CITY OF LAUDERDALE LAKES

INTEROFFICE MEMORANDUM DEPARTMENT OF FINANCIAL SERVICES

TO:

Jonathan K. Allen, Acting City Manager

DATE: August 18, 2011

FROM:

Marie W. Elianor, Interim Financial Services Manager

RE:

Preliminary Financial Review

Introduction The purpose of this memorandum is to provide the results of the preliminary financial review deliverable. As we discussed during the hiring process my first priority was to prepare an agenda item that would balance the FY 2011 Budget which was completed in June. The second item was to develop a schedule for the FY 2012 Budget. As you know, the two public hearings are scheduled for September to adopt the FY 2012 Budget. Additionally, I have begun to implement some financial controls and procedures that have helped to assess the current financial condition of the City. Background The Financial Services Department is responsible for accounting which is the internal function of collecting financial transactions and recording them into the Citys accounting ledger/system (Munis). Every City uses an accounting system for recording and reporting their financial information, whether formal or informal. Properly prepared financial information assists the City with maintaining financial accountability and sustainability. Most cities develop a written accounting policy manual to ensure employees follow all accounting rules. As noted in the BSO memorandum dated August 11, 2011, a preliminary financial review was being conducted covering the following issues which will be discussed in detail: cash flow; restricted/designated funds; current year revenues; internal controls and procedures; and data integrity. Note: All references to fund relate to the general fund unless otherwise stated.

Cash Flow Cash flow can be defined as the way money moves into and out of the City. A cash flow analysis is a method of checking up on the Citys financial health. It is the study of the movement of cash through the City, called a cash budget, to determine patterns of how the City takes in and pays out money. The goal is to maintain sufficient cash from month to month. If cash flow turns negative for any month, normal practice is to borrow funds from a bank or other financial institution until cash flow is positive, in turn, the loan will be repaid. Borrowing should be kept to a minimum. Last year, the City took out a Tax Anticipation Note (TAN) of $1 million to assist with the cash flow needs. However, the repayment terms of the loan were not highly favorable for the City as the note was due during a month where the City received less than $1 million in revenues. Thus causing further cash flow pressures. Any future cash flow loans will be incorporated into the cash flow analysis. RECOMMENDATION/ACTION PLAN: Conduct a monthly cash flow analysis called a cash budgeting analysis as part of the Citys financial forecasting plan. It will be used to determine the amount of cash received by the City during the month. Like wise, it will assist in determining the amount of cash expensed during the month. A healthy cash position means that the monthly cash inflow is greater than the monthly cash outflow. The ending balance for the prior month becomes the beginning balance for the subsequent month. The cash flow analysis will provide critical information to assist in setting priorities for payable items. A cursory cash flow analysis for the current fiscal year suggests that the City has not maintained the $250,000 general fund payment to the Broward Sheriffs Office (BSO) for police and emergency medical services contract services. Another $250,000 was committed for fire rescue services from the Fire Rescue fund. The last payment to the BSO was sent in July towards the May invoice. Furthermore, the review suggests that the June, July, August and September payments of $250,000 each month for a total of $1 million can not be made. Additionally, no other invoice/payable can be processed including payroll (approx. $120,000 biweekly 3 pay roll periods) for a total anticipated General Fund expenditure of $475,000. Current Year Revenues Below, is a chart that shows the total amount and percentage of actual revenues received as of July 31, 2011. The total budgeted revenue is $19,085,534. As of July 31, 2011, 77.88% of the general fund operating revenues have been received; $4,078,151 is anticipated as debt proceeds as repayment to the BSO and is not considered operating revenues. It is projected based on the prior three years average, that another $2,019,813.37 or 15% should be received prior to years end. The total projected revenue is $13,506,644.70 or 91% of budgeted

operating revenues. DISCLOSURE: As of July 31, 2011, the General Fund has received $11,688,497.06 in revenue. Of that $201,665.47 needs to be deducted because it is next years revenue (occupational license renewal/inspection fee). The General Fund has paid out $13,328,894.94 (checks issued and cashed). Thus, any revenues received will be automatically applied back to the fund that covered the General Fund checks. Please see chart below:

