State controller audit raises concerns about Atwater finances

Two state Controller’s Office audits of Atwater’s finances were released Wednesday, painting a troubling picture of the city’s financial practices and declining revenues.

Atwater became the subject of a state audit in April after failing to submit annual financial reports on time and making substantial adjustments to numbers it reported to the state.

The first audit, which focused on Atwater’s administrative and internal accounting controls from July 2011 to June 2013, found a number of weaknesses in the city’s accounting processes. Of 79 internal control elements evaluated by the state, 65 percent were considered adequate.

The city agreed with deficiencies identified in the 26-page audit and is in the “process of developing corrective actions,” the audit stated.

According to the audit, Atwater appeared to report financial figures that were “misstated, incomplete or incorrect.” The city understated revenue in 2011-12 by $7.5 million, failed to report revenue of $5.6 million from the dissolved Redevelopment Agency and overstated spending by $14.5 million.

In 2012-13, the city overstated revenue by $349,339, understated spending by $1.6 million and made prior-period adjustments of $4.9 million “without an explanation.”

City Manager Frank Pietro said Wednesday he doesn’t believe city officials intentionally misrepresented the numbers. “It could have been a lack of staff or people who didn’t have enough expertise,” he said.

Lakhwinder Deol, Atwater’s finance operations manager, said that the city hired an outside accounting firm to complete the annual state financial reports but that it was given incorrect numbers from city staff. The numbers reported to the state were not double-checked by Atwater city auditors either, she said.

The audit reported other critical findings: continued decline in general fund and other balances; cash impairment in the city’s investment pool; lack of comprehensive accounting policies; and annual budgets that were not balanced, adopted after the start of the year and carried unfavorable variances.

Additional findings included employee evaluations that were not performed in a timely manner, questionable allocation of salaries, noncompliance with the city’s contracting policies and lack of a proper timekeeping system.

The audit made a special mention of the “excessive auto allowances” of City Council members, although the council axed those benefits in October 2012. The City Council and mayor in the past received allowances of $700 and $750, respectively.

The city has been aware of declining revenue, Pietro said, but it has carried a general fund deficit of $4.8 million from the past few years. The audit showed the city’s general fund balance has been declining since 2006-07, dropping more than $10 million in the past seven years.

Pietro said the city is monitoring expenses closely and updating the City Council on finances regularly.

When it came to salaries, the audit found the city allocates certain employee salaries using different fund sources, but no “reasonable approach” is identified and there’s no clear audit trail. Deol said the city will rectify that by charging salaries to different funds in a more equitable way.

The audit also noted that some payments to contractors exceeded the original approved contract amounts. The city responded by saying it will update its purchasing manual and train staff.

Pietro said the city has also rectified the overdue evaluations of employees, some of whom hadn’t received a performance review in 10 years. All employee reviews are done for this year, he said.

In the second audit released Wednesday, the state focused on Atwater’s Special Gas Tax Street Improvement Fund, which is derived from state taxes on the sale of motor vehicle fuels. The money is for construction, maintenance and operation of local streets and roads.

The audit found the city understated the fund balance in the gas tax fund by $2.2 million as of June 30, 2013. It also found the city charged unsupported overhead costs, had an “unallowable” negative fund balance and an unacceptable transfer for prior-year expenditures.

The city disputed the first two findings, Deol said, but not the third one regarding the transfer.

From fiscal year 2006-07 to 2011-12, the city charged $1.5 million to the gas tax fund for overhead, including administrative fees, IT maintenance, risk management and other benefits costs.

Deol said the state will require Atwater to pay the $1.5 million back to the gas tax fund from its general fund unless it can develop a new method for handling similar costs in the future.

A negative balance of $639,270 in the gas tax fund was identified in 2008-09, according to the audit. Deol said the city projected it would collect $1.2 million in revenue that year, but only collected 56 percent of that. She said the gas tax fund is now positive and has been since 2010.

This story was originally published December 3, 2014 at 8:12 PM with the headline "State controller audit raises concerns about Atwater finances."