State Board of Accounts audit cites lack of financial controls in Marion

The Indiana State Board of Accounts audits local governments like cities and counties annually, but the agency’s obligations are essentially limited to auditing and reporting audit findings. Because the board lacks enforcement power, its auditors and supervisors seldom act on repeated inconsistencies.

“Generally, there’s not much that happens,” said Charlie Pride, a State Board of Accounts office supervisor in Indianapolis. “We just note it in the audit.”

Exceptions like missing money and fraud are forwarded to the relevant authorities, Pride said.

State examiner Bruce Hartman, the certified public accountant who signed off on Marion’s 2012 audit, could not be reached for comment Friday. Neither could Marion City Council President Don Batchelor, who, along with City Controller Tammy Miller and Mayor Wayne Seybold, attended the audit exit conference.

Miller, who started working for the city in April 2013, deferred to Seybold. The third-term mayor, who is currently running for state treasurer, cited “new federal guidelines” and a paltry controller’s office staff as the reason for Marion’s latest audit results.

The controller’s office staff has lost four employees since 2008 because of retirement, resignation or transfer to another city hall department. They were not replaced in an effort to save money. Seybold has said repeatedly this year that to avoid layoffs in recent years, he has reduced staff size through attrition, meaning he has intentionally left vacated positions empty in various departments.

Several instances of inadequate internal controls noted in the 2012 audit trace back at least in part to the controller’s office’s loss of employees. These inadequacies, the audit states, could risk recordkeeping errors.

Such findings include insufficient internal control over cash, investments and receipts, for example, because the same person oversees issuing and posting receipts as well as reconciling. In the city’s official response to the audit findings, Seybold stated that he has added a third employee to the city’s proposed 2014 budget to help remedy the problem.

Seybold has postponed the remedy of another new audit concern until at least 2015, however.

The latest audit cites a $1 million loan the city received from Marion Utilities in September to provide cash flow until the city received its December property tax payment. Although Marion Utilities Director Chuck Binkerd has said the loan agreement stipulates that the debt be repaid by Dec. 31 or shortly after Marion received its fall 2012 property tax payment, the loan remains unpaid.

The city’s initial proposed 2014 budget set aside funds to repay the $1 million loan as well as a $700,000 interdepartmental transfer from the city-owned utilities company. Seybold announced at a news conference earlier this month, however, that repayment of the loan had been postponed until after 2014 because the city learned of higher than expected losses due to property tax caps in 2014.

Other issues noted in Marion’s 2012 audit include:

Overdrawn cash balances: The city ended last year with negative balances of about $138,000 in its animal care and control fund and about $5 million in its employee health insurance reserve fund, both of which also ended 2011 in the red.

Seybold has said he intentionally underfunds Marion Animal Care and Control to encourage the shelter to become self-sufficient through adoption fees and outside donations, for example.

To help reduce health insurance costs, Seybold switched the city’s insurance coverage provider last fall to the Texas-based Group and Pension Administrators (GPA) with a plan brokered by the Indianapolis-based Apex Benefits Group, a move projected to save Marion $3.1 million. But as of the end of July, the insurance reserve fund was $5.1 million in the red.

Omission of departments from annual report: Financial transactions and cash balances for the city clerk and probation departments were missing from the city’s 2012 annual report, according to the audit.

Seybold said that annual report was completed by then-controller Cindy Wright, Deputy Controller Lynda Faw and city consultants Bob Swintz, a partner in the Indianapolis-based financial firm London Witte Group, and Suzy Bass, vice president of Greenwood-based HR Unlimited Resources.

The same two departments were missing from the prior annual report, according to the 2011 audit. Other types of inconsistencies in annual reports were also noted in the 2005, 2006, 2007 and 2008 audits.

Annual report supplemental schedules: The 2012 annual report’s Schedule of Accounts Payable and Receivable, for example, “understated the amount of accounts payable (by more than $500,000) and did not properly reflect the financial activity of the city,” according to the audit. The annual report’s Schedule of Leases and Debts “included numerous errors and did not properly reflect the financial activity of the city,” with the city under-reporting its debt by $9 million, according to the audit.

City officials chose to change both schedules, though, which resulted in corrected schedules being presented with the audit.

Bank account reconciliations: A list of outstanding checks, for example, included checks that had been outstanding for more than two years — a concern noted in Marion’s 2008, 2009 and 2010 audits.

Fund sources and uses: On the same day, the city dispersed about $269,000 from its tax increment financing (TIF) allocation fund and transferred the exact same amount from its 2011 bond fund to its general fund. “It appears the transfer should have been made to the TIF allocation fund as a reimbursement,” the audit states. Seybold’s response letter states that the transfer was to reimburse an expense originally made from the general fund, but issues regarding fund sources and uses were also noted in the 2007, 2009 and 2010 audits. In 2010, for example, the city used money from its employee health insurance fund to pay for fire truck repairs.

Unauthorized transfers: The audit cites transfers between the city economic development income tax (CEDIT) fund and four overdrawn funds — parks and recreation, park bond, group gasoline, and city bond and interest — made in the last few days of the year that restored the balances of those three funds back to zero. None of the four transfers were approved by the city council as required under state law.

Additionally, two transfers from the insurance reserve fund to the general fund made on Dec. 31 kept the general fund from ending the year with an overdrawn balance. Another Dec. 31 transfer from a fire pension fund to a police pension fund avoided an overdrawn balance.

Seybold blamed all six questioned transfers on “posting errors,” but Marion was also cited for unauthorized transfers in 2009, 2010 and 2011 and cited for funds ending the year in the red in 2008 through 2011.