Cash Revenue 001 General Fund $11,688,497.06 ($201,665.47)

( c) (b)

Paid Expenditures Balance

$3,978,169.04 $4,239,722.00 $1,383,379.00 $3,727,624.90 $11,486,831.59

(d)

(d) (d2) 79 (d3) 79 (e)

$13,328,894.94

($1,842,063.35)

Expenditures including Insurance and related Insurances Police Services Payment (d3) Emergency Medical Services Payment (e) Salaries and Taxes
(d2)

Fiscal Year 2011 Amended Budget Revenue* Month Dollar Amount Percentage Oct $217,984.77 1.45% Nov $721,908.78 4.81% Dec $4,954,241.66 33.01% Jan $706,731.16 4.71% Feb $868,614.18 5.79% Mar $721,706.83 4.81% Apr $900,779.61 6.00% May $804,930.85 5.36% Jun $680,864.12 4.54% Jul $1,110,734.84 7.40% Aug 0.00% Sep 0.00% Total $11,688,496.80 77.88% *As of July 31, 2011

Total Operating Revenue Debt Proceeds FY 2011 Budget Revenue *As of July 31, 2011

$15,007,383.00 $4,078,151.00 $19,085,534.00

Fiscal Year 2010 2009 2008

Budget $18,697,885.00 $19,920,486.00 $20,118,415.00

Actual $18,200,636.61 $17,376,652.22 $18,100,342.52 3 Year Average

Percentage 97.34% 87.23% 89.97% 91.51%

RECOMMENDATION/ACTION PLAN: Determine the payment priority of the City and suspend payments of non-essential (prioritized) invoices/services. It should be noted; however, that according to state statue, payment of undisputed invoices must be paid within net 90 days or they can be subject to penalty of interest. The City currently has several outstanding obligations listed by amount in descending order: According to the Broward Sheriffs Office Statement of Billing, Payments & Accounts Receivable as of 7/29/2011, the City owes $8,506,613.58 (general and fire rescue fund) for current year expenditures. There are three more payroll periods left in the fiscal year for an approximate general fund payroll cost of $457,000 plus $318,000 other funds for a total of $775,000 current year anticipated expenditures. General Fund invoiced (services rendered/product received) obligations include: Williams Paving $153,416.24 Health and related insurances $112,207.74* Legal $62,000
* A portion of the amount due has already been collected through payroll deductions from eligible plan participants.

As noted earlier in this section it is expected that an additional $2,019,813.37 will be received for the end of the fiscal year. It is projected based on prior three years average, that another $2,019,813.37 or 15% should be received prior to years end. The total projected revenue is $13,506,644.70 or 91% of budgeted operating revenues. Restricted/Designated Funds Fund accounting is an accounting system emphasizing accountability rather than profitability, used by governments and non-profit organizations. In this system, a fund is a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations. For example, the Fire, Solid Waste, Stormwater and Grant Funds are classified as special revenue funds which monies are collected, segregated and are to be used for a stated purpose. Federal, state and local laws set restrictions and limitations on the use of monies of those funds.

The City has a pool cash account where there is one consolidated account (000 Pool Cash Account) which is a mirror of the total balance of the participating (excluding CRA) transaction accounts (all funds excluding CRA). In other words, the Pool Cash Consolidation Account is a virtual account, in which the total financial position of the entire City is reflected. It contains cash for all funds including General, Fire, Solid Waste, Grant and Stormwater funds, etc. Cash Pool Accounts are common and can provide crucial snap shot information regarding cash position. Since funds from the balances of all current accounts belong to the cash pool there is the possibility of using monies from restricted funds as certain other accounts do not have the cash position.

RECOMMENDATION/ACTION PLAN: During the account payable process, review the pool cash account balance to ensure that expenditures from a particular account not only have the budget allocation, but the cash to cover expenditures. Currently, all payable items are processed regardless of budget allocation or fund cash position. As noted above, the General Fund pool cash portion is negative. Thus any general fund expenditure is being paid from other pooled sources.

