Santa Ana in the Red and Cooking the Books?

The City of Santa Ana is facing a significant budget shortfall for the current fiscal year. Estimates presented at the last City Council meeting peg the amount somewhere between $20 and $30 million. Rumors have the estimates rising as time progresses. While $30 million is a lot of money, it is still less than 10% of the overall city budget. The problem for Santa Ana is that they have already significantly reduced non-public safety staffing to critically low levels. There really isn’t anywhere left to cut. There are also no longer any reserves of cash lying around to plug the hole.

In the process of poking around to find out how the City engaged in a recruitment process for City Manager without any formal direction from the City Council I think I may have stumbled on to a systematic problem for the City as it tries to stop the hemorrhaging of its budget. They don’t seem to be following any of the controls in place to manage the millions of dollars in professional services contracts on their books.

Several weeks ago I requested a copy of the City’s contract with Bob Murray and Associates for the City Manager Recruitment. I was told, more than a month after the application period for the City Manager recruitment had closed, that there wasn’t one in place and that the contract was not available because it had not been returned from the vendor with signature.

I asked how the search was initiated without a contract and was told that the Executive Director of Personnel Services had piggy-backed the City Manager search with the City Attorney search. I asked if there were any amendments in writing and I was told that there were none, that the instructions to the vendor were transmitted verbally without any written instruction. That contract ended on June 30, 2011.

So I asked for all the invoices submitted by Bob Murray and Associates and discovered that $30,258.49 in expenditures had been incurred by the contractor on a contract that, by ordinance, was not to exceed $25,000 during the fiscal year. I was told that the contractor had not exceeded the expenditures allowed because the City didn’t include the $6,387.92 in invoices in the total because the invoices were dated after the close of the year.

Well, that explanation doesn’t really fit with the way contracts work. Contracts, like the one in question, tell the contractor that they are to invoice for services provided during the contract period after they are performed. Simply put, its like how you get paid for the last week of work in June when your time sheet is due on the first Friday in July. Just because you submitted your timesheet on the first of July, doesn’t mean that you worked all those hours on the first of July.

Finance Director Francisco Gutierrez however is sticking to his guns claiming that even though $6,043 in services were performed between May and the end of June, they really were performed in between July 1st and July 15th the date of the invoice and therefore are covered under a new contract for the new fiscal year. That contract had not even been submitted to the vendor for signature at the time the invoice was dated.

“The administrative practice utilized for the management and tracking of expenditures relating to agreements is done by invoice date unless otherwise directed,” Gutierrez wrote in an email. “In terms of City agreements, there is no requirement that the modified accrual method [as specified in the City’s Consolidated Annual Financial Report] be used for the tracking of expenditures.”

Basically, he’s saying the City is having its cake, and eating it too.

There is no reason for contracted services not to be accounted for in the accounting period when they occur. To do otherwise negates the rationale for setting a term of service for a contract. The only reason I can find for their actions is that the City is trying to hold the invoices for services provided in the year ending Jun 30, 2011 until the new year begins in order to conceal the fact that those services were performed without a contract and/or that the services provided by the contractor exceeded the amount allowed before a contract must be presented to the City Council for approval. This is appropriately called  “Cooking the Books.”

It appears that there is no oversight to assure that contractors are not allowed to perform services that they don’t have a contract to perform. In the case of Bob Murray and Associates, they started the recruitment for the City Manager position without any contract in place authorizing the work. The contract for the City Attorney recruitment specifically prohibited any modification without written authorization, and none exists.

By permitting the contractor to perform work essentially off the books the City allowed the contractor to exceed the scope of their contract and the value authorized by more than 20%. If this could happen with a high profile contract like the recruitment to fill two of the top city management positions, how many other contracts have similar cost overruns?

Since there is no supervision by an experienced City Manager, there is no way to know for sure how deep and pervasive this lack of control is. What I do know is the Finance Director appears to have no problem picking and choosing how he accounts for contract expenditures. He doesn’t appear to be using any generally accepted accounting principle other than the “whatever covers his ass” principle. Only by accurately tracking the expenditures on City contracts, and recording those costs in the proper time period, can you see what position the City is in financially. Using the method the City is telling me, they could have started the new year in the hole without even knowing it. This might partly explain how the City is already in the hole $30 million dollars two months into the year.

I’m beginning to worry that the problem for the City of Santa Ana is more than a revenue and expenditure problem. It appears to be a management problem.

Such is life in the Banana Peel Republic of Santa Ana.