City Finance: The Consequences of Losing Institutional Knowledge | Deep Menlo | Stuart Soffer | Almanac Online |

Local Blogs

Deep Menlo

By Stuart Soffer

E-mail Stuart Soffer

About this blog: Growing up in Brooklyn, NY I lived in high-density housing and experienced transit-oriented services first hand. During high school and college summers I worked in Manhattan drafting tenant floor plans for high-rise office buildi...  (More)

View all posts from Stuart Soffer

City Finance: The Consequences of Losing Institutional Knowledge

Uploaded: Mar 9, 2017
Since last week’s post I’ve delved more into the 2016 City Financial Report (CAFR) and additional materials on the City’s website. There are indications of some serious internal problems in the Finance Department.

-----
A. Four Finance Managers In The Six Years Of The City Manager Tenure

The Finance department has essentially been rudderless. Menlo Park has churned four Finance Managers in the six years since the City Manager joined.
From data in the CAFRS since 2012 we see the history of staff nominally in charge of finance. Here is the list of the city Assistant City Managers (ACM) and Finance Directors (FM):

2012: Starla Jerome-Robinson and Carol Augustine (FM)
2013: Starla Jerome-Robinson and Uma Chokkalingam (FM)
2014: Starla Jerome-Robinson and Drew Corbett (FM)
2015: Starla Jerome-Robinson and Drew Corbett (FM)
2016: Nick Pegueros and Rosendo Rodriguez (Finance and Budget Manager)

Here are the staff mastheads of the respective CAFRs. Note the transitions in the position of Finance Director. Most telling is that the 2016 CAFR masthead identification name of the person responsible for the financial department is omitted.

2015


2016


As a partial result, an environment was created where retention was not a priority, where institutional knowledge (i.e., experience) was forgotten.


-----
B. In 2015 The City Hires a A New Manager

In 2015, as a previously operating organization, The Good Ship Finance ran aground. The city lost considerable institutional knowledge of finance – 2015-2016 – but it wasn’t replaced with appropriate expertise. Staff was left hanging. The city manager hired an Administrative Services Director because of convenience, and not necessary that needed experience skills were met. The Almanac describes this key staffing change, and related questions, in August 2015. This gives a clue to the problems.


From Almanac News 8/26/2015:

“Former Portola Valley town manager has interim job with Menlo Park
Nick Pegueros is interim administrative services director

Almanac News 8/26/2015

“Nick Pegueros, whose "involuntary resignation" as the Portola Valley Town Manager was announced Aug. 12, has been named the interim administrative services director in Menlo Park, City Manager Alex McIntyre announced Aug. 25.

“Nick Peugeuros is interim administrative services director… “He will coordinate human resources, finance and information technology services, according to Mr. McIntyre.” … "I am happy about my appointment of Nick," he said. "For Nick it's a trial run, he gets to test us out; we get to test him out."
….
“Mr. McIntyre said that while Mr. Curtin has a "limited background" in finance, he is "a good manager." He will be reporting to Mr. Pegueros, who has an extensive background in finance, Mr. McIntyre said.

But here’s the real problem. The risk of hiring civil finance expertise from Portola Valley, for Menlo Park, was too big a jump in complexity and responsibility. Comparing the 2014 CAFRs for the respective towns, Menlo Park's Revenues and Expenses are 10 times larger than those of Portola Valley's. Menlo Park’s financial model – the types of funds and how they flow - is way more complex than that of Portola Valley’s. Portola Valley 2014 CAFR.



Basically, Menlo Park Financial operations have many more moving parts; it's much more complex.

-----
C. Loss of Financial Transparency

Traditional reports for governmental transparency, usually found on the city’s website, stopped appearing. Open Government is No Longer.


Last week I suggested the need for a second document alongside the CAFR. I explored the typed of information I recommended last week on the city’s web site. I discovered, in spite of a page called “Open government” ( http://www.menlopark.org/484/Open-government Open Government), important periodic reports stopped appearing on the web site. Open Government has this nice rationale:

“Open government is important to the City of Menlo Park. In designing this page, the City utilized a checklist provided by the Lucy Burns Institute's Ballotpedia site (formerly Sunshine Review), a nonprofit organization dedicated to government transparency.”

I found a relevant page that enumerates all city contracts (other than the city manager’s contract) in chronological order. You may be surprised, as I was, to know that entry of new contracts stopped in January 2016. It’s a year stale. Agreements/ Contracts: Last 1/14/2016 Link

I also found expected data, such as audited payroll bills. However, the last entry was August 22, 2015. (Link) http://www.menlopark.org/ArchiveCenter/ViewFile/Item/2619

The list of audited bills is also stale, with the latest entry of May 4, 2015.

