City audit raises ‘significant concerns’
Published 8:32 am Monday, April 21, 2014
Louisiana Legislative Auditor Daryl Purpera said he has significant concerns about the fiscal operations of the city of Bogalusa.
In a letter dated April 16 and released Monday by his office, Purpera writes that because of “the severity of issues” found in the city’s 2012 audit report, he is requesting Bogalusa officials submit a detailed action plan to address its fiscal problems to his office on or before May 16.
The letter lists the auditor’s recommendations along with seven areas that must be addressed, including a $12.7 million-plus unfunded actuarial accrued liability in the City of Bogalusa Employees’ Retirement System.
The letter states the city’s action plan must note the corrective action that will be taken, who will be in charge and when the correction will be completed.
The report was issued after representatives of the city and Purpera’s office met last week to discuss the city’s resolution of matters in the 2012 audit report. Mayor Charles Mizell, City Administrator Jerry Bailey and City Council President Doug Ritchie attended. Mizell said he appreciated the time and the insight the Legislative Auditor’s office provided and added city officials were already aware of these issues and had begun to study them.
Along with problems in the city’s retirement system, other problems addressed were the now $1.7 million deficit in the General Fund; the fact that approximately 75 percent of the city’s budget is used to pay salaries and benefits; “improper” loans to the General Fund from dedicated funds after Hurricane Katrina that have not been fully repaid; a nearly half million dollar deficiency in bond reserve accounts; lack of control over credit card usage; and the fact that the city suffered a computer system failure in May 2013 and was unable to implement a fully functioning accounting system for the remainder of the year.
The letter recommends the mayor and City Council work together to develop a comprehensive plan to address the system’s problems, including looking at options to provide adequate funding and pension plan reform.
Among the problems noted by Pupera in the employee retirement system is that “at the time of our visit, the three-member board responsible for managing the City of Bogalusa Employees’ Retirement System had two vacancies and was not meeting on a consistent/regular basis.”
Pupera also said COBERS funding levels dropped from nearly 58 percent in 2003 to less than 36 percent in 2012, and the city had not submitted the COBERS actuarial reports to the Legislative Auditor’s Office as required by law.
Mizell said the system is increasingly strained because more people are living longer after retirement.
“The system has an unfunded balance of $12.7 million,” Mizell said. “All revenue dedicated to the system is being contributed, but it does not keep pace with the growing cost of the defined benefit program.”
In Bogalusa, due to different collective bargaining agreements, city employees with the police and fire departments belong to separate municipal retirement systems that operate according to changing state guidelines, but all others are members of COBERS, created specifically for Bogalusa by the Louisiana Legislature in 1952.
The city currently pays 11 percent of an employee’s salary into the COBERS system, 31 percent for someone in the police system and 28.25 percent for an employee with the fire department.
“Pension costs alone totaled over $1.1 million in 2012,” Mizell said.
City retirees can earn up to 66 2/3 percent of their top annual salaries, and overtime is included.
Any change in COBERS would probably have to be made in the Legislature, he said.
“But first we’re going to have to have something to replace it with,” Mizell said. “And it’s complicated. If we go to a new system we still have to have enough money in the old one for all the people it’s already obligated to.”
The city is developing a plan that should be ready “in the coming months,” he said.
Purpera’s office recommended a review of the purpose, structure, responsibilities and vacancies on the COBER board and a clarification of duties and responsibilities of the board members, secretary and treasurer. It also recommended discussing the funding station and options with the city’s actuarial, accounting and legal advisors to determine what changes are needed to strengthen funding levels, to identify and disuss strategies that may eventually provide adequate funding and to incorporate a goal of pension plan reform as part of the city’s strategic plan.
It also said the city must ensure compliance with state law by annually submitting the COBERS actuarial valuation to the Louisiana Legislative Auditor between the first and 120th day following the close of the fiscal year of the retirement system.
General Fund Deficit
City officials say they are working to address the “ongoing issue” of a General Fund deficit that the auditor noted as $1.1 million before the city’s computers crashed last May. Bailey recently found what he believes is an additional $635,000 shortfall, bringing the total to more than $1.7 million, Mizell said.
“We could not tell if the $1.1 million deficit had increased or decreased in 2013 because management did not have current financial statements available on the operations of the General Fund at the time of our visit,” the letter states. “Furthermore, management did not have an up-to-date plan to eliminate the deficit and begin operating on a fiscally sound basis.”
