SAN BERNARDINO—(March 22) Racing to meet a May 30 deadline to present the city’s bankruptcy exit plan, San Bernardino city officials have learned they may very likely disappoint the judge hearing the entire bankruptcy matter as the figures upon which to base future city financial action will simply not be available until after the deadline passes. In a desperate measure to meet that deadline, the city council agreed to nearly double what it is paying to get those audits completed.
The city of San Bernardino filed for Chapter Nine bankruptcy protection in August 2012, and Riverside-based federal bankruptcy judge Meredith Jury has pretty much indulged the city in most of its efforts to hold off its myriad of creditors as it attempts to stabilize its financial picture and structure a future municipal operation in which revenues match expenditures.
But the city’s financial situation, past, current and future, is exceedingly complicated. The city’s previous auditing firm – Rogers, Anderson, Malody and Scott – was unable to get its arms around the matter and the audit it was supposed to complete for fiscal year 2011-12 – just as the city was heading into bankruptcy – literally took two years to complete. That document was not submitted until June 2014.
In the meantime, with questions mounting over the integrity and quality of the financial monitoring, guidance and strategy the city had received in the past, the city ditched Rogers, Anderson, Malody and Scott and brought in the Macias, Gini and O’Connell LLP accounting firm, depending on that company to provide a transparent profile of the city’s financial condition overall as well as its income and outgo, liabilities and assets, investments and rates of return, reserves and balances.
In June, the council approved a contract with Macias, Gini and O’Connell, LLP to perform an independent audit of the city’s financial records for the fiscal year ending June 30, 2013 and the fiscal year ending June 30, 2014. The estimated cost when the contract was executed between the city and the auditing firm was $218,086 for each fiscal year and included the annual financial statements, successor agency to the city redevelopment agency financial reports, single audit report (including 6 major federal grant programs), and an appropriations limit review.
Last year, Macias, Gini and O’Connell represented that the available city financial figures would allow them to carry out the auditing in a timely manner. From all appearances, it seemed the firm understood the urgency of completing the reports expeditiously. That need became manifest in November when Jury told the city the exit plan had to be presented to her by May 30.
Inexplicably, Macias, Gini and O’Connell did not begin the fiscal year 2012-13 audit until November 2014.
According to a report from the city’s finance department for the city council’s March 16 meeting, Judge Jury’s “deadline necessitates that the city have audited beginning numbers to support the city’s plan and as such, Macias, Gini and O’Connell is auditing both fiscal years simultaneously. Because of the complexity of the city’s audits, the city being in Chapter 9 bankruptcy, the number of transactions that require testing and the tight deadline mandated by the city of April 30, 2015 for completion of the audit reports, it is now estimated that costs will increase $270,000 to $488,086 for fiscal year 2012-13 and will increase $220,000 to $438,086 for fiscal year 2013-14.”
Over a barrel, the city council in accordance with a recommendation in that report amended the city’s contract with Macias, Gini and O’Connell to reflect the estimated increases in costs to perform the auditing services.
Despite the significant increase in the amount the firm will be paid, Macias, Gini and O’Connell’s officers are not confident they will be able to complete the auditing of the city’s financial statements in time for them to be assimilated into the bankruptcy exit plan due for presentation to Jury on May 30.
The city and Macias, Gini and O’Connell will be cutting it pretty thin. The auditors believe they can have the 2012-13 audit in the can by April 30. But under even the most optimistic of projections, it will be touch and go on whether the 2013-14 audit will be finished by May 30, let alone well enough in advance of that date to allow the numbers to be carefully considered and abstracted into the plan of adjustment.
The rush job the city is being forced to do carries with it a high probability that corners will be cut and mistakes made in formulating the plan of adjustment. For some time Jury has been holding an increasingly impatient line of the city’s creditors at bay. If such errors manifest in the plan or the documentation the city provides, it will give many of those creditors more ammunition with which to attack the city and its credibility.
Last week, city manager Allen Parker and assistant city manager Nita McKay blamed – some said scapegoated – former finance director Scott Williams for the delay.
Williams, who had only been with the city since December, was ignominiously placed on administrative leave and then dismissed less than three weeks ago. Williams had been hurriedly hired into the position after his predecessor, David Cain, bailed from the position in September after having lasted 18 months in the post.
When he was confronted by the council about the delays in having Macias, Gini and O’Connell getting the auditing show on the road, Parker said that Williams had control of the information the auditing firm needed to go over to make its report but that Williams had dithered, carrying out his own review, even though McKay had been pushing him to turn over to Macias, Gini and O’Connell everything the firm needed to do its work. According to Parker, some order of personality conflict had emerged between Williams and McKay, and McKay had petulantly balked at working with McKay and taking orders from her, even though she was higher in the municipal pecking order than he was.
At one point, Parker came close to expressing complete despair over the city’s listing financial ship ever being righted, saying that the city’s problems were years or decades in the making and that the city council’s demands that he and current staff, most or all of whom have only been with the city for a few years, solve the problems in the near term are hopelessly unrealistic.