A climactic, eleventh-hour offensive by two Killeen City Council members to stop an independent investigation of city finances fell short of derailing the plan but fueled concerns about past financial decisions.
Under the council’s 5-2 decision Tuesday, Houston-based public accounting firm McConnell & Jones will sign a contract with Killeen, which will open its books to help the firm examine seven financial trails.
The investigation — a management audit and risk-based analysis — will dissect within certain years capital outlays, bond issuances, interfund transfers and pay increases, among other items, to determine whether misuse, misappropriation, or gross negligence, of taxpayer money played a role in the city’s budget problems.
To recap, council members and residents learned in June that the city was $8 million short in its budget, and had been overspending for years without city officials raising red flags. Residents called for a forensic audit of the city’s finances that would cover problem periods, one of which, according to city data, was consistently between fiscal years 2013 to 2016.
The audit subcommittee charged with securing a contract was led by Councilman Jim Kilpatrick, who on Tuesday publicly stated he was against any investigation.
In previous discussions on the city’s budget, Kilpatrick said he did not want to micromanage finances.
“It is not my responsibility to look at every single item,” Kilpatrick said in a March 27, 2016, Daily Herald story. “I am not a micromanager. I have never have been and never will be.”
Councilman Juan Rivera also was against an outside audit, but wanted the burden of sifting through mountains of paper trails and data to fall on City Auditor Matthew Grady. Grady conceded that he could do the job, but cited previous discussions about maintaining transparency with the public to safeguard that independent eye.
Councilwoman Shirley Fleming agreed it needed to be external.
“To tie you down … you would never get done,” Fleming said to Grady. “You just can’t do it by yourself. We do need to check out what has gone on in our city government. … The citizens want to know what is going on.”
Councilman Richard “Dick” Young, one of five who voted in favor of the audit, said something needed to be done.
“There’s been people (who have lost) their jobs trying to bring things to light,” Young said at the regular meeting Tuesday. “There’s been lives that have been shattered; there’s been reputations impugned by trying to pinpoint some of the same things that may or may not come out of this audit.
“I believe for us to not do some sort of an audit, I think is an injustice to the citizens,” he said. “It is my intent, even though I disagree with the audit format, it is my intent to vote for an audit to proceed forward … the (roughly) $394,000 out of a $184 million budget — it’s in the grand scheme of things, not a lot of money.”
City memorandums show the cost would be $394,456, and would be paid to the auditors biweekly.
Since June, the city has been keeping its ship afloat by moving money around to plug budget holes. It resolved an $8 million shortfall, but it also approved purchases in the face of residents’ voices and opposition.
In August, for example, the council authorized the purchase of a fleet of nine, fully-loaded police units at a cost of $540,632. The issue divided the six council members 3-3. Mayor Jose Segarra broke the tie. A separate vote that night to advance purchase of 42 city vehicles, including 32 for police, split the council the same way, with the mayor again breaking a tie to spend an additional $934,867.
Killeen residents, during fall public hearings, crammed into the Council Chambers, outspoken in support of an audit to find out what’s been causing problems.
In December, administrators placed a bet on the city’s creditworthiness by taking more than $1.67 million from an enterprise fund primarily sourced from trash ratepayers. It was approved by the council, but even the city’s own finance director told the Daily Herald it was a gamble.
A short time later, city administrators said they found $5 million through cost saving measures — a swing of about $13 million in just over six months — from the city’s initial jawdropper of needing to find $8 million.
None of the routine annual audits hinted at the problems that surfaced June 30. The city in 2015 was awarded national recognition for its financial reporting.
PAYING FOR IT
As was discussed Tuesday, the city will spread the cost of the audit over the city funds to be scrutinized, minimizing the weight each fund would bear.
“For a rough estimate, $280,000 of the roughly $400,000 would be covered by the general fund, and the other enterprise funds that are involved would pick up the balance,” according to Killeen Finance Director Jonathan Locke, who compared funding the expected audit to how the city funds its yearly financial statement audit, of which 70 percent, he said, is paid for by the general fund.
Of the $394,456 required, the general fund will pay 70 percent ($276,119), Water & Sewer will pay 20 percent ($78,891), and Solid Waste will pay 10 percent ($39,446). An amendment for the general fund will be $216,687 because $59,432 was already budgeted.
The city has a history of taking money from enterprise (moneymaking) funds, which are supposed to be self-supporting, and mixing it with other money in the general fund. City administrators in recent years have taken money from those accounts to pay everyday operating expenses.
Moving money from one fund to another is legally permitted with limitations. In general, fees paid to the city in exchange for goods or services are corralled within enterprise funds that are earmarked for the upkeep of those services.
Leaning on ratepayers to fund general government expenditures, which is what the money in the general fund does, may raise accountability and fairness issues and could negatively affect debt issuance and have other financial implications, experts previously interviewed have said.
Councilman Gregory Johnson was concerned during the meeting about drawing on the general fund savings account for support.
“My concern with the general fund again, I say this time after time, this council has worked very hard to get in the black, including staff and citizens,” Johnson said. “Week after week, we brought those items, over a half million dollars that we spent, and now we’re in this situation.
“I’m hoping that we can search for more cost savings to get this item approved,” he said. “My goal for the city is to ensure that it is a place to work, play and grow our families, but the city finances continue to come back up. I want to do whatever I can to regain the citizens’ trust.”
