Truth or Consequences City Manager Morris Madrid has yet to deliver on his promise given last summer that he would make the city more financially transparent. Madrid skipped giving a first-quarter financial report last fall and had staff present a second-quarter report at the last city commission meeting in January that confuses more than clarifies the city’s financial position, especially as it relates to the budget.
Madrid made his promise after three new city commissioners, who had all campaigned on the need for greater fiscal transparency, took their seats last April. Just after passing the final 2020-21 budget in July, the commission tellingly asked for more frequent financial reporting, particularly insisting on receiving quarterly reports.
Yet, despite the lip service given to fiscal transparency by the city commission and the city manager, T or C’s budgeting processes did not follow good government practices, and its hit-or-miss quarterly reporting that is supposed to allow the commissioners and city staff to closely track budgeted revenues and expenditures remains opaque.
To document how the T or C’s financial management and reporting falls short and thus makes it difficult for anyone to assess the city’s financial health, it is first necessary to set forth what constitutes good government practice. Our assessment draws from three sources of credible information about the norms other cities and counties follow in setting budgets and tracking financial performance. It relies, first, on this reporter’s experience covering five cities, three counties and one school district within three states over the last 15 years.
Second, the Sun researched the rules established by New Mexico Department of Finance to regulate the quarterly reports it requires municipalities and counties to submit. Finally, we interviewed Michael Steininger, the special director of the DFA’s Local Government Division, a troubleshooter who is sent around the state to help cities and counties get back on financial track.
THE BASICS OF GOOD FINANCIAL MANAGEMENT
Responsible local governing bodies devote five or six months to the careful preparation of an annual budget, starting in March to make a July 31 deadline. When budget time comes, local governing bodies can and should expect to receive next-year cost projections from each department head and an explanation for any increase or decrease in those costs.
Conscientious local governing bodies expect to be kept well informed about the city’s financial condition throughout the year so that they are prepared to take a leadership role in drafting a budget that takes into account both short-term priorities and long-term goals. They insist on receiving bimonthly or monthly reports, written and oral, from all department heads about their department’s work, needs and challenges.
When ongoing maintenance and replacement schedules and asset surveys reveal problems, department heads should report the issue discoveries to the governing body. The governing body often orders an engineering study to thoroughly investigate the problem.
Conscientious local governing bodies expect formal presentations of the study results. A public document paid for by the taxpayers, the engineering report allows the governing body and the public to prioritize the project’s ranking among competing needs and assess its budgetary and debt implications. Usually an engineering study will investigate alternative solutions and evaluate them for long-term cost savings.
Capital projects addressing big problems, such as 40-year neglect of water and sewer lines, are usually driven by long-term master plans that prevent public money from being spent unnecessarily or in a patchwork manner that will cost more in the long run.
Capital project costs, including debt, are always included in the budget.
Quarterly financial reports, presented in a standard accounting format that mirrors the budget and compares planned revenues and expenses to actual revenues and expenses, prepare the governing body and public for changes in services, taxes or utility fees.
T or C’S DISREGARD FOR FINANCIAL ACCOUNTABILITY
By contrast, the Truth or Consequences City Commission has not been regularly informed about the city’s financial condition during Manager Madrid’s two-year tenure (and, in fact, before). Commission meetings do not routinely include department-head reports, engineering reports or information about how contemplated capital projects fit into the city’s comprehensive plan or departmental master plans. Budget adjustments are approved without discussion of their implications for current and future budgets. Quarterly reports are either nonexistent or nonsensical.
The transparency problem begins with the city’s budget, which in 2020 was presented for the commission’s consideration in the space of only two meetings. At the commission’s regular July 22 meeting, Finance Director Carol Kirkpatrick gave an hour-long budget overview, during which she kept to general statements. Her presentation did not touch on capital projects, whose projected 2020-21 costs totaled $12.5 million or 35 percent of the $35.5 million budget. The city commissioners remained mostly mute, providing no input or direction to city staff. No public comment was allowed, and no public hearing on the budget was held.
At a special meeting on July 29, two days before the deadline for submitting the budget for the fiscal year that began July 1, 2020 to the state, Madrid said nothing in the budget had changed from the week before. Instead, he directed the commissioners’ attention to the fourth-quarter financial report. State law requires local governing bodies to approve only one quarterly report—the fourth quarter’s—since the beginning balances in the budget for the following year are determined by prior year’s ending balances.
The T or C city commissioners passed both the fourth-quarter report and then the final budget with little comment. Again, no public comment was allowed, and no public hearing on the budget was held.
