Thursday, December 03, 2009

December 3, 2009 City Council Meeting: Sewergate To Cover-up Bankruptcygate?

In a previous post (click here), I mentioned the City of Morristown's illegal transfer/loan of $2.5 MILLION dollars from the city's sewer fund to the city's general fund in the fiscal year ending 6/30/08. Former City Administrator Jim Crumley apparently authorized the transfer to cover up the "poor" cash situation of the general fund.

The city's auditor is Craine, Thompson & Jones. Terry Winstead of CTJ (click on e-mail below) states that Tom Jones of CTJ was present in a meeting when Crumley authorized the transfer but that CTJ's auditing "independence" and objectivity were not lost because while Jones knew about the entry, he (Jones) didn't physically  make the entry himself.   So Jones was in the meeting where the entry was authorized. Jones then completed his audit of the city's books and recorded the $2.5 MILLION switcheroo as an inter-fund loan.  BUT Jones did not report that this $2.5 Million "inter-fund loan" had not been approved by council (as is required). AND Jones did not report that this $2.5 Million "loan" had not been approved by the State Comptroller's Director of Local Finance (as is required).

At left is Winstead's e-mail to Wampler describing how the $2.5 Million "entry" for fiscal year 2008 came about and then disavowing any direct involvement by auditor Tom Jones-- Jones just happened to be there when the entry was authorized.  On the November 2009 e-mail, there is also a written notation by Wampler stating that Dynise (Robertson), the city's finance director, informed Wampler that the $2.5 Million 2008 sewer to general fund transfer was "transferred back last week."  No mention of who authorized the transfer-back or why the transfer-back, like the initial transfer, did not go through council.

The scariest part of the note is Wampler's second statement: "We will have to transfer most of that money back to the General Fund before the end of the fisical (sic) year."   Why? To cover up a poor financial situation again?  After the whopping property tax increase of 2007, after the sales tax increase of 2008, and after red light cameras were installed for even more revenue, is Wampler's comment a warning that the city may still not have enough funds for general government operations at the end of FY 2010 (6/30/10) and will somehow need another sewer loan as a cushion?

At city council yesterday, Charles Cook asked Mayor Barile if she knew about this $2.5 Million sewer fund to general fund transfer in 2008. She said she didn't recall being told at the time.

Cook then passed out an e-mail that I had received from the Director of Municipal Audit (Dennis Dycus) in the State Comptroller's office in response to questions about (1) whether a temporary transfer of money from the sewer fund to the general fund could be made (no) and (2) how an inter-fund loan from sewer to general fund should be handled (carefully).  [Cook had blacked out my name on the e-mail so the city officials could concentrate on the contents of the e-mail itself.  By now, the Mayor and/or some members of the council or others have probably called up the state to find out who was asking questions when in reality it is the Mayor and the councilmembers who should have been asking this and many more questions all along.]

Mr. Dycus, Director of Municipal Audit, simply confirmed the obvious. There has to be local approval of an inter-fund loan by the city council. Then the loan is sent to the Division of Local Finance in the State Comptroller's Office for approval.  Dycus twice notes that any loan of this type has to be an arms-length business transaction and that the going rate of interest has to be paid by the fund that is borrowing the money. In the city's case, the general fund (largely funded by taxes) borrowed the money and should have paid interest to the sewer fund (largely paid by ratepayers) that made the $2.5 Million loan. Click on the e-mail below to enlarge.

Because of the illegalities of the handling of the funds transfer/loan and because the whole thing was cleverly orchestrated to cover-up the dire (essentially bankrupt) financial situation of the city's general government fund, Cook referred to this matter as "sewergate."  Maybe it was "sewergate" to cover up Morristown's "bankruptcygate."

Now click again and read Wampler's last statement in his hand-written note on Winstead's e-mail. "I will develop a fund transfer policy as soon as I can."  Transfers are not allowed.  No need for a transfer policy.

An inter-fund loan from sewer to general fund can be made, BUT it must be an arms-length transaction that is first passed by the council and then approved by the state. The Dycus e-mail pretty much outlines the procedures for such an inter-fund loan. Maybe the city should consider following state law as its inter-fund loan policy!

Of course, maybe the city would not have to borrow money from its sewer fund at all if the Mayor and councilmembers managed the taxpayers' money responsibly and didn't pass every nice-sounding spending proposal that comes around plus borrow and spend every penny that they can get their hands on.

Mr. Cook pointed out to the Mayor and Council that they could and should have known about the $2.5 million switcheroo (my word) if they had ever actually looked at the 2008 audit.  He also pointed out that they could and should have known that the city's 2008 general fund balance of $3,431.536.00 was all smoke and mirrors (my words) if they had actually looked at the audit. 

The $3,431,536.00 fund balance was largely a charade, but you had to ask questions or you had to be paying attention to see the charade.  Every penny of the 2008 "fund balance/rainy day fund" of $3,431,536.00 was  reserved or set aside (1) to pay back the sewer loan ($2,500,000.00), (2) to pay existing contracts ($995,419.00), and (3) to pay other bills owed by the city ($135,617.00). 

Real available general fund balance/rainy day fund as of 6/30/08. Zero!

Now how many times do you reach the end of the year (December 31) and your debts and bills are EXACTLY, down to the penny, what is in your checking account (fund balance) at that point in time?

Yet, that's what the city's 2008 audit would have the taxpayers believe. The audit suggests that the city's checking account (fund balance) had EXACTLY $3,431,536.00 in it as of 6/30/08 and that the city's current debts and bills just happened to total EXACTLY $3,431,536.00 as of 6/30/08.  An unbelievable coincidence? Smoke and mirrors? Or plain old local hoodoo economics?

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