Killeen residents paid their water and sewer bills each month. They paid their trash bills and drainage fees, too.
The payments, perhaps difficult for some to make, would cover services the residents used. All extra money should go to toward maintaining water pipes, trash trucks, maybe curbside recycling.
Residents were critical last fall, when the city took $1.67 million from the trash fund’s account and put it into an unrelated city account to help make up for a small piece of the city’s massive overspending. That was two months after the city cut the trash department’s voluntary recycling program to save money.
Dennis Baldwin, the former police chief and then-interim city manager, proposed taking the $1.67 million from the trash account, saying it would help the city’s credit to have that money in a city account. The council approved the money transfer Dec. 13.
In January 2016, the city under then-City Manager Glenn Morrison took $4.5 million from trash and other enterprise funds to start a new fund known as the fleet replacement fund. The amount was one of several findings in the special audit of city finances conducted by McConnell & Jones of Houston.
Deputy City Manager Ann Farris was over the Finance Department when Finance Director Jonathan Locke presented the fund to the council. When Farris was named interim city manager in April 2016, she said the fund provides a way for the city to ensure it has money to pay for replacement of vehicles and equipment.
Auditors said there are allowed reasons for taking money from these business funds. One is to pay for city administrators’ work on that division. Another is to pay a franchise fee.
The fleet replacement fund wasn’t one of them.
Auditors described problems with the fleet program:
Questionable purchases; “The City purchased vehicles from the ISF (internal services or fleet) fund that did not benefit the respective Enterprise Services Fund from which the funds were transferred,” auditors said.
No guidelines: There were no policies and procedures documented for the operations for the fleet program
Failure to report: The city’s fiscal year 2016 Certified Annual Financial Report fails to describe the nature or purpose of interfund transfer transactions or a summary of the source and destination funds.
The city transferred $14.3 million total between enterprise funds and other funds in fiscal year 2016. The enterprise — or business funds — are for trash, water/sewer, drainage and airport. The audit didn’t break down the amount from each fund.
Auditors found problems with the city’s money transfer process, saying the city did not have adequate policies governing the transfer of money out of the enterprise funds to prevent misuse or misallocation of restricted funds.
“The absence of written policies has created the current environment where there are no restrictions specified for the transfer of individual funds,” auditors said.
The city already had a mystery account, Fund 596. The city took $548,724 from the Drainage Utility Fund in 2015, and put it into Fund 596. The city said it was for debt payment.
Auditors said they found no Fund 596 and no documents to support the transfer. In addition, the city violated the state’s document retention requirement. Any documents should have been kept.
Even when the city transferred money for an allowed purpose, it had problems. The city overcharged, sometimes undercharged and occasionally double charged these business accounts.
The auditors described one double charge:
“For example, the purchase of CityWorks software from Azteca System totaling $25,540 was allocated 25 percent to General Fund and 75 percent to Enterprise Funds according to usage. The City’s general IT expenditures are charged to General Fund under account code 010-2705-419, and are allocated to Enterprise Funds using an indirect cost allocation rate. As the result, the 25 percent portion that was charged to the General Fund would then be allocated to Enterprise Funds, causing a double charge.”
“The Finance Department has not resolved the double-charging issues as of the date of this audit report,” auditors said. The audit was released Sept. 5.
The auditors also said the city erred in basing franchise fees and the allocation of costs to Enterprise Funds on budgeted amounts rather than actual revenues and expenses.
What auditors didn’t cover, is whether the amounts were justified.
“We did not assess, nor were we tasked with assessing, the appropriateness of the approved allocation percentages,” auditors said in the report.
1. The city manager should create and the city council adopt policies to govern each Enterprise Fund. The policies should be specific about the use of the money, the conditions in which funds can be transferred to other funds. Then, staff should be trained.
2. Although the Fleet Vehicle Program was terminated, the city needs policies to govern any similar program that may be put into place. The policies should clarify the purpose of the program; specific roles and responsibilities of management and city council related to the program; the type of transactions related to the program; and how the program will be funded, to name a few guidelines.
3. The city manager should create and the council should adopt policies requiring the city manager to obtain city council approval for major interfund transfers or for transfers above specific dollar thresholds established by the city council.
4. The city manager should develop and the city council should adopt policies and procedures to govern all interfund transfers, including recurring transfers. The policies should include establishing and enforcing authorization levels, requiring documented justification for the transfers, and minimum documentation requirements for all interfund transfers.
5. The city should ensure the City’s Comprehensive Annual Financial Report complies with GASB (Governmental Accounting Standards Board) Statement 38 requirements by providing more descriptive information regarding the amount and purpose of all interfund transfers in notes to the financial statements related to interfund transfers.
6. The city manager should develop and city council should adopt written policies and related procedures to govern monthly and annual closing processes to ensure that potential adjustments related to interfund transfers are identified, reconciled and posted. The procedures also should include the required supporting documents that must be included with all transfers and adjustments.
7. The city should determine the amount franchise fees paid by Enterprise Funds to the General Fund using “actual” rather than “budgeted” revenue. The city can align budgeted to actual revenues at the end of each fiscal year and make the appropriate adjustment to the calculation of franchise fees paid by the Enterprise Funds.
8. Update the cost allocation annually and develop a methodology to ensure that Enterprise Funds are not charged twice for direct and indirect costs.
Note: The city recently was given an award for its CAFR and budget presentation. It was not from GASB, rather from a private group called the Government Finance Officers Association, which relied on information given to it by the city and did not audit the city.