Since the budget was approved last July, Madrid has presented no capital projects report beyond informing the commission at its August 19, 2020, meeting that during his then 18-month tenure the total commitments made by the city to capital projects had increased from around $4 million to $20 million.
Six months passed before the city commission received a financial report. At its Jan. 27 meeting, Finance Director Kirkpatrick delivered “second-quarter” reports that covered July 2020 through December 2020. Presented in a format of her own devising consisting of 10 sub-reports, her puzzle-piece approach provided a fragmented picture of city finances.
The commissioners would have been better served had Madrid and Kirkpatrick chosen to present the quarterly report that state law requires municipalities to present to the New Mexico Department of Finance and Administration.
Unlike the DFA quarterly reports, Kirkpatrick’s separated revenues from expenses and did not compare either to the budget T or C had submitted to the state. Kirkpatrick’s reports also did not include transfers from one fund to another, as required in the DFA quarterly reports. Capital projects were not named in Kirkpatrick’s reports nor gathered under one rubric. How long-term debt was assigned to past or ongoing capital projects was difficult to discern.
The Sun asked Madrid and Kirkpatrick why the second-quarter reports given to the city commission were structured so differently from the required DFA report, since their format left the city commission and the public none the wiser on how closely the city is following the budget, if expected revenues have come in, if expenses need to be cut back and if capital projects are on track. Since the city has a long history of transferring millions of dollars out of the utility departments to the general fund, the Sun also asked why transfers were not included in the city’s second-quarter reports.
Madrid did not respond to the Sun’s questions.
In a Feb. 3 email, Kirkpatrick explained that her intent had been “to present a comparison of the 2nd quarter revenues and expenditures for the fiscal years of 2017, 2018, 2019, and 2020.”
“Never was it presented that the reports would compare where we are now in comparison with the current year’s budget,” Kirkpatrick said.
Asked by the Sun for his perspective on T or C’s financial reporting practices, Michael Steininger, the DFA’s Local Government Division troubleshooter, said he always recommends that city or county staff present all four DFA quarterly reports to their governing boards.
“I think they should know what is filed with the state,” Steininger said. “The staff can’t manipulate the DFA quarterly report under penalty of perjury. What staff told the governing body often doesn’t resemble what is sent to the government.”
Formal governing-body approval of DFA quarterly reports also protects staff. “If the governing body doesn’t care and something goes wrong—as it inevitably does—elected officials can say, ‘Why didn’t you say anything?’” Steininger said. “The governing board is legally responsible for the finances, and it is their job to ask questions.”
Steininger said, that if city or county staff presents a quarterly budget report in a format other than the DFA’s required format, they are usually following their budget’s format. “Most governmental entities use three budget divisions: payroll—usually the most expensive—operations and capital projects.” Not tracking these divisions separately or “switching money between them” can create reporting problems, he said.
Steininger gave the example of a city’s taking money from unfilled positions and putting it into capital projects, leaving the city shorthanded. Conversely, overspending on payroll or unneeded capital projects will result in a neglected infrastructure, Steininger said, “which, unfortunately, is not unusual.”
SCATTERED TRACKING OF CAPITAL PROJECTS EXPENDITURES
Asked by the Sun about her untraditional reporting on transfers, capital projects and long-term debt, Finance Director Kirkpatrick responded: “The Commission is fully aware of the budgeted transfers from enterprise funds as it was presented in the annual budget approved by the Commission and the DFA. Handout #2 Expenditure Report for All Funds clearly shows the expenditures for every fund, including capital projects and long-term debt.”
The Sun examined Handout #2, included in the commission’s Jan. 27 packet, in an attempt to identify capital projects expenditures. The report is 35 pages long and gives expenses, not by department, but by fund. Thirty-six funds are listed, some with accompanying line items stating “Construction Cost,” or “Capital Improvement” or “Capital Purchase.” It is impossible to match a fund to a specific capital project.
The Sun found one fund (as opposed to a line item within a fund) labeled “Capital Improvements” on page 243 of the packet. It is duplicated here:
Fund 315: Capital Improvements
2017 2018 2019 2020
Professional services 19,063
Maintenance and repair-Grounds 48,257
Capital Improvements 206,318
Land Acquisition/Improvements 30,093
This example demonstrates the futility of comparing past mid-year expenses to current mid-year expenses by fund. Prior city finance officers obviously kept the books differently than Kirkpatrick, since it is unlikely there were no capital improvements expenses in years past. It is also unlikely expenditures on the city’s projected $20 million in capital projects are as low as about $300,000 mid-year.
