By: John D. | Original Article at
FINDING 1—
Lack of proper accounting and records of bond issuances, fixed assets, and inventory
Total Lack of Accounting for and Questionable Use of Bond Proceeds
The City did not keep proper accounting records of its component units’—the Beaumont Financing Authority (Authority), the Community Facilities District No. 93-1 (District), and Beaumont Utility Authority (Utility)—transactions relating to Authority, District, and Utility bond issuances totaling $626 million.
We noted the following:
– The Authority issued $313.09 million in local agency revenue bonds for use mainly in acquiring District bonds and for a sewer enterprise project between 1993 and 2014;
– The District issued $303.12 million in special tax bonds for use in the various improvement areas within the District between 1994 through 2014; and
– The Utility issued $9.79 million in revenue bonds for a wastewater enterprise project in 2001.
It should also be noted that during FY 2014-15, the District issued an additional $44.36 million in special tax bonds for the refunding of prior bonds. The Authority concurrently issued another $44.36 million in local agency revenue bonds for acquiring the District bonds.
The Indenture of Trust between the Authority and the Trustee requires the Authority to:
…keep, or cause to be kept, proper books of record and account, prepared in accordance with generally accepted accounting principles, in which complete and accurate entries shall be made of all transactions relating to the Bond proceeds, the Revenues, the District Bonds, and all funds and accounts established pursuant to the Indenture.
Similarly, the Indenture of Trust between the District and the Trustee requires the District to:
…keep, or cause to be kept, proper books of record and account, and spreadsheet showing the allocation of moneys in the Construction Fund, Cost of Issuance Fund, Administrative Expense Fund between each of the Improvement Areas within the District and of the allocable share of each improvement acquired or constructed by the District, and the status of such costs in relation to then current budget for each improvement.
The Indenture of Trust between the Utility and the Trustee requires the Utility to:
…at all times keep, or cause to be kept, proper books of record and account prepared in accordance with industry standards in which complete and accurate entries shall be made of all transactions made by it relating to Gross Wastewater Revenues and all funds and accounts established pursuant to the Indenture.
Although legally separate entities, the Authority, District, and the Utility are all governed by the City Council and are managed by City staff; thus,
they are treated by the City as component units for financial reporting purposes. The City was responsible for managing the component units’ activities, including performing the accounting functions; however, it did not fulfill these responsibilities. The City failed to provide us with any accounting records for the bond transactions for our review. The current City management and employees performing accounting functions did not have any information or records of bond transactions. We were given access to the former Finance Director’s computer files; however, we were able to find only incomplete spreadsheets and copies of requisitions pertaining to the bond transactions.
Based on our interviews of current City staff members and our review of the available records, we noted the following:
– Bond proceeds are held by the Trustee in specific accounts until such time the Trustee receives an authorization, through a Requisition Form, from the City to release funds. A requisition could be a request for payment to a vendor either through a check or electronic transfer of funds to a vendor’s account, or a request to transfer funds from one bond account to another.
– It is not clear how the City accounted for the bond proceeds payments in its financial accounting system. We could not trace any of the requisitions tested to the City’s ledgers (official accounting records).
– The City lacked sufficient supporting documentation for the requisitions and, therefore, we could not determine whether the bond proceeds were used for their intended purposes.
– It appears that the former Finance Director was responsible for the accounting of the bonds, as evidenced by payments the former Finance Director received directly from the bond proceeds. Invoices from these payments were described as payments for “reviewing, summarizing, and recording of bond transactions.” Additionally, it is unclear whether these tasks relating to bonds were separate chargeable tasks outside of the responsibilities of Finance Director. The agreement for the Finance Director services was not available for review, as the City destructed the document citing its retention policies.
– The former City Manager and former City Public Works Director, principals of General Government Management Services (GGMS) and Urban Logic Consultants, Inc. (ULC), respectively, both provided professional services in several of the bond issuances as Special Tax Consultant and Project Engineer, and received fees from the bond proceeds for the services provided. Agreements for these services were not available for review, making it unclear whether the services were separate chargeable tasks outside of the responsibilities of City Manager and Public Works Director. The former City Manager and former City Public Works Director were consultants working for the City.
– Requisitions, including payments to GGMS and ULC, were prepared and approved by the Public Works Director and the City Manager. Considering that these payments were made to companies owned by the requisition approvers, the City should have taken additional procedures to minimize conflict of interest.
Due to the lack of proper accounting records, we were not able to determine how the bond proceeds were spent. Based on interviews of current City staff members and documents reviewed, it appears that the former Finance Director (Aylward), City Manager (Kapanicas), and Public Works Director ( Moorjani ) had complete control over the bond proceeds and each of them was personally benefiting financially. We could not determine the extent of these financial benefits because the City could not provide us with agreements and/or information on payments to the former Finance Director, City Manager, and Public Works Director from the bond proceeds. In effect, this situation created a conflict of interest that the City failed to address or prevent from occurring.
It is difficult to understand why the City Council would ever approve or condone having the City’s executive management team’s personal businesses enter into such agreements with the City.