-----
D. The City (at least initially) Failed the Auditor’s Review of the Finances in producing the Annual Report.

It appears that the Finance Department, and management above the finance department, collapsed. The Staff report for February 7, 2017 includes the full CAFR, a statement by the auditors (Appendix B on page 804, and staffs ‘ask’.

i) The audit disclosed three problems

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs as 2016-1 to be material weaknesses. ” (Page 806)

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies described in the accompany schedule of findings and questioned costs as 2016-2 and 2016-3 to be significant deficiencies. ”

Audit Find 2016—001 (Page 808)

Condition:
During the performance of the audit, we noted that there were delays in closing of accounting books and providing the requested information for the audit. The City recorded numerous adjustment and correction journal entries subsequent to the trial balance being provided for the audit. We noted that some of these entries provided such as for debt refunding and interest payable had material errors. We also noted that in few instances, the journal entries provided were not properly reviewed for accuracy, which caused some errors in recording the transactions. In addition, we noted some instances wheretransactions related to payroll and bank reconciliation were not posted to the general ledger in a timely manner.”


Audit Find 2016—002 (Page 809)
Condition:
During performance of expenditure testing, we noted the following matters with regard to the City’s purchasing and accounts payable processes:
• The City did not accrue retention payable when progress payments were made to contractors under capital projects.
• We noted several instances where purchase orders were created after the purchase was complete and invoices were received.
• In few instances, several invoices were paid after significant delays.”

Audit Find 2016-003 (Page 810)

“Condition:
During the audit, we noted that the City was recording and tracking Measure A funds in the General Fund comingled with other funds. This made it difficult for the City to identify expenditures and revenues related to the Measure A program.”

ii) Staff's response

The problems came home to roost in the latest CAFR report. The auditors noted problems. From the city staff report to council on Feb 7, 2017:

“In their report on internal controls, the Auditor found that the City has a material weakness and two significant deficiencies in internal controls that could have a material impact on the accuracy of the financial statements. As part of the Auditor’s established procedure, additional testing was conducted to arrive at a confidence level that permits an unmodified audit opinion. Notwithstanding the unmodified opinion, the Auditor’s findings of a material weakness and two significant deficiencies require immediate attention to ensure the accuracy of future financial statements.” (Staff Report #: 17-037-CC, page 580)

Link

“To identify what attention is required, it becomes particularly important to understand the root cause of the material weakness and significant deficiencies. The division has been staffed for over a decade by 8.0 full- time equivalent (FTE) employees. While the division’s staffing has remained constant for the past decade, the responsibilities of the division and complexity of city finances have changed considerably. In addition to the change in duties, the division is operating with information systems that are over 15 years old and are in differing states of upgrade. In all cases, however, sufficient time has not been devoted to integrating the systems and maximizing built-in efficiencies. In other words, the finance division has been too busy keeping the basics on track (payroll, accounts payable, etc) to focus on complete software implementation and integration of key systems.”


link

“In 2015-16, the finance division experienced a significant loss of institutional knowledge when the director, manager, and analyst all left the City’s employment for lateral opportunities in other public agencies. ” (Staff Report #: 17-037-CC Page 580)

(Quite true; the departures of Carole Augustine, Stephen Green and Geoff Bucheim, in particular.)

“As a consequence, the City’s cumulative lack of investment in administrative services functions over the past fifteen years has resulted in gross inefficiencies that plague the City and adversely impact services to the public. ” Staff Report #: 17-044-CC Page 212.

These issues were somewhat known during past years:

The funded projects for the 2015-2016 MP Budget included $125,000 for the Technology Master Plan and Implementation - "... to assess existing tools; evaluate the need for replacement;and develop [a recommendation as to the best type of replacement in priority order..." While not specific to financial systems, this was on someone's radar.

An environment was created where retention was not a priority, where institutional knowledge (i.e., experience) was allowed to be forgotten.

Adding more staff without clear and competent management is a mistake. The problem isn’t quantity of people - it’s the skills of people. You’re not going to solve a problem merely by adding people. You’re not going to solve the problem by changing IT systems. All our finance systems – people and tech - used to function correctly with a clean audit.

-----
E. The earlier 2015 Financial Audit and Report foretold these problems and risks.

I returned to the CAFR for the prior year, FY 2015, in order to review auditors comments at that time. Low and behold, the same auditors as in 2016 caught issues over a year earlier.

FS 2015-001 Staff Turnover and its Impact on the Financial Audit
(2015 CAFR) (Page 81)

Condition:
During the performance of the audit, we experienced some delays in receiving adequate responses for audit requests due to the turnover of key employees. In addition, we noted several errors to cash and investments, interest payable and deferred revenues that were not detected by the City during its closing process.

