City Council

Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -1– ______________________________________________________________________________ The work session of the Petersburg City Council was held on Tuesday, June 20, 2017, at the Union Train Station. Mayor Parham called the work session meeting to order at 5:15p.m. 1. ROLL CALL: Present: Council Member Charles H. Cuthbert, Jr Council Member Annette Smith-Lee Council Member Treska Wilson-Smith Council Member W. Howard Myers Council Member Darrin Hill Vice Mayor John A. Hart, Sr. Mayor Samuel Parham Absent: None Present from City Administration: Interim City Manager Tom Tyrrell Interim Finance Director Nelsie Birch City Attorney Joseph E. Preston Clerk of Council Nykesha D. Jackson, CMC 2. PURPOSE: a. Presentation by the External Auditors on the 2016 Comprehensive Annual Financial Report (CAFR). Mr. Bobb stated that it is their pleasure to present the 2016 Comprehensive Annual Financial Report. He stated that there is a lot of information in the report that they would like to move forward with. He stated that the auditor will make the presentation and that they will answer questions as well. Ms. Birch stated that she knows that this can be really daunting to go through numbers for the next hour, particularly the CAFR. She stated that her goal is to make this digestible. She stated that there is a lot of information. She stated that she will let David Foley talk from the auditor’s perspective the challenges. She stated that they are going to see tonight that they are concerned that the City is not going to survive if they continue to do business as usual. She stated that they need some type of liquidity event. She stated that the CAFR is telling them to get to zero. She stated that in order to get the balance to zero they need $7.7 million dollars. She stated that this is not money that will be used to invest into things. She stated that this is paying back all of the things that the City has borrowed to make it whole. She stated that $7.7 million is to get the City to zero. She stated that an additional $12.1 million will get the City the fund balance that is needed to operate the City. She stated that they also need to gain access to the create market. She stated that typically the way City builds a credit account, savings account or a rainy-day fund is with a one-time cash event or budget surplus. She stated that it will take 19 years for the City to get where they need to be per the policy level. She stated that this is $19.9 million dollars. She stated that the City has not done this for a very long time. She stated that a CAFR is the like an annual tax return. She stated that the audit that is done on the City tells them what happened. She stated that they spend a lot of time on the budget. She stated that the budget needs to be managed by the people that control the budget. She stated that the CAFR tells if they did financially what they supposed to have done. She stated that the monthly financials give you an idea of what is going on. She stated that they are typically supposed to do this by November 30th of every year. She stated that they have had the same audit firm since 2009 and the same pre-audit firm since that time as well if not before. She stated that they were concerned that they were too comfortable. She stated that they hired a new audit team which is VML *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -2– ______________________________________________________________________________ VaCO. She stated that the financial structured had to be rebuilt so that the auditors can do their job. She stated that this is a period of time. She stated that they hire people to do the day-to-day operation but that they really do not really see the day-to-day. She stated that they have snap shots of everything. She stated that part of their transparency and disclosure, they wanted council to know who are touching these numbers and how much it is costing the City. She stated that without Michael and Dan helping to drive some of the accounting restricting the City would not be in good of a place as they are now. He stated that they did a lot of work to prepare the CAFR. She stated that the audit company had 25 findings. She stated last year the audit company gave their update at a council meeting. She stated that they asked for this to be a discussion in a work session. She stated that the information was not in the minutes but that they asked the Clerk of Council to transcribe verbatim what information was stated during certain sections of the meeting. She stated that 2016 was worse than the year 2015. She stated that they are better now but that there are some serious challenges that they need to overcome. She stated that since the audit was done late that there may be some findings in 2017. She stated that they were not able to execute them from 2017. She stated that she will get with the new Finance Director to help make sure that there are no findings in FY18. She stated that the general fund had no cash. She stated that it also had a negative $7.2 million dollars of cash. She stated that this is like an overdrawn account. She stated that they did not have a savings account to go to. She stated that this would be a rainy- day account. She stated that they had to borrow from different areas to get the money. She stated that they need $19.8 million dollars to get the City to operate appropriately. She stated that this is something that bothers them often. Council