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City’s accounting right and wrong

Answer depends on who’s talking
By: Stephanie Dumm News Messenger Reporter
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The city’s accounting procedures are being questioned by News Messenger readers and bloggers. Last week’s News Messenger stories (“General Fund’s deficit inflated,” page A1 and “Just how much cash is in Lincoln’s reserves?” page A1) said that $3 million in unrealized investment losses were allocated to the General Fund instead of being distributed across all of the city funds participating in the investments. The city stands behind its accounting procedures, including the consulting firm that provides its accounting services and the mayor. “The city meets GASB (Governmental Accounting Standards Board) requirements and practices acceptable accounting procedures,” Mayor Paul Joiner said. The News Messenger spoke with a GASB representative on Tuesday. She wasn’t able to comment on whether the city follows acceptable accounting procedures because “ the questions related more to auditing than accounting.” City Manager Jim Estep and Assistant City Manager/Chief Financial Officer Anna Jatczak were also asked in last week’s articles if $57 million of the city’s cash investments are reserves, to which they said no, and why $57 million shows up as a negative on the city’s most current balance sheet. Those cash investments are $21 million in the Local Agency Investment Fund, $2 million in a demand account at US Bank, $1.3 in money market funds, $18.7 million in U.S. Agency bonds and $13.2 million in corporate bonds. The News Messenger spoke with Joe Aguilar, a partner at Vavrinek, Trine, Day and Company, on Monday about the city’s accounting procedures. Vavrinek, Trine, Day and Company provides accounting services for the city of Lincoln since July 2009. Aguilar said services include “assisting them in keeping them up to date and preparing for their audit.” The consultant’s contract has been extended to June 30, 2011, with a total contract amount of $433,960, according to the professional service agreement with the city. Aguilar was asked by The News Messenger if it’s a good accounting procedure to have cash in bank show up as a negative on a city’s balance sheet. “Some cities practice accounting for their cash month to month in that fashion,” Aguilar said. “It’s a lot more work to do the accounting that’s required at year end than to do it every month.” But David Masche, a Lincoln resident and certified public accountant who addresses the City Council during most City Council meetings about financial matters, sees the negative cash in bank differently. “I think it’s absolutely ridiculous,” Masche said. “To me, if you look at a financial statement and you have a negative balance, it means your account is overdrawn.” Aguilar also said the negative number could have shown up because the city hasn’t received its allocation of property taxes yet. The News Messenger asked Aguilar if the city’s $57 million in cash investments could be considered the city’s reserves. Aguilar said the city’s reserves are “a policy matter” and it’s up to the City Council to determine what the city’s reserves are. “The investments are comprised of an investment pool, and those funds are restricted only to specific uses. They may not be able to use those for any function,” Aguilar said. “Investments and reserves are two separate issues.” The News Messenger asked Terry Dorsey, the non-staff member of the city’s investment committee and owner of Dorsey Capital Management, about Aguilar’s response that the city’s investments are not reserves. “In my experience over the last four years as the outside (member) of the city of Lincoln’s investment committee, I was not made aware of any restrictions on the two investment funds that have a value of approximately $57 million,” Dorsey said. “I know there are other reserves that are restricted for specific usages.” Masche “doesn’t think” that the investments listed are the city’s reserves. “Just because money is an investment doesn’t mean it’s a reserve,” Masche said. As far as allocating the $3 million in unrealized investment losses to the General Fund, Aguilar said there is “no standard procedure” for this. “It depends on their managerial choices, how they want to handle their portfolio and the criteria their auditors set up,” Aguilar said. However, Masche said, the money should have been allocated to all of the funds that participated in the investment suffering loss. “If it’s a management choice to allocate it to the General Fund, that’s a stupid decision,” Masche said. “Why put it all in the General Fund when it’s not supposed to be there? The General Fund is the one that operates the critical departments, it’s our police and fire.” Jatczak told The News Messenger last week that it’s an appropriate accounting procedure to allocate the unrealized investment losses to the General Fund, but that the losses should have been allocated across other funds that participated in those investments. Masche said the city used “bad judgment” in allocating the unrealized investment loss to only the General Fund. Masche referred to a presentation made by the city about the city’s financial plight during an Oct. 26 City Council meeting. “I and many others sat in a long budget meeting in late October where the city management outlined all the bad things that would happen to us if we did not vote for Measure K. There would be massive layoffs in police, fire and one or both of the libraries could close,” Masche said. “I addressed the City Council and told them, ‘In my opinion this late, unscheduled budget meeting was held to scare us into voting for Measure K.’ Now we know that they knew for months that they had another $3 million in the General Fund. In my opinion, the withholding of that information for such a long time with a critical vote on the ballot is inexcusable. What else are they not telling us?” Dorsey also weighed in about the city giving residents all of the facts. “I feel that withholding this information is at best misleading,” Dorsey said. “The sin of omission is as bad as the sin of commission.” Richard Pearl, who was chairman of the Citizen’s Advisory Task Force and supported Measure K in his recent unsuccessful run for City Council, said the task force didn’t notice the $3 million in unrealized investment losses. “That was way out of our scope. We were asked to look at structural revenues and structural expenditures that we could change,” Pearl said. “This was part of a previous financial that was outside of our purview.” Pearl said the $3 million was discovered during an audit. When The News Messenger asked when the audit was, Pearl said he found out about the audit by reading last week’s The News Messenger. Stan Nader, a newly-elected City Council member, said he will look for clarification as to whether showing a negative number on the balance sheet “is the right way to express cash in bank,” and why the $3 million was allocated solely to the General Fund. Nader brought the $3 million in unrealized investment losses to The News Messenger’s attention two weeks ago. “There seems to be a difference of opinion because it’s technically a paper loss, but the fact is if there is a loss, it should be distributed against all of the funds,” Nader said regarding the $3 million loss. “From the common sense point of view, it shouldn’t just be in the General Fund, it should be against all funds.” Nader said he realizes that the $3 million is “one-time revenue and that it doesn’t fix the structural deficit.” “The biggest issue with this is transparency and credibility,” Nader said. “My concern is we need to be transparent and tell people what the real numbers are because when you don’t tell people the real numbers, they question everything else that you do.” Nader said he will assist the city in becoming more transparent and credible through his recommendation for a citizen’s advisory auditing task force “to be a third set of eyes looking at how the city is handling the money.”