Jefferson City has approved a series of cuts to cover a $1.68 million shortfall in the current fiscal year, but how did that shortfall come about in the first place?
Interim Finance Director Bill Betts said when he took over the Finance Department in late January, he sat down with the department staff and went through the budget for the current fiscal year. He said it quickly became apparent the city would be short of some of their projections and he took that information to City Administrator Nathan Nickolaus.
The two began meeting with department directors, Betts said, and the information was then taken to the City Council.
In a Feb. 22 e-mail to council members and the mayor that was obtained through a Sunshine Law request, Nickolaus wrote the two principal reasons for the shortfall were an incorrect projection for revenue received through cellphone audits and falling sales tax revenues.
Nickolaus wrote in the e-mail: "The result is that we will likely receive $1 million less in cell phone money than we put in the budget. Second, based solely on the sales tax received this year we think sales tax revenues will fall short by about $600,000.
"While the sales tax is unpredictable, the cell phone projection was simply wrong and was presented to the council by staff under my supervision. Although I had no knowledge that the figures were not calculated based on accepted financial standards, I accept full responsibility for them and the embarrassment they have caused. Credit should however go to Bill Betts, Sheila Pearre (Senior Accountant), and Cara Sankey (Deputy Accountant) who though not included in creating the projections were instrumental in finding the errors and working to correct both the numbers and the process."
A question last week to Nickolaus about why the projections were so off to begin with went unanswered.
A no-accountants policy
When the budget shortfall was initially revealed in February, Nickolaus said he had discovered that the previous finance director had instituted a policy to exclude accountants from the budget process. Nickolaus did not answer a question about how long the policy of excluding accountants was in effect, but said he found out about it after the budget process was well under way and immediately overrode the former director's policy.
Last week, Betts said he couldn't say why the projections were so far off, especially considering he wasn't an active part of the last budget process.
In a statement released by Mayor Eric Struemph on March 13, he said the shortfall was discovered thanks to some changes with the internal software.
"Due to a software upgrade and process change that was instituted this year, we were able to identify this issue early," Struemph said in the release.
But Betts said last week it's not an issue of software or an upgrade, just how the numbers are looked at.
"There's not been a software upgrade or issue ... It's just the way that we use the software today since I've taken over, and I don't think that's had anything to do with any of this," Betts said. "I think that's kind of gotten confused in the grand scheme of things ... I don't think it's really been the software itself."
Betts said the city has had large amounts of money coming in the past few years from audits, which would find additional money owed to the city from utility taxes, like with cellphones.
When the audit initially found the added funds, the amount was larger because it was covering a greater period of time, he said. Now, those additional funds have gone from more than $1 million to maybe a couple hundred thousand dollars, he said, which makes it less capable of compensating for over-projected revenues.
"I think we would have noticed this problem prior to this year had it not been for the audit money," Betts said. "All of a sudden you notice, hey, there's an issue there ... Our revenues don't look as good as we wish they did."
Audit did note "significant deficiencies'
The most recent available audit of the city's finances did raise some issues about expenditures outpacing revenues, as well as issues with how the city was reporting grant funds.
The 2011 Comprehensive Annual Financial Report of the city, done by Evers & Company, states "the general fund revenues increased by 20.2 percent over the past five years (2006 vs. 2011) while the general fund expenditures and transfers out increased by 22.2 percent."
The audit also shows a couple of "significant deficiencies" in financial statements and federal awards. The audit states there is an issue with the schedule of expenditures of federal awards because the city had not "designated an individual to be responsible for oversight of all grants received by the city regardless of department."
Communications Manager Michelle Gleba said "the city's chief accountant has financial overview of all grants, but each department still does their own grant administration."
Another deficiency identified by the audit was that requests for reimbursement for 2011 grant funds "were not submitted until at least seven months after the funds were spent," which has a negative impact on the city's cash flow. The audit states the cause of the problem was that "the electronic submission process was unavailable for a period of time and the city did not pursue an alternative submission method."
According to the audit, the city agreed to implement policies and procedures to ensure all requests for reimbursements are submitted no later than the end of each quarter.
"Our process for how we handle grants needs to change," Betts said.
Betts said the city has been making those changes throughout the past year and will continue to make changes into next year. The issue, he said, is how those grants are documented in the budget.
"We were recognizing grant revenue in our budget that wasn't necessarily available to us just yet, and that then throws off our expense side of the budget," Betts said.
In the future, Betts said, any grant revenue put in the budget will have an expense line item to match that amount and prevent any further issues.
"We're going to do better with it in the coming years," Betts said.
Changes in policies, procedures
Betts said in order to try to prevent another shortfall situation in the future, the department is looking to change the way it comes up with its initial projections.
"From now on, when we do our projections, it's not just going to be a few people making the projections," Betts said. "We're going to involve all the department directors and what the staff's recommendation is for the revenue projections before we give them to the council."
Betts said the most recent actual data will be used in forming projections, meaning the past 12 months of actual figures will be used as a base for the projections. One of the main issues discussed during the budget shortfall was the practice of basing projections off projections in budget processes.
"We're going to change our policies and procedures, we're going to get more eyes on the numbers, more thought into those numbers," Betts said. "The more people who look at them, the more likely they are to be correct."
Another possible change, Betts said, is contracting with the city's auditor, Evers & Company, to look over the projections and give feedback on their accuracy, though that idea is under consideration and no decision has been made on whether to proceed.
Betts had said previously the city's revenues are flat and staff will have to look at new ways to bring in revenue to improve the situation. Betts said staff is working on some ideas to present to the council in the next few months, but couldn't go into detail on what those were.
"I'm not sure that there's a lot we'll be able to do to find new sources in 2014," Betts said. "We're very cautious of what we put out there as revenue enhancements."
As for 2014, which is anticipated to be another difficult budget year, Betts said a lot of the cuts put in place this year hopefully will carry over and help cover all needed expenditures and any possible shortfalls they encounter.
The 2011 comprehensive annual financial report of the city, done by Evers & Company, shows expenditures exceeded appropriations in the following departments within the general fund. The unbudgeted expenditures were funded from the available fund balance.
Department: Amount Overspent
Mayor and City Council: $1,918
City clerk: $77,303
City administrator: $35,860
Community Development - Code enforcement: $98,763
Community Development - Central maintenance: $88,608
Community Development- Streets: $69,161
The News Tribune submitted a Sunshine Law request March 1 for all e-mail correspondence between City Administrator Nathan Nickolaus and Mayor Eric Struemph beginning Nov. 1, 2012, through March 1. The records requested were given to the News Tribune on March 13 at a cost of $215.47 to compensate for staff time devoted to collecting the requested e-mails. You can see a sampling of the e-mails, which include discussions about how to address the $1.68 million budget shortfall and other financial issues, at www.newstribune.com/budget_emails.