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When did city representatives know about the accounting errors?

By: Carol Feineman, Editor
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Exactly when Lincoln’s city manager, assistant city manager/chief financial officer and City Council understood what a $3 million unrealized investment loss placed in the General Fund meant is also being asked by several community members. City Council members, encouraged by the two top city staff, unanimously approved on June 22 the placing of Measure K, a utility users’ tax that would increase the General Fund, on the November ballot. The seven city representatives repeatedly said that Measure K was the only way to generate revenue to the General Fund that supports police, fire, libraries, and parks and recreation services. But Assistant City Manager/Chief Financial Officer Anna Jatczak sent an e-mail June 30 to City Council members Kent Nakata, Paul Joiner, Spencer Short, Tom Cosgrove and Linda Stackpoole and City Manager Jim Estep about the General Fund reserves. In the e-mail, she wrote, “As you are aware, unrealized investment losses over the past had been allocated only to the General Fund, when in fact, they should have been allocated to a majority of the funds. Over the four years, the total of these unrealized losses amounted to approximately $3.225 million. …That means that the General Fund will have a one-time gain. We are proposing that these monies be credited to the General Fund Reserves …” During a handful of Measure K workshops and City Council meetings, starting in the summer and leading up to the November election, council members, Estep and Jatczak said that four police officers would lose their jobs, library hours and services would be greatly reduced and 19.5 other city jobs might be slashed unless Measure K passed in the November election. They said there was no other source of revenue available. City Council voted to spend $54,000 with the consultant, Lew Edwards Group, “to educate” the public about the need for Measure K. Public outcry made the city reduce that amount, however, according to previous News Messenger stories. Measure K failed miserably with 66.5 percent of voters saying no on Nov. 2. The measure is a topic again in Lincoln as some community members are speaking out. They say that City Council and the two top city executives knew the $3 million unrealized investment loss was misallocated to the General Fund while they stressed that Measure K needed to pass so that current city services would be maintained. The $3 million misallocation, according to Lincoln resident David Masche, a CPA for 40 years and a critic of the city’s accounting practices, “bumped up” this year’s General Fund deficit, which the city has said in previous News Messengers is $2.7 million. If there wasn’t a misallocation, Masche said, the General Fund would have reflected a positive balance of $300,000. This year’s budget deficit resulted in five city layoffs and four other positions that opened but were not filled, according to previous News Messengers reports. Community members, including Masche, say that Estep, Jatczak and City Council should have disclosed the $3 million discrepancy before the city’s Oct. 26 budget meeting. Measure K’s fate would be determined six days later. “They told us all the bad things that would happen if we didn’t vote for Measure K,” Masche said, “while at the same time, they knew there was another $3 million in the General Fund they neglected to tell us.” If the public knew that the General Fund was $3 million higher than previously told, Masche said, Measure K would have received less votes in November. City Council was made aware of the $3 million in May or June, Estep and Jatczak told The News Messenger in mid-December. Mayor Paul Joiner confirmed to The News Messenger in mid-December that staff told him about the unrealized investment losses in “late June or early July.” “My understanding is that, upon discovering the misallocation, staff began research to ensure that no prior-year audit adjustments had corrected for the misallocation,” Joiner told The News Messenger in mid-December. Also in mid-December, Councilman Spencer Short told The News Messenger that he “found out about it mid-last year and Councilman Tom Cosgrove, who was mayor last June, told The News Messenger that he learned about the $3 million investment loss this fall. While the three councilmen’s statements in December vary about when they heard about the misallocation, Jatczak’s General Fund reserves e-mail on June 30 talks about the approximately $3.225 million allocated only to the General Fund. And the city’s audited financial statements of 2008 and 2009 describe the Lehman Brothers loss. “This proves that the city and council knew about the investment loss when the auditors prepared the audit in 2009 but they didn’t do anything about it,” said Noreen Skillman, an accountant of 10 years and new City Councilman Stan Nader’s chief of staff and campaign co-chairwoman/treasurer. “What it means to me is that the City Council and the city manager knew about the investment loss when they received the completed 2008 audit in July 2009 but didn’t act on it,” Skillman said. “This is a misallocation and shows ineptitude and incompetence. The city grew too fast for the City Council boys during the boom time here. They didn’t know what to do with the auditor’s information. And today, they’re defensive.” In addition, Skillman said that City Councilmen Paul Joiner and Short are on the city’s finance committee, along with Jatczak and Estep, and should have known about the Lehman Brothers misallocation. “It has to do with lack of knowledge on their part,” Skillman said. Short, in an e-mail Tuesday, wrote that there was no misallocation. “What occurred was a long standing accounting practice which had continued since prior to the City having a diversification of the investment portfolio,” Short wrote. “This practice is changing in light of an audit suggestion because it will help resolve any potential loss issues we may have in the future.” What bothers Masche the most is Estep telling The News Messenger on Dec. 13 that City Council could decide in January whether to allocate the $3 million investment loss to the General Fund or to all the investment funds. “There is no choice. The city already told us in the June 30, 2008 financial statements and June 30, 2009 financial statements that the loss is going to all the accounts,” Masche said. “I think Estep and (Joe) Aguilar (VTD consultant) are trying to waffle themselves out of this. A mistake was made by allocating the loss to one fund. A bigger mistake was not telling the public. They should have told the public that the General Fund was $3 million higher than previously told.” On Tuesday, Cosgrove, who was mayor when the misallocation was found, said that council didn’t tell the public about the misallocation, which could have saved some jobs, because “it hadn’t been determined that money would be allocated to the General Fund.” “Are we sure it’s $3.2 million? I wanted to be absolutely sure it could go back to the General Fund,” Cosgrove said. “The conversations I had with Jim (Estep) was, ‘Are you sure?’ and his answer was ‘quite sure.’ I wasn’t assured that money absolutely belonged in the General Fund.” “I wasn’t getting the answers primarily from Jim of how definite the money belongs in the General Fund, “Cosgrove added. “As long as I was not convinced that money had to go in the General Fund, I wasn’t prepared to tell people we had it.” Estep said Cosgrove’s comment above is true. “It’s correct in the sense that we hadn’t finalized the amount or had our auditor’s opinion that it would be an acceptable accounting practice to reallocate for that period of time,” Estep said. “You know there’s $3.2 million but you don’t know whether or not you can move it and when. It’s complicated because you’re dealing with different fiscal years and auditing requirements on how and when you can reallocate these losses. It’s very complicated.” Jatczak’s June 30 e-mail to council members and Estep stated that “Staff researched to ensure that no prior year audit adjustments had corrected this misallocation. No adjustments had been previously made.” On Tuesday, Jatczak said one reason not to tell the public this summer about the $3.2 million wrongly placed in the General Fund was because, “What we needed to research, part of Johnny’s assignment, was to look back and make sure we hadn’t done any of those allocations.” “Number two, we wanted to make sure the number was the audited number. Auditors determined this in December,” Jatczak said. “You don’t want to put it out there that’s there a potential for $3.2 million. What happens if it’s not? You get people ‘s hopes up. Last step was to verify through our auditors that the number was a solid number. When we have auditors coming in, numbers are pretty good estimates but not final, final numbers.” Former City Councilwoman Linda Stackpoole, whose term ended Dec. 14, would have liked to have those audited numbers. “We didn’t know what the dollar amount was,” Stackpoole said Tuesday. “What I was told was it wasn’t an audited number. Communication from staff to council members doesn’t always get distributed to everyone at the same time. And I wanted an audited number before we could loosen up the belt in the General Fund.”