Johnson summed up his statement by saying that although he does not want to spend the money for an audit, and he believes City Auditor Grady has the skills and resources to do it, ultimately, it comes back to credibility.
Residents have specifically mentioned credibility, trust and transparency as key ongoing issues, and have specifically cautioned about keeping an independent eye.
If Grady were asked to investigate, there is a potential that he as a city employee would be investigating his employers, forcing a conflict of interest. The same would apply to the council, which oversees his position and to whom he reports.
Councilman Kilpatrick, during a second go-around of comments from council members, was firmly anchored in his position against an investigation.
“I heard might, could, may — find things,” Kilpatrick said. “My constituents are very concerned about $400,000 for a we-might-show-this, we-could-show-that. There’s not been one specific area identified by any citizen.”
Kilpatrick said he had conversations with 162 residents in his district, then revised it to 164. He did not provide names of any of these residents.
Kilpatrick did not acknowledge that a laundry list of red flags had been raised by the Herald, nor that numerous concerns had been brought forward publicly by residents over more than six months.
“Our finances have credibility,” he said. “The bond agencies have not lowered our bond rating by one iota with all of the publicity … that has been emphasized, overemphasized, continued to be overemphasized in the news media. … We have credibility. We’re not broke. We’re not bankrupt. … We’re not in debt. No money has ever been missing.”
Former Mayor Dan Corbin, a vocal opponent of an investigation, approached City Auditor Grady after the meeting and referred to the Herald’s list of red flags as red herrings, calling them “bull—.” Corbin previously put the spotlight on an ongoing “revenue problem” as the source of city troubles, but like Kilpatrick, maintains there is no cause for pursuing an investigation.
Kilpatrick, in a last-ditch effort to make his point known in the meeting, asked Finance Director Locke whether the annual financial statement audit would also need to be done. Locke said yes.
“So we’re going to pay for another external auditor to come in and audit, just what McConnell & Jones just audited?” Kilpatrick asked. “To tell us the very same thing? That the nine external auditors have told us in the last nine years … they said that all of our working procedures are OK.”
The other auditing firm currently contracted to the city, Weaver, will need about $120,000 to perform the work mandated by state law, Locke said. The 2016 analysis was $106,000, city records show.
The difference between the pending work and the annual-statement audit municipalities regularly do is that the routine annual audit is limited in scope.
Flaws with cities routine annual audits were the subject of a Los Angeles Times story after the investigation of Bell, Calif., showed corruption and fraud, not reflected in the annual audits.
The Times reviewed state and local records in California and found that “the independent audits that public agencies in California are legally required to obtain frequently fail to flag cases of fraud and mismanagement.”
One factor, the Times said, was that cities might not rehire auditors who don’t give them a good review.
Councilman Jonathan Okray was quick during Tuesday’s Killeen meeting to point out a key characteristic.
“We’re talking about the yearly audit, it’s something that says we dotted our i’s and crossed our t’s. … The difference is that in an annual audit, we provide the documentation to present to the audit company … versus this audit here, is where it’s more intrusive, … where they say now it’s time to show and tell.”
City Auditor Matthew Grady will be assisting the external auditors as the audit liaison to facilitate the process, Grady said, which is typical.
Work to resolve some of the council’s concerns will begin next week at the workshop meeting Tuesday. Houston-based McConnell & Jones’ partner Odysseus Lanier is expected to attend.
The visioning session allows the auditors to get input from the City Council, and helps the firm focus, Grady said, much like a survey.
“They’ll be soliciting concerns and helping manage expectations about what the audit will achieve,” he said.
Will the audit find anything?
“I think there will probably, more than likely, be some process improvements that will come out of the audit,” Grady said.
In a “Law and Order” TV show reference, Grady said that “you’re probably not going to see Jerry Orbach … come in a raincoat and take anybody out on a perp walk.
“But, something will come. Something good will come out of the audit,” he said.
The Herald reached out to McConnell & Jones on Thursday, but it declined to comment, citing a policy of not speaking to the press while engaged with a client.
The only scheduled update after the audit begins is the mid-audit briefing to the Audit Advisory Committee — made up of council members Kilpatrick, Fleming and Young — anticipated to take place in May. It’s unclear if that mid-audit briefing will be open to the public.
Work could be completed by July 31.
City memorandums show the total cost of the audit would be $394,456, paid biweekly to Houston-based public accounting firm McConnell & Jones.
Councilman Jim Kilpatrick in last week’s council meeting used sticker price to argue against it, but Councilman Richard “Dick” Young disagreed.
“That money would go through our city budget like sand through the colander,” Young said. “(And) I just think that we have to get to the bottom of it.”
Some examples of financial fluctuations and items recently approved include:
$8 million: Amount city needed Sept. 30 to balance FY 2017 budget
$5 million: Amount of money identified by city officials in January for the 2018 budget through “a number of managerial practices”
$1.86 million: Contract to Freese and Nichols firm for water supply project
$1.67 million: Money taken from enterprise fund primarily consisting of trash ratepayers’ money to boost the general fund savings account
$934,867: Purchase of 42 city vehicles, including some for police
$741,623: Contract to Mitchell and Associates for Rosewood Drive Extension/Heritage Oaks Hike and Bike Trail
$540,632: Purchase of nine, fully-loaded police units
$226,316: Purchase of fleet tires
$150,405: Stewart Neighborhood Project, Phase 3 sidewalk reconstruction
$93,098: Change Order No. 63 to James Construction Group for U.S. 190/FM 2410-Rosewood Drive project