It was discovered that employee deductions are included in the pool cash account amount. Normal accounting treatment of placing the funds in holding liability account is not sufficient to ensure segregation of funds. Internal Controls and Procedures Accounting procedures and controls are the specific rules employees follow when recording and reporting financial transaction. Organizations usually design procedures and controls that are simple to follow and easily applied to common accounting situations. Accounting procedures should explain the exact manner in which City financial services staff should treat financial information. Common guidelines will cover the procedures for accounts payable, accounts receivable, payroll, general accounting and financial statement preparation. Accounting controls, commonly called internal controls, are the checks and balances used to ensure City accounting procedures are being followed. Auditors may test employees on how they handle accounting information to ensure the procedures are followed by all accounting employees. RECOMMENDATION/ACTION PLAN: Develop an accounting policy and procedures manual and distribute to the individual(s) directly responsible for handling specific financial information. Job positions with several tasks may have lengthy procedures or controls to guide employees through the accounting process. High-risk accounting functions, such as cash, accounts payable or payroll, should have very detailed procedures and controls that limit potential abuse by employees. It was discovered that one employee is responsible for distribution of petty cash. The unlocked petty cash box is being stored in a small movable safe in the employees office, although there is a more secure commercial grade safe available. Only the one employee knew the combination of the safe. There is no evidence of reconciliation of the petty cash or a record of opening/closing balances. This particular issue will be investigated further. The City should use accounting procedures and controls to outline specific requirements for each accounting position. This ensures that everyone from the financial services director to the lowest accounting clerk has a clear understanding of the objectives in their daily tasks. Data Integrity The City currently uses the Munis Financial system to store its financial data. The system is used to select, gather, analyze, and manage data for tracking daily operations and overall organizational financial performance. The data from the financial system is used to support organizational decision making including the ability to engage and pay for services. To ensure financial accountability, financial data should be accurate, have integrity, be reliable, timely, as well as secure.

It is common knowledge that the financial system was open to being compromised which has been addressed to some extent. Further controls will be implemented as the review continues based on sound accounting practices. Additionally, the data in the system needs to be cross checked for accuracy, timeliness and security. RECOMMENDATION/ACTION PLAN: Request a back up copy of data for a time certain to be used as the base source for comparison and reconcile all to the source data. Current cash balance (all funds) according to Bank of America as of 08/17/2011 is $1,089,204.94. However, through the financial system (Munis), it is not easily discernable which portion of the cash is General Fund. If the data and analysis of the data is correct, there is a discrepancy between actuals and the bank statement which needs to be reconciled. Conclusion As of August, all payments have been suspended due to the ongoing financial review. It is documented that the Fire Rescue Fund has received $3,252,980.76 in revenues (cash); however the City has only paid $2,343,783.67 for a fund cash balance of $909,197.09. The Solid Waste Fund received revenues (cash) in the amount of $1,403,586.63; the City has only paid out $879,453.74 for a cash balance of $524,132.89. Accordingly, the City should have a minimum cash balance of $1,433,329.98. Following that logic, the Bank of America cash balance amount of $1,089,204.94 is primarily Fire Rescue and Solid Waste Funds. It should be noted that the City has not paid BSO for fire services since May 2011 and has not paid Waste Management since April 2011. Therefore, it can reasonably be concluded that $344,125.04 of the pooled cash has been used to pay for other funds expenses. There should be a continued due diligence regarding cash flow; restricted/designated fund use; revenues projections; internal controls and procedures; and data integrity. I understand and appreciate the information may be difficult to handle; however, with the leadership and support of City Commission and your management goals, I believe the City will weather this storm. You have begun the process with the reorganization, amended FY 2011 budget, and the proposed FY 2012 budget. Your confidence in the Citys ability to overcome this financial crisis is not misplaced. I am privileged to be a part of the Citys management team. In the upcoming weeks, I look forward to developing strategies to end the current fiscal year and continue with the financial accountability and sustainability action that is being developed beginning with the Fiscal Year 2012 Budget. CC: Mayor and City Commission James Brady, City Attorney Department Directors

Financial Status File 8-2011