excel, the report said, and with leadership in limbo, overspending and many irregularities went unchecked.
Five city departments, for example, had separate bookkeeping, which recently was corrected, according to a city management rebuttal letter in the report. The city also failed to maintain some documents according to records retention policy, and state law was likely broken when pay raises were authorized retroactively.
The Herald reached out to Bell County’s attorney, the state attorney general’s office and Texas Rangers, to ask about repercussions, if any. The Rangers referred questions to the state attorney general’s office, which said it could not “advise on or interpret the law,” and instead provided online resources. The county attorney did not respond by press time.
Austin attorney Bill Aleshire in an email Thursday said: “Destruction of public records, contrary to the records retention laws, is a misdemeanor criminal offense by whomever destroyed the records. … But, in my experience, that crime is not usually prosecuted.
“Good use of tax dollars should not depend on the auditor; it should occur because elected officials and every employee respects how hard taxpayers work to pay those taxes and hold a sincere desire to give taxpayers a good deal,” Aleshire added.
Aleshire represented Barbara Gonzales, a former Killeen finance director, who filed a wrongful termination lawsuit. Gonzales believed she was fired in December 2012 in retaliation for reporting violations of state and local finance laws, according to Herald archives. The suit was eventually dismissed on appeal because causation wasn’t proven, a legal memo filed November 2015 said. A December 2015 Herald report found flaws with the state’s whistleblower law that did not protect against retaliation.
During a presentation to the City Council at City Hall on Tuesday, McConnell & Jones at times appeared to soften the blows of its findings by repeatedly stating some items weren’t unusual.
The firm in its report, however, was more direct: “The City has not demonstrated sound fiscal management in that General Fund expenditures have outpaced General Fund revenues each year since FY 2008, (and) as a result, the City’s fund balance has decreased and debt has increased.
“This overspending can be attributed to a lack of fiscal discipline,” the firm said.
As a result of increasing expenditures, specifically in public safety that doubled over the last decade, and no consistent leadership, some decisions were made without regard for the long-term impact, while some put the city at a greater risk for fraud. Among them:
– Annual increases in public safety expenditures disproportionate to revenue increases in the general fund in fiscal years 2009, 2012, 2013, and 2016.
– Grants that required significant matching funds or commitments for future salaries were used and the decisions did not consider the long-term financial impact on the general fund.
– Enterprise (moneymaking) funds were heavily used to support the general fund.
– Failure to maintain some documents and data according to state records retention policy.
– Failure to document discussions with bond counsel on guidance obtained.
– The Aviation Department, Killeen Civic and Conference Center, Volunteer Services, Senior Center and Cemetery maintained books outside the city’s SunGard financial system, a “significant weakness in internal controls.”
– The Finance team frequently added new accounts to record transactions because they were not able to understand how former staff established and used certain accounts, leading to “convoluted recordkeeping and an unwieldy chart of accounts.”
– Elevated risk of financial transactions manipulation, which could go undetected.
Capital Outlays (fiscal years 2006–2016):
– Capital outlay accounting requires strengthening to prevent or discourage fraud. No fraud/gross mismanagement found.
– Unable to determine cause of 311 percent increase in general fund capital outlay spending because city could not provide supporting information. In this instance, the city was not in violation of its records retention policy.
Use of Bond Money (2002–2017):
– Of $356.5 million paid by bond funds between 2002 and February 2017, $3.4 million was analyzed, and of that amount, $3 million (89 percent) was inconsistent with the bond’s purpose, $240,416 (7 percent) was consistent, and $115,153 (3 percent) was undeterminable.
– Violation of bond document retention requirements for bond fund 344-2012/CO, a $6.7 million fund for U.S. 190 expansion and police vehicles.