Member Cuthbert asked Ms. Birch who does the City owe the $7.7 million dollars too. Ms. Birch stated that part of the $7.2 million-dollar overdraft is the negative cash position that is owed to other funds. She stated that if this is paid off then it would dramatically help the other fund balances. Council Member Cuthbert asked whether it was permissible to write off some of this. He asked that it is a debt that the City owes itself. Ms. Birch stated yes in a way. She stated that part of it is that the City owes $1.8 million dollars to the stormwater fund. She stated that this is one of the biggest “No’s” that they have seen thus far that they City did in times of stress. She stated that they took a bond that was supposed to be used for utility funds and took the cash to pay for something else. She stated that they cannot write this off. She stated that the good thing is that they are paying the debt service on this and that the bad thing is that they need to pay this back before the investors calls about the bond. She stated that this is one example. She stated that others are grants. She stated that they are trying to make sure that all the vendors get paid. David Foley, auditor of Robinson, Farmer & Cox Associates, stated that the standard for a write-off is that they would have to be on the books for over a year. He stated that one thing he wants to point out is the reconcile overdraft of $7.2 million dollars that is in the general fund that is negative cash is not just owed to other funds because the City drew down money. He stated that there are vendors that are owed that money as well. He stated that they cannot just write that off. He stated that there is a $3.4 million-dollar liability. He stated that most of that is VRA contributions and that he will be talking about this later. He stated that this is contributions that the City has not yet remitted. He stated that there are a lot of liabilities that are driving this deficit. Council Member Cuthbert stated that he can see why the City cannot write-off the examples that were given. He asked whether there is any part of the $7.2 million dollars that is ripe to be written-off. Mr. Foley stated that he is not aware of anything that can be written off. He stated that there were some amounts in prior years where amounts were owed to the utility funds. He stated that they recommended for those amounts management because they were so old and were not going to be paid back. He stated that *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -3– ______________________________________________________________________________ those amounts were written off. Council Member Cuthbert asked were any constitutional officers responsible for this misappropriation of funds and if so are they still in office. Mr. Foley stated that he is not sure that he can fully answer the question. Council Member Cuthbert asked Mr. Foley can he partially answer the question. Mr. Foley stated that the firm has been the audit firm for many years. He stated that he has been the partner charges for the first year. He stated that this has been an accumulation of over spending for many years. He stated that this would consist of budgeting and missing the revenue charges. Council Member Cuthbert asked are any of the constitutional officers responsible for the inappropriate bookkeeping transfer still in office. Mr. Foley stated that some of the financial conditions did not occur just this year. He stated that he is not sure that he can fully answer that question. He stated that if they are not collecting revenues that they are budgeted then there are receivables out there that have not been collected. Council Member Cuthbert stated that he understands. He asked that if a grant comes in doesn’t it have to go to the review of a constitutional officer before it is put into any account. Mr. Foley stated that as they incur expenditures a lot of the grants are on reimburse basis. He stated that two issues that they saw where there were grant funds available for fire and rescue. He stated that the orders were placed then the funds were drawn down from the grant and then the check was never paid. Council Member Cuthbert asked whether a constitutional officer who is still in office participate in any of those transfers of funds for inappropriate purposes. Mr. Foley stated that the check would have been signed. Council Member Cuthbert asked who would sign the check. Mr. Foley stated that it would be authorized check signers. He stated that he knows that the treasurer is an authorized check signer. Council Member Cuthbert stated that he sees. He stated that he does not have any further questions. Council Member Wilson-Smith stated that she realizes that the treasurer is one of the authorized check signers. She asked that during the year weren’t there other persons in City government who were also check signers. Mr. Foley stated that the City has more than one check signer. Council Member Cuthbert asked Mr. Foley if he has seen checks signed by the treasurer. Mr. Foley stated that he cannot say that one of the checks in this situation is one of the checks signed by the treasurer. Council Member Cuthbert asked not even for the VRA or the stormwater irregularity. *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -4– ______________________________________________________________________________ Mr. Foley stated that the VRA and stormwater was transfers that were made out of the account. Ms. Birch stated that that one in