Staff Response:
“The City experienced extraordinary turnover in its financial department in August 2015 with the departure of the Finance Director and the Financial Services Supervisor, the two individuals who had previously taken the lead on the year-end close and worked closely with the City’s independent auditors. As of January 4, 2016, the City has hired a new Administrative Services Director with over fifteen years of municipal finance experience to oversee the City’s finance division. Further, new Finance & Budget Manager has also been appointed with a start date of January 13, 2016.

In addition to making key staff appointments, the City has opened discussions with Vavrinek, Trine, Day and Associates (VTD) about providing ongoing accounting consultant services with financial reporting matters and annual assistance with the year-end close. In the unlikely event that both the Administrative Services Director and the Finance & Budget Manager were to leave the City’s employ, VTD’s services will provide continuity through the transition. “

The City had a Plan B. Was it used?

-----


So Stu, do you have any suggestions? Thanks for asking, yes.

A) The council should remember that they have ultimate responsibility. Grow some backbone for making unpopular decisions, learn to say 'NO' and be prepared to act quickly. BE SKEPTICAL!

B) Have the auditors return for a candid assessment of staff financial skills currently available, and skills needed.

C) Could this audit cause a San Mateo Grand Civil Jury to further scrutinize Menlo Park’s finances? Would we pass?

D) Finance needs to be up the chain under City Manager. Reorganizations failed.

E) Perhaps we can re-acquire personnel with historical knowledge in order to stabilize our financial system.

F) Reconsider all hiring until this problem is solved.

G) Re-evaluate the technical aspects of managing finances after the department is stabilized. That means no new IT systems until we have current people systems working flawlessly. From working in clinical and library systems, adapting a replacing system is a big task. Configuration, harmonizing data types, and importing historical data for the previous systems comes to mind. If you're going to buy new systems, tell the date that it will be operational, before committing funds.


-----

I am happy to discuss these item with staff and council, and assist in improving financial operations.

Comments

 +  Like this comment
Posted by stephanie b, a resident of Menlo Park: Linfield Oaks,
on Mar 10, 2017 at 9:34 pm

I have more questions than comments. The chart at the beginning comparing Portola valley and Menlo park has two totals in the expense field for Menlo park. Are these numbers separate? Meaning general expenses than total expenses? It's not saying Menlo parks revenue is only half of the actual expenses?
And if I read this article correctly it is not just do to the departure of the financial management, because per the audits this issues existed before these people left, which to me means they covered up any discrepancies until they left. Is that the gist of this?


 +   2 people like this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 11, 2017 at 11:45 am

Peter Carpenter is a registered user.

Stu's point in that the City needs to hire quality people, then work hard to retain them and demand accountability.


This did not happen in a vacuum - The Council is responsible for overseeing the City Manager, the City Manager is responsible for overseeing the financial officer and the auditors are responsible to the shareholders, i.e. the taxpayers.


 +  Like this comment
Posted by fortunate, a resident of Menlo Park: other,
on Mar 11, 2017 at 12:16 pm

The loss of institutional knowledge may be a product of Drew Corbett being unnecessarily interrogated. Fortunately, Alex McIntyre managed to bring back Chip Taylor whom had previously left for another city. Nick Pegueros is another excellent hire. Compared to surrounding cities, Menlo Park has abundant cash on-hand, and is paying down unfunded pension liabilities more aggressively.

Although previous councils chose not to reappoint commissioners with critical or conflicting views, this council is inclusive and transparent. This council had a Finance & Audit Committee member addicted to feeding the Daily Post, but that commissioner served out their full term. We are fortunate to have an outstanding staff and excellent council members.


 +  Like this comment
Posted by fortunate, a resident of Menlo Park: other,
on Mar 11, 2017 at 12:27 pm

Carpenter writes, "The Council is responsible for overseeing the City Manager, the City Manager is responsible for overseeing the financial officer..."

Menlo Park City Council should be responsible for overseeing the City Manager, as Peter suggests, but they need to pay McIntyre properly and let him hire people to do the work. The MPFPD Fire Chief and several direct reports make much more than Menlo Park's City Manager.


 +   2 people like this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 11, 2017 at 3:10 pm

Fortunate - How do you reconcile your praise for the staff with the glaring deficiencies noted by the auditors and posted here by Stu?


 +  Like this comment
Posted by Stu Soffer, a resident of Menlo Park: Linfield Oaks,
on Mar 11, 2017 at 4:44 pm

Stephanie:

I've modeled the table you note to clarify the data.

No, I don't think anything was hidden.


 +  Like this comment
Posted by moving on, a resident of Menlo Park: The Willows,
on Mar 11, 2017 at 10:42 pm

Drew Corbett left Menlo Park to become Finance Director for the City of San Mateo. After about one year, he became Assistant City Manager (Web Link).