The city apparently has no internal mechanism for tracking capital project expenditures either. The Sun’s recent Inspection of Public Records Act request for the most recent capital projects report was denied by the city clerk with the explanation that “No such document exists.”
Steininger said of the city’s scattered reporting of capital projects expenses throughout various funds: “The DFA recommends you run capital projects through a separate fund.”
Despite its title, Handout #2 does not total all the city’s expenditures to date, making it impossible to gauge, mid-year, if expenses are around 50 percent of the projected $35.5 million budget.
“UNETHICAL BUT NOT ILLEGAL” FUND TRANSFERS
The DFA approved the city’s budget in an Aug. 18, 2020, letter, but warned, “Due to estimated expenditures and transfers exceeding estimated revenue, your entity’s General Fund cash balance is being depleted by -8.23 percent. Careful control of expenditures and attention to revenue collection efforts is recommended to avoid further depletion of reserves.”
T or C’s 2020-21 budget estimates $31,708,901 in revenue and $35,478,966 in expenses, with the nearly $4.4 million difference to be made up in transfers. Of the $4.4 million, nearly $2.8 million will be transferred out of “enterprise funds,” which means the deficit spending will be paid for with utility fees. About $1.66 million out of the electric fund, nearly $293,000 out of the wastewater fund, nearly $395,000 out of the solid waste fund and nearly $436,000 out of the water fund will be transferred to various operating funds.
Steininger said of the city’s practice of invading its utility funds to cover operations: “Each enterprise fund should be independent.” In other words, utility revenues should be used to pay for the utility’s operations and maintenance, capital projects involving that utility and payment of the utility’s debt.
If money is regularly transferred out of enterprise funds, he elaborated, “The people are paying an additional tax with no say. It’s not illegal, but in my opinion, it is unethical.”
Steininger said numerous transfers, especially from one fund to another fund and then back again, can indicate “smoke and mirrors” to “obscure what is really happening within the fund.”
The city budget states nearly $4.4 million will be transferred out of 11 funds into 18 funds. Five of the fund transfers will crisscross, obscuring what is happening in the sending and receiving funds.
ACTUAL MID-YEAR EXPENDITURES IN SEVERAL FUNDS “WORRISOME”
The city’s second-quarter DFA report indicated expenses in the following funds were significantly beyond the expected 50 percent mark and therefore were worrisome.
• Economic Community Development Fund: Line item “Contractual Services,” $98,968 was budgeted, but $348,118 has been spent so far, making the line item 351.75 percent over budget. Line item “Furniture/fixtures,” budgeted at $500, with about $7,300 spent so far, is 1,453 percent over budget.
• Parks and Recreation Fund: Line item “Capital Purchases,” $0 was budgeted, but $236,410 has been spent so far, making the line item “inf” or infinitely over the yearly budget.
• Lodgers Tax Fund: Yearly revenue was budgeted at $412,000, which has already been “fully realized” mid-year, meaning the budget estimate was underestimated by a wide margin.
• Governing Body Fund: Line item “Professional Services,” with a sub-line item for attorney fees, is budgeted at $63,000, which appears reasonable. However, the second sub-line item, described as “Other Services,” is budgeted at $73,000, with nearly $42,000 expended so far this year. If both line items are for attorneys’ fees, splitting and obscuring a nearly $140,000 expense, it warrants questioning. Manager Madrid has not reported publicly on any litigation, although several executive sessions have included pending or actual litigation as discussion items.
• Manager Fund: Line item “Professional Services,” budgeted at $0, with $3,400 spent so far, is “inf” over budget. Line item “General Office Supplies,” budgeted at $1,500, with $2,325 spent so far, is 155 percent over budget. Line item “Furniture/fixtures,” budgeted at $0, with nearly $3,000 spent so far, is infinitely over budget. Line item “Employee Training” is budgeted at $14,000, although only $300 has been spent so far.
• Finance/Budget/Accounting Fund: Line item “Contract-Other Services” is budgeted at $29,500, an unexplained expense that warrants investigation, since salaried staff should be handling the work of the department. Line item “Software,” budgeted at nearly $16,000, is also a large expense, with over $10,000 expended so far. Line item “Employee Training,” is budgeted at $8,000, although only $50 has been spent so far.
In his government staff trainings and in his interview with the Sun, Steininger emphasized that the local governing body is ultimately responsible for passing a good budget and sticking to it. “Budgets are monetary plans, communication tools, public policy,” he explained, “and legally-binding contracts.”
Great article on the budgeting and financial reporting! I just would like to understand if you think the problem is only with the budgeting and budget vs. actual reporting procedures, or if you also think that money is being spent where it shouldn’t be spent?