particular was not initiated by the treasurer. She stated that it was by the prior Director of Finance. She stated that the City has a pulled cash system so all the cash goes into one big account. She stated that it is up to both the treasurer and that office and the director of finance to code it appropriately. She stated that one of the challenges that they have stopped is the speculations about where revenue go and if they get put somewhere. She stated to work with the finance office to know that the money came in with a grant. She stated that what could have happened is that the finance office may not have known that they got a grant because of the way the money came in. She stated that the money was just thrown into an account not knowing that it was put in the said account for the grant. She stated that she does not know how often this happens. She stated that there have been several instances where they had to find money that they knew was coming in and code it appropriately. She stated that the connection between the treasurer and director of finance is very critical. Council Member Cuthbert asked which office is responsible for coding. Ms. Birch stated that it should be finance. She stated that the treasury codes. She stated that treasurer codes when you pay a bill. Mr. Foley stated that the treasurer may not know that it is a grant expenditure. Ms. Birch stated that the only way that they know is that there are people that have been there for a long time. She stated that they see certain grants that come in one a regular so they know where it goes. She stated that the accounting was so broken that she is not sure that they knew that if you get this money in that they go with these expenditures and that they need to be coded appropriately. She stated that the accounting system confirms her assessment. She stated that she is not sure that this is what happened but that there are a lot of things broken that they are fixing. She stated that she put in her presentation that assets equal liability plus the fund balance. She stated that both sides have to equal each other. She stated that on the asset side there is $6.9 million dollars of taxes receivable. She stated that this is extraordinary. She stated that this is saying that the taxes are not hitting for the time period that they need to hit for. She stated that they need to improve their collection on taxes. She stated that $1.9 million dollars came in after June 30th. She stated that this still leaves $5 million dollars that was not collected. She stated that they can improve it but that they will never have zero because there will have people that will not pay. Council Member Cuthbert asked what constitutional officer is responsible for the collection of taxes that is at the number of almost $7 million dollars. Ms. Birch stated that this is the function of the City Treasurer. She stated that the Commissioner of Revenue prepares the bill and the Treasurer mails the bills and collect them. Council Member Cuthbert asked what would the number usually be in a normal working municipality. Ms. Birch stated that she will have to get back with Council Member Cuthbert with that answer. She stated that $5 million dollars is an extraordinary number. She stated that she can see it being $2 or $3 million dollars. She stated that it should be at $3 million dollars. She stated that this is money that can be used to build back the fund balance. She stated that they have to be more aggressive than they have been. She stated that on page 22 at the top this an area for opportunity. She stated that there is inventory in the amount of $5.15 million dollars of property. She stated that this is property that the City is holding that they can sale. She stated that it is valued in the book at $5.2 million dollars. She stated that this is an area that they wanted to point out. She stated that it will still take years to offset the $19 million. She stated that they have a long way to go. She *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -5– ______________________________________________________________________________ stated that a qualified opinion is not normal Ms. Birch went through pages of the proposed budget book. She stated that she pulled out some numbers so that they can see what works and does not work. She stated that pulled four points out the CAFR. She stated that she went to 2007. She stated that cash is really nice to have and not worry about payroll and if the City is going to miss it. She stated that they started to see a challenge in 2012 and then they had nothing 2013. She stated that they had not had any liquid cash that they could fall back on. She stated that they had to go grab cash from other places. She stated that the second column shows receivables from taxes. She stated that back in 2007 they were okay and that they had about $3 million dollars. She stated that it got up to $9.8 million dollars in FY15. She stated that this makes her stomach drop that it got so high. She stated that she is not sure when the collection agency started working on this but that they still have ways to go. She stated that all the numbers play together. She stated that the same that they started going to other areas to get cash is the same year that they did not have any cash. She stated that this was the time that the receivables started going up. She stated that this next thing should make everyone stomach hurt. She stated that this happened quickly but it will take longer to fix. She