 +  Like this comment
Posted by Deficit Budgeting, a resident of Menlo Park: Downtown,
on Mar 12, 2017 at 8:18 am

I think Corbett was the Finance Director who McIntyre had prepare and present deficit budget.


 +   3 people like this
Posted by More questions than answers, a resident of Menlo Park: Linfield Oaks,
on Mar 12, 2017 at 12:28 pm

Praise for Nick Pegueros seems unwarranted -- am I missing something, or does his coming on board coincide with a lot of the deficiencies Stu has highlighted? Even if the council doesn't want to point fingers at specific employees, the audit findings should send up a few red flags. Did the council members even read the report, or do they rely on staff for everything? Obviously, staff is not going to draw attention to the fact that the auditors found so many problems.

Thanks, Stu, for bringing this to everyone's attention - hope you email the council a copy of this analysis too!


 +   4 people like this
Posted by Roy Thiele-Sardiña, a resident of Menlo Park: Central Menlo Park,
on Mar 13, 2017 at 6:06 am

Roy Thiele-Sardiña is a registered user.

Audit deficiencies are NOT a good thing, and quite frankly to see the same issue pointed out as a problem in multiple deficiencies is a RED FLAG.

Clearly there is an issue in the finance dept. and it needs fixing. In the long-term the consistent loss of institutional knowledge from employees within certain departments (Finance, Operations, etc.) causes erros, ommisions, and extra cost during the "re-learning" curve and makes for an inconsistent delivery of goods and services.

The cause needs to be determined and the problem needs to nipped in the bud.

Stu's analysis is significant since it highlights a functional group that the auditors caught. a more interesting question is what other groups have seen this turnover? is it an issue throughout the city? why? at what cost? can it be stopped or is it endemic to Menlo Park?

In private industry when we see this we ask: is it a Management issue? Is it company culture? is it the industry culture?

Clearly the city manager and city council need to get on top of this.

Thanks Stu.

Roy Thiele-Sardina


 +   5 people like this
Posted by Dancing, a resident of Menlo Park: Belle Haven,
on Mar 13, 2017 at 12:00 pm

Dancing is a registered user.

This issue is about transparency rather than staffing. The ultimate responsibility lies with the current City Council.


 +  Like this comment
Posted by Keeping Digging, a resident of Menlo Park: other,
on Mar 13, 2017 at 7:59 pm

Menlo Park has been a training ground for employees for a long time. Retention has been a big problem and will continue.


 +   1 person likes this
Posted by Retention, a resident of Menlo Park: other,
on Mar 13, 2017 at 10:00 pm

Alex McIntyre seems like an underwhelming leader, but for some reason the Council is planning to give him a $4,400 "performance bonus" tomorrow night- Web Link

Maybe some citizens can show up and ask WTF? Also, the Almanac should trace "fortunate"'s IP address and see if it came from Chip Taylor's computer. I don't know anyone who can point to anything tangible he's done besides try and position himself for the City Manager job.


 +  Like this comment
Posted by Newsflash, a resident of another community,
on Mar 16, 2017 at 5:07 pm

Credit rating agency affirms Menlo Park's AAA rating; outlook stable
Web Link

On March 16, 2017, Fitch Ratings affirmed ‘AAA' ratings for the City of Menlo Park's issuer default rating and $10.1 million general obligation bonds, series 2009A and 2009B. ‘AAA' is Fitch's highest rating when evaluating creditworthiness of long-term debt issuances.

In their affirmation, Fitch concluded that “The rating reflects the City's strong operating performance, which is supported by a history of strong revenue growth and solid expenditure flexibility, and low long-term liabilities."
Additionally, Fitch noted “Solid reserve levels contribute to strong gap-closing ability relative to revenue declines anticipated in a moderate recession. Financial flexibility is further supported by ongoing funding of capital needs from current resources."

Fitch reviewed the June 30, 2016 Comprehensive Annual Financial Report and interviewed Administrative Services Director Nick Pegueros to arrive at their affirmation.


 +  Like this comment
Posted by $10 million surplus, a resident of Menlo Park: other,
on Jun 9, 2017 at 5:53 pm

Budget grows by 4% in 2017-18 with nearly $10 million surplus and workforce adds 2½ positions; city set to approve it June 20 Web Link


Sorry, but further commenting on this topic has been closed.

Nobu Palo Alto eyes next-door expansion
By Elena Kadvany | 4 comments | 3,070 views

Are We Really Up To This?
By Aldis Petriceks | 3 comments | 1,656 views

Couples: Cultivate Love, Gottman Style
By Chandrama Anderson | 1 comment | 451 views