Interfund Transfers (2002-2017):
– No rules and guidelines defining “allowable” expenditures; policies governing interfund transfers not adequate to prevent misuse or misallocation of restricted funds, although no instances of fraud were found
Pay Increases (June 2014 and October 2014):
– Retroactive pay increases were authorized, and could break with state law that prohibits it; No long-term budget impact considered for 3 percent pay increases in June 2014; no long-term planning or analysis done for 8 percent pay increase to civil service (public safety) positions in October 2014.
City/Owner Agreements (2002–2016):
– City is not following the best practices.
– Four developers accounted for more than 60 percent of the city/developer agreements from Oct. 1, 2001, through Sept. 30, 2016: WB Development; Purser Family; Reeces Creek Development; RSBP Developers Inc.
Roadway Ownership (2002–2016):
– No policies or procedures in place to monitor roadway ownership.
Post-Recall Spending (November 2011–May 2012):
– Based on audit procedures, no indicators of fraud or abuse detected.
– Weak internal controls that could result in undetected fraud.
McConnell & Jones on May 2, seven weeks into the audit, hinted about the conditions of city finances and trouble finding older documents.
Darlene Brown, director of risk advisory services for the firm, stunned some council members when she said defective communication and a lack of transparency left Killeen council members and the residents they represent in the dark on city finances.
The firm’s findings flew in the face of statements made by Mayor Pro Tem Jim Kilpatrick, former Mayor Scott Cosper, former City Manager Glenn Morrison, former Mayor Dan Corbin and longtime city spokeswoman Hilary Shine, who each have said there was no problem.
The city touted a “clean opinion” from external auditors last year. Ann Farris, who used to be interim city manager and is now deputy city manager, in a news release said she found it “particularly gratifying” the city won its 26th financial reporting award.
The management audit said the opposite. McConnell & Jones criticized the city Comprehensive Annual Financial Reports for not providing adequate disclosures.
Kilpatrick, who ran for re-election May 6 and won, opposed the audit despite being chairman of the council’s subcommittee charged with giving direction to the audit firm based on council recommendations.
Kilpatrick voted against the audit, then voted for funding it but maintained throughout that no investigation was needed. Councilman Juan Rivera also voted against the audit.
Mayor Jose Segarra questioned the need for an audit in the past, as has Corbin, who previously called red flags raised by the Herald “bull—.”
Some of those red flags were validated by the findings.
Corbin previously put the spotlight on an ongoing revenue problem as the source of city troubles, but like Kilpatrick, maintained there was no cause for an investigation.
In a Saturday email, Corbin said: “My initial reaction is that the findings did not reveal much given that $394,000 of the taxpayer money has been spent on a fishing expedition where the public’s expectations, fueled by speculative reporting by KDH, were that past management had engaged in fraud and that $8 million was missing.”
The Herald in its reporting has used documents provided by the city through records requests, internal audit reports and external audit reports, interviews and its own newsgathering, that show finances were irregular.
The Herald reported on Farris’ announcement about an $8 million shortfall from the summer of 2016. McConnell & Jones’ findings concluded the figure was a miscommunication by the city in the way budget projections were made. Auditors said in the report it found no fraud strictly based on what it looked at, and summed up its findings based on, at times, what it said was incomplete documentation.
City administrators also did not agree entirely with auditors, and provided a rebuttal to several items in the report.
Killeen resident and standing audit committee member James “Jack” Ralston offered insight into the results.
“The fact that the audit did not uncover outright fraud or abuse is not surprising since it was not in fact designed to,” Ralston said in an email. “The bottom line is we now have … well-documented examples of managerial shortfalls that the city can move forward and fix. Mr. Olson’s speech concerning our future path was a good one and I truly hope we will achieve it! The future of this city depends on a transparent and open governance based on what we can actually afford.”
The Herald and kdhnews.com will bring more findings next week.
Go to http://bit.ly/2wGmoEC to read the firm’s final report, see http://bit.ly/killeenfinances for more articles on how municipal government impacts you, and check out http://bit.ly/managementaudit for continuing coverage of the investigative audit's results.