stated that the City and get out of this. She stated that the City has to collect more. Mr. Foley stated that there are a few things that he would like to talk about. He stated that he would like to highlight some items that need to be pointed out. He stated that for the audit that they do for the City there are three main pieces. He stated that they audited the City’s financial savings. He stated that they look at and review the City’s internal control over its financial reporting for the purposes of being able to decision the audit procedures to make that financial statements are not materially misstated. He stated that the third piece is the federal compliance audit. He stated that there is a list of requirements that they have to follow. He stated that they go through this as part of the audit. He stated that there are three different reports. He stated that the first report is in the financial section. He stated that in the report they give an audit on the City’s financial statement. He stated that the report talks about the management statement and which management is responsible for the preparation of the presentation of the financial statements. He stated that it talked about their responsibilities as auditors in issuing their opinion and financial statements. He stated that as Ms. Birch pointed out there were some instances where there are several different pieces that they have to issue their opinions on. He stated that there are some on modified opinions and other that they issued qualified opinions. He stated that in FY16 the City encountered significant problems with the utility billing system up to system measurement changes. He stated that it is not uncommon to issue opinions on funds for localities in Virginia. He stated that he has been doing local government audits for 16 years. He stated that this is the first time that he had to issue an opinion. He stated that there are 13 materials weaknesses in the City’s internal control. He stated that there is lack of control over the utility billing system and insufficient documentation over sewer and water fees. He stated that there was insufficient reports and calculation throughout the year. He stated that there is a lot of work that needs to be done because it was not done due to insufficient staff. Council Member Cuthbert asked did any of the material weaknesses exist in the prior fiscal year of 2015. Mr. Foley stated that he cannot totally speak to FY15. He stated that he was the partner in charge for FY16. He stated that he does know that in the past this was not the first year that the City’s pre-audit firm had to do extensive work to get the folks where they needed to be. He stated that they found material adjustments that needed to be made as part of the audit. He stated that there was unreported material and capital lease. He stated that they had to do a lot of material reclassification to the City’s federal revenue. He stated that they recommended that the City have a person in finance that is dedicated specifically to accounting for and tracking all the federal grant programs. He stated that there was also instances of noncompliance’s. He stated that the City was not paying their bills in a timely manner. He stated that there was nonpayment of VRS contributions. *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -6– ______________________________________________________________________________ Mr. Bobb stated that the information that was presented is very significant and that they need City Council to wrap their minds around it. He stated that their task from July moving forward is to develop a plan to fix the findings. He stated that they will bring the plan to City Council for approval so that the next administration can follow through with it. He stated that he knows that there is a lot of issues and stuff. He stated that the point is that there are a lot of major decisions that they have to make. He stated that if there are questions after the meeting tonight then the auditors and Ms. Birch can be reached and they can do one-on- ones with City Council Members. Mayor Parham stated to Ms. Birch that an alarming point was raised during her presentation on how the past practices of City administration was fixing or cooking the books before the auditors came to the City. He asked Ms. Birch can she discuss what was being done and what to look for in years to come. Ms. Birch stated that she thinks that the management went wrong in budget projects of revenue. She stated that if there are any cooking of the books from her perspective then it was on the budget. She stated that they need to make sure that whatever is being reported for the current year and look at 2018 to see how close they seem normal. She stated that with respect to audit work she has not been told of any situation where they cooked the audit accounting numbers. She stated that they outsourced the function so that they did not know what they did. She stated that they prepared the numbers and reports of everything every month. She stated that they cannot fix a broken system until you know what is broken in the system. She stated that the new finance director will be responsible for monthly closes so that they are not surprised at the end of the year. She stated that there were bills that were provided to customers that were in error. She stated that this is things that they have all heard. Mr. Bobb stated that when they say cooking the books this is a supersonic negative. He stated that he