City of South Pasadena logoThe South Pasadena City Council responded to community input regarding the status of its financial controls at last night’s public meeting. Mayor Robert Joe explained that the City Council was recently made aware of community concerns about the City’s financial processes based on public comments by a former City employee. “This City Council firmly believes the community has every right to know about our financial condition, the oversight processes we now have in place, and how we are managing our resources during this very challenging period,” he said. The City Council and staff continue to prepare the City budget, which must be adopted by the end of June. The Council pledged to not take action to adopt the 2020-21 fiscal year budget until the City Finance Commission fully reviews all changes made since its last review.

Related to the criticism from the former finance department staff member, Mayor Joe said, “I want to assure the community that we take these concerns seriously. Over the past few years, we have made significant changes in our procedures so that our financial record-keeping and forecasting is far more rigorous than in the past. We recognize the critical importance of having the community trust us to manage our public resources wisely, and we have taken significant steps to earn that trust.”
Mayor Pro Tem Diana Mahmud, who served as the City Council’s liaison to the Finance Commission during the relevant period of the City’s review of the Finance Department, made the following statement:

“About three years ago, we learned of some accounting errors and deficiencies that had gone undetected for several years during previous Finance Director’s and City Manager’s tenures. We took immediate action to correct these issues, including conducting a forensic audit to find out exactly what happened and how it could be prevented in the future. We want to be very clear: the audit confirmed that no city funds are missing. The audit did highlight the need for process improvements and we have made them in our operations, including a reorganization of our Finance Department; stronger internal controls; and contracting out for services such as payroll and business licensing.”

“We are continually examining our operations to maximize efficient use of our limited resources and have the proper tools in place to weather financial downturns such as the one we are now experiencing. As the Mayor stated, our Finance Commission will review our budget once again before the Council considers its adoption at our June 24th meeting. We encourage the community to ask questions, provide feedback, and share comments. You expect and deserve nothing less.”

City Manager Stephanie DeWolfe, who was hired by the City three years ago to bring a higher level of oversight of financial operations, spent time during the Council meeting to provide an update to the City Council and community:

“I would like to provide the Council and the community with a brief history of our financial procedures and operations, outline the significant changes we have made to become even more responsible stewards of public resources, and address the points made in a recent communication from a former City staff member.

“Let’s begin by noting that the community has every right to expect full disclosure and transparency regarding our financial operations, reserves, and other aspects of city management. I understand the frustration among some members of our community and welcome any opportunity to discuss our finances in detail.

“First, some background on how we got to where we are today. In late 2017, we discovered a pattern of inappropriate accounting practices and internal control deficiencies dating back several years, spanning several previous Finance Directors, which, among other things, inflated the size of the unrestricted General Fund. This same accounting issue shows up in the City’s 2017/2018 Comprehensive Annual Financial Report. Staff brought the concerns to the City Council, which quickly directed staff to begin the process of investigating and determining the full extent of the problem. We immediately put into place proper protocols to correct these practices while we began detailed work to reconcile all funds. We found that the amount of funds in various categories were over- and under-stated, resulting in the unrestricted General Fund to appear larger than it really is. Very importantly though, and as the mayor (vice mayor) pointed out: we found there are no missing funds in any City account. The location where various funds were inaccurately placed was not disclosed or discussed in previous audits; the City has a new independent auditing firm to increase the overview of internal controls, including proper accounting.

“We began the process of documenting and reallocating dollars to the appropriate accounts for multiple previous years. This effort was – and continues to be – time consuming and labor-intensive. We have a small team of employees in the Finance Department, and while they work to complete clean-up efforts, they must also continue to process the City’s daily business such as paying bills, managing audits, monitoring the budget, and preparing the budget for the next fiscal year. As a result, the clean-up efforts will require additional time to complete.

“We also put other measures in place to strengthen the Finance Department and reduce the potential for similar deficiencies in the future. This included restructuring the department, hiring additional specialized staff, contracting out other financial services at a savings to the City, hiring a new independent audit firm, creating and enforcing new policies, training and cross-training employees, and introducing new technology.

“It’s important for the community to know that the presentation of the draft budget for the 2020/21 budget year was delayed from June 3 due to the curfew put into place by Los Angeles County, and as a result, the final adoption of the budget is delayed until June 24. In addition to the budget presentation, at that meeting we will provide a much deeper explanation and review of the actions we have taken to address the previously identified deficiencies. Prior to that meeting, I thought it would be helpful to provide a brief timeline of events during the past few years that have brought us to where we are today. We will make that document available tomorrow (June 11, 2020) afternoon.

“Also, since the budget was presented to the Finance Commission on May 26, there were changes made to the draft budget posted on the City website as a result of updated non-general fund revenue estimates provided by Los Angeles County and changes in department budgets in response to evolving Safer at Home rules. Those changes will be presented to the Finance Commission next week along with a discussion of the enhanced fiscal controls now in place. It is important to note that department budgets and revenue estimates will continue to evolve as the County permits more services and businesses to reopen. We must recognize that we are still in a very fluid environment regarding estimates and predictions. Because of this, we anticipate presenting a budget update to Council at least quarterly, and potentially more often if circumstances demand. That said, we are confident that the accounting and allocation of General Fund monies, including General Fund reserves, is more accurate today that it was in 2017 or in the 2017/2018 Comprehensive Annual Financial Report.”

The City’s Finance Commission will hear a presentation from City staff on June 18, 2020 regarding the 2020-21 budget; a recommendation to the City Council by the Commission is expected at this meeting. The City Council will review the draft budget and Commission recommendations and consider adoption of the budget at its meeting on June 24, 2020.