Manteca City Manager Miranda Lutzow has halted discretionary spending “out of an abundance of caution” after extensive financial accounting issues have been unearthed during the past six weeks.

Some of the issues go as far back as at least 2015 — the last time there was a hard closure of the municipal books. At the same time “roughly $67 million” in cash deficits have been identified.

Interim Finance Director Stephanie Beauchaine will be presenting the City Council with an assessment of the finance department issues when they meet at 7 p.m. on Tuesday. Beauchaine — who as a consultant has over the years worked to help other cities with similar issues get their house in order — along with financial expert Bill Zenoni from the MRG Management have made 20 key assessments in the report being present to the council.

Beauchaine stressed it will likely take several years before all issues are cleared up and addressed. Tuesday’s report will not get into specific numbers given there is a significant amount of work needed to be done to get the city’s financials in order.

City management wanted to go public as soon as the experts and the current finance department staff had a clear understanding of the key issues facing they city.

“We want to be as transparent as we can with the public,” Lutzow said.

It is why Lutzow opted not to wait until specific numbers were in hand in terms of dollar amounts that are out of whack for a number of reasons. The city is months away from that point.

Reserves likely robust

enough to cover shortfalls

Beauchaine said “we are confident” that the municipal revenues are robust enough to cover any shortfalls but also noted it is likely those reserves will need to be drawn down.

The interim finance director indicates in her report to the council “revenue projections are of our primary concern” when it comes to the provisional budget Manteca is currently operating under “and we believe that the adopted revenue assumptions are overly confident.”

Once an analysis is completed, Beauchaine said “we are expecting to bring back recommendations to reduce sales tax, TOT tax (transit occupancy tax charged on per night stays at hotels), recreation revenues, gas taxes, SLESF funds (Supplemental Law Enforcement Services Fund), and others as necessary.”

Hotel room taxes will be adjusted for COVID-19 impacts as well as Great Wolf revenue projections as outlined in the development that was not allocated in the original budget that was adopted. The money collected  on the booking of Great Wolf rooms doesn’t stay in the general fund as it is already virtually all earmarked to go to Great Wolf as the agreed upon incentive  to get them to locate here as well as to repay other city funds that deal primarily with development fees.

Adjustments will also be made to correct errors in the provisional assumptions, including revenue forecasting and the allocation of funding for employee positions.

City’s general ledger hasn’t

been reconciled for years

The biggest concern is reconciling the general ledger which hasn’t happened for several years if not longer.

General ledgers are used to provide a record of each financial transaction that takes place in an institution whether it is a business of a government agency. It is the heart of the city’s financial system and critical to produce budgets with assumptions based on solid numbers as well as generating budget spending and revenue status reports that are accurate.

Beauchaine noted the “front line” financial activity that encompasses everything from utility bill payments and billing to payroll is being done daily but when that data is transferred to the general ledger it is not being regularly reconciled. That is when the wheels come off.

Instead of recording numbers produced from those procedures as well as grants and such to the general ledger various city departments have been keeping their own “off-the-books” spreadsheets.

Those spreadsheets have been used to create city budgets and to get a snapshot of where the city is at a given point when it comes to revenues and expenses.

Beauchaine noted that the city doesn’t have a system per se in place. That meant when key personnel department the institutional knowledge of the specific way that the City of Manteca has been doing things over the years that apparently do not follow standard accounting practices, the finance department slipped into disarray.

“There needs to be a system,” she stressed.

Cash deficits pegged at roughly

$67 million from various accounts

Numerous funds have been found to have cash deficits that are estimated to total roughly $67 million.

The largest single fund deficit is $40 million. It appears to have been accruing over a 3-year span involving a multi-year capital project for which the bond fund appear to have never been drawn down.

Similarly to fund balance deficits, the cause and appropriate course of action with each of the deficit funds will remain uncertain until the general ledger has been reconciled.

“We expect to be able to resolve the deficits by cost reallocations and use of reserves once the origins have been identified,” Beauchaine noted.

Other key points in the report being made to the council:
*Fiscal years have not been closed in the accounting system since 2015. The closure process protects the integrity of the financial data and is typically performed after the completion of an audit. Beauchaine and the staff have since completed a hard closure for the years 2015 through 2018.

*The unreconciled general ledger led city staff from both inside and outside the finance department to conclude the city’s system — and the reports it generates — as unreliable. That led to the establishment of off-book spreads sheets throughout the city in place of the general ledger allowing for the possibility of errors, duplicated reports and emissions. The staff is working to eliminate the off-book spreadsheets and replace them with central system general ledger procedures.

*Bank and investment reconciliations have not been done since February 2020. Staff is now in the process of reconciling them.

*Numerous fund deficits have been identified. The origin at this time is unknown and may be the result of a number of issues including cost overruns, revenue shortfalls, project overruns, missing interfund transfers posting errors and so forth. Beauchaine stressed fund reserves are “substantial enough that we expected to be able to reallocate cost overruns and return balances to a positive status once we understand their origin.”

*The management of grants is disjointed and performed by various staff across multiple departments without coordinating with one another. The finance department is now working on a strategy to manage grants in a cohesive and accurate way.

*Redevelopment accounting is largely unreconciled a decade after the state pulled the plug on the agency.

*Several funds appear to be misclassified and reported incorrectly.

*The purchasing ordinance is out of compliance with federal regulation.
*A physical inventory of city assets has not been completed and the city is unable to verify the last year one was performed.  A physical inventory is required every two years for any entity spending federal funds. An physical inventory is planned for the spring of 2021.

*The city is not allocating overhead/shared expenses such as city administration, human resources, and finance which results in unfairly burdening the general fund. The city has commissioned a cost allocation study with the intent to fully implement it in the 2021-2022 fiscal year.

*Enterprise fund rate studies (sewer, water, solid waste, and the golf course) as well as capital plans need to be updated once accurate fund balances are determined.

*Various frontline functions such as payroll and billing need to be reviewed for process improvements and internal controls.

*A finance department staffing assessment needs to be completed to determine if the department has appropriate staffing and classification at each level. The study should be done after the current issues are corrected, the general ledger has been brought up to date, and processes have been updated as the workload may appear different than it does currently.

*The city’s investment policy is outdated.

*The budget policy lacks administration and maintenance guidelines.

*Several key positions remain open in the finance department impacting the ability to do work do to needed skills and knowledge.

Great Wolf deal holding

up 2018-19 audit completion

The city is still unable to close out its audit for fiscal year 2018-2019 due to one item — the sale of almost 30 acres to Great Wolf from wastewater land holdings.

The 2018 property transaction was never recorded in the city’s financials. The issue was brought to the city’s attention by its auditing firm of Maze & Associates.

“The transaction needs to be recorded properly in the city’s financial statements and we have sought a legal opinion to advise in its proper recordation,” Beauchaine noted “We hope to have that opinion in the near future and to close the FY 18-19 Audit as soon as possible.”

The room fees from Great Wolf are supposed to payback the city $675,000 for the parcel that is just under 30 acres. That comes out to roughly $22,500 an acre.

To contact Dennis Wyatt, email dwyatt@mantecabulletin.com