would not like for them to use those kind of terms in reference to the past. He stated that he thinks that those were bad projections that were made. He stated that when they say cooking the book it puts it into a whole different hemisphere. He stated that this is something that they cannot document. He stated that he would add is that what is important to the members of City Council is fiduciary responsibility. He stated that when the budget is presented or updated to ask the hard questions of what’s behind the numbers and how they were developed. He stated that they have to question and trust the people that work with you. He stated that he wanted to make those statements. Council Member Wilson-Smith asked Ms. Birch that in the budget that they passed at the last council meeting didn’t they have information where they were putting money into the golf course. She stated that she does not remember the number and she does not have the book with her. Ms. Birch stated the general fund contribution to the golf course is to pay the debt service. She stated that it is self-supporting as an operation. She stated that it was not part of anyone’s assumption that this supported the debt service and all the improvements that have been made on the golf course. She stated that Council Member Cuthbert asked was there a way to structure this to be fully self-supporting. She stated she committed to developing a five-year plan. She stated that this is her responsibility in working with Mr. Bobb for the next quarter. She stated that part of the analysis they will be looking at the golf course and giving them some recommendations on what they can do. Council Member Wilson-Smith stated that she was reading the report from the gentleman prior to them coming here. She stated that it said that the City should consider the effect of the golf course operations has on its financial position. She stated that it also prior to transfers from the general fund the golf course operated in an approximate loss of $300,000. She stated that she went back and pulled up all the reports from 2012 and that every single year it is telling them that the golf course is not a good idea. She stated every year it is telling them this and that it is not a good idea. She stated that in 2012-2013 it says the same thing. She stated that in 2014 and 2015 it says the same thing. She stated that she is wondering does it make since to keep this in the *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -7– ______________________________________________________________________________ budget. Ms. Birch stated that they whole-heartedly feel like those conversations should have happened before the City invested what it did in the golf course. She stated that building the new facility out there with the restaurant and putting the money in the golf course, the conversations should have come before all this. She stated that one of the things that she wants to look over the next couple of months is on whether there is a way that they can do something differently or some other opportunities that she or Mr. Bobb does not know about. She stated that this would be to generate funds for the golf course. Mayor Parham stated that they have not had any cash on hand since 2012. He stated that the peak was in 2010 at $15 million dollars. He asked Ms. Birch what was the year that they made the investment of the golf course so that they can figure out what happened with the fund balance. Ms. Birch stated that she can do the analysis. She stated that she does not have the answer right off top of her head. She stated that there are a couple of different investments that have been made over the last couple of years. She stated that they had the brand-new library that was largely funded private. She stated that she does not know if it was exclusively done by private. She stated that they have the golf course and other things. She stated that she would not want to pin it on this. She stated that there have been a lot of investments made in that five-year period of time. She stated that she would need to pull back and analysis the budget in a different way. She stated that she can say that it was 100% lack of management that caused that this to happen. She stated that what the items where she does not know. Vice Mayor Hart stated to Ms. Birch that as they are moving forward and restructuring one of the things that they brought out in the standing committees is the audit committee. He asked Ms. Birch how often do she recommend an internal audit. Ms. Birch asked Vice Mayor Hart whether this is referring to the audit committee or an internal audit. Vice Mayor Hart stated that he would say the audit committee that is part of the new standing committee. Ms. Birch stated that she would recommend that they meet quarterly to review the information that is presented. She stated that she thinks that this would give them good data. She stated that from her experience the audit committee does not audit but that they ask really hard questions. She stated that she would say a quarterly review would be appropriate. 3. CLOSED SESSION (if necessary): *There are no closed session items. 4. ADJOURNMENT: City Council adjourned at 6:39 p.m. _________________________ Clerk of City Council APPROVED: _________________________ *Audio available  Minutes from the Petersburg City Council Work Session meeting held on: June 20, 2017 -8– ______________________________________________________________________________ Mayor *Audio available