The state auditor recommended that Mizell and the council update the city’s 2008 Cost Savings and Revenue Enhancement Plan and “focus on the elimination of this significant deficit in fund balance” by cutting expenses, raising revenues or both.
He also said the council should adopt a formal fund balance policy that defines the appropriate level of the fund balance, and each month the mayor and/or the city’s chief financial officer should present the City Council with current financial statements and budget comparisons for all city funds, also warning of any corrective action needed.
Mizell said the city has already identified $1.6 million in cost savings and anticipated cost savings as well as approximately $2.2 million in revenue enhancements for 2014.
However, he would not provide details, saying he is not ready to discuss them yet, but he said that as far as cutting costs and increasing revenues are concerned, “everything is on the table.”
Salaries and Benefits
Purpera said Bogalusa officials should review all expenditures and focus on “the economic sustainability of continuing to pay existing salaries and benefits.” Approximately 75 percent of the city’s General Fund goes to pay for salaries and benefits, including 100 percent city-paid health premiums for all full-time employees.
The auditor said the mayor and City Council’s review should also include the legal and contractual obligations resulting from the city’s salary and benefit policies and practices and whether or not these obligations are sustainable under current economic conditions.
He said the city should also review its policies and practices for providing compensated absences like annual leave and sick leave; its policies and practices for paying cost-of-living adjustments to retirees; and the funding methods and sources, including whether the city’s taxing structure can be revised to generate additional revenue.
“We must take a very hard look at levels of staffing and benefits in all departments and find ways to work smarter,” Mizell said. “There are several things we’re doing. Part of it is a compensation study.”
The city has engaged a company to study its staffing structure, salaries and benefits. And it’s put a new policy into effect for use of compensated absences that is designed to have the long-term benefit of lessening the financial obligation of the city when an employee leaves the job.
“We have been kicking this can down the road for years,” Mizell said. “We are a city with half the population that used to support this government. We can no longer accept the status quo.
“We are working very hard to make decisions and policies that will strengthen our economic status and right size our government. It is a delicate balance that determines the government that is right for the city as it is today, yet has enough capacity to rebuild our city. We intend to find that balance.”
If the municipal government is downsized, Mizell said he hopes that can be accomplished through attrition.
Improper Loans Not Repaid
The audit found that the city’s General Fund had not repaid $610,000 (75 percent) of the $811,030 that it “improperly borrowed” in 2006 and 2007 from the Debt Service Fund and Street Overlay Fund.
“According to the director of administration (Bailey), there was a lack of revenue after Hurricane Katrina, and it was necessary to borrow the dedicated funds to pay for operational expenses of the city,” according to the report.
The auditor recommends the mayor and city council work together to implement a formal plan for the General Fund to repay the loans.
Mizell said the city is continuing to repay the remainder of the money borrowed from the Debt Service and Street Overlay funds from the General Fund.
Bond Reserve Accounts Not Funded as Required
The audit found the city was not in compliance with certain covenants in its revenue bond agreements.
“The city informed us that, as of March 7, 2014, there was a cash funding deficiency/shortage in the bond reserve accounts for both the Revenue Refunding Bonds (Series 2012) and the Water Revenue Bonds (Series 2009) totaling $465,927,” the letter says.
The auditor recommends that management strictly comply with all requirements of the city’s bond agreements and that the mayor and council should work together to implement a formal plan to ensure sufficient cash is transferred into the reserve accounts to eliminate all funding deficiencies.
“We met with the Bonding Commission Thursday,” Mizell said. “It approved our ability to borrow, so evidently they are pretty happy with us.”
Accounting System Not Fully Functional
Mizell said the city is working to develop and implement failsafe backup procedures for its computer system, and that all revenues and expenditures will be monitored on a monthly basis.
Among the auditor’s recommendations is off-site storage of backup and the implementation of a disaster recovery and business continuity plan to aid the city in a timely manner in the event of another computer failure or disaster.
Lack of Control over Credit Card Usage
The audit found that controls over credit cards need to be strengthened, and the auditor said the assessment revealed that some employees are not turning in itemized receipts and/or not documenting the business purpose of purchases made with a city-issued credit card.
“In addition, supervisory staff was not conducting a review of employee usage to ensure compliance with city policy,” the letter said.
Mizell said he doesn’t feel there is a real problem with city credit cards, but that written procedures must be put in place.