Independent audit of Benton Harbor’s finances reveals problems

Jan 5, 2012

The State Treasurer’s office is reviewing an independent audit of Benton Harbor’s finances for the 2011 fiscal year. The audit shows the city still spent more money than it made during its first year under a state appointed emergency manager.

Still a lingering operating deficit

The audit shows Benton Harbor Emergency Manager Joe Harris cut the yearly operating deficit by about $126,000 from when elected city leaders were governing. The city still spent about $653,000 more than it took in for the fiscal year that began in July of 2010 and concluded at the end of June 2011.

“The point that I want to make is that the changes we made occurred during the year and we did not have a full year of cost savings,” Harris said. Harris was the city’s emergency financial manager for most of the 2011 fiscal year but became an emergency manager with more power in April of 2011 (more than 9 months into the fiscal year).

Since this audit Harris has combined Benton Harbor’s police and fire departments and has new contracts in place for most city workers. He’s cut city staff by 30 in total and says he’ll cut another 10 positions this month. He says the 2011 budget included a number of one-time expenses to pay off old debt.

On the other hand, Benton Harbor’s cumulative general fund deficit went down significantly from $3,474,205 in 2010 to $2,186,466 in 2011 because of a sort of onetime accounting fluke. Harris writes in an audit note that the reduction “exceeded the amount of the State approved deficit elimination plan.”

Audit notes Benton Harbor violated state and federal regulations

The audit outlined three accounting mistakes where the city violated state and federal laws (as stated in the audit) in fiscal 2011. Harris says those mistakes have been or are being addressed.

The City did not make timely payments to the IRS for FICA taxes (both the employer portion, and the employee withholdings) throughout the year. As of June 30, 2011, the outstanding liability to the IRS amounted to $402,305.

Harris reported in September the city has paid what it owed the IRS and the accompanying fines for being late.

While it appears that the City made a good faith effort to be timely with distributing current tax collections, we noted that as of June 30, 2011, the City still owed approximately $1,700,000 in back taxes to local entities. These balances appear to primarily relate to collections from prior years.

Harris argues this liability was discovered from years before he was in office. He says the city does show that liability on its balance sheets. But he says it’s not clear if the local entities think Benton Harbor owes them money. “If it’s something that is not of the books of anyone else’s in terms of a receivable from the city than we really don’t owe it,” Harris said. He says city staff is researching the back taxes.

The City has failed to remit the required employer contributions to its individual pension trust funds for several years, including 2011. During the current year, the contributions owing from prior periods (which had been accrued as receivable in the pension trust funds and payable in the City’s other funds) were written off, as the City does not foresee the ability to make these contributions in the near term.  In connection with that adjustment, management initially also wrote off the current year tax revenue from a dedicated pension tax levy owing to the Police & Fire Pension Trust Fund, which was improperly received and retained by the City’s general fund. Furthermore, while the City has not been making the required employer contributions to either pension trust fund, it has continued to withhold employee contributions throughout the year. However, these amounts were likewise not remitted to the pension trust funds, but rather retained as part of the City’s pooled cash and investments. Employee withholdings not remitted during the current year totaled $73,441 and $108,025 for the General Employee Pension and the Police & Fire Pension, respectively.

Harris agrees that the city does not have the money to contribute to the pension at this time. However he says the problems with the employee contributions was the result of outsourcing payroll. “(The third party company) assumed that (the city) was going to do it. And we assumed that they were going to do it and so nobody did it,” Harris said. Harris says that money has been put in the pension fund and a process is in place to prevent it from happening in the future. The pension fund is 58-percent funded, which Harris says is “adequate" for now. He hopes to begin “doubling up” the city’s payments soon.

The state treasurer’s office said the audit would be the first way they’d know about an emergency manager or any regular elected officials breaking state or federal regulations. A department spokesman declined to comment for this story.

Other problems audit outlines for fiscal 2011

The fire department didn’t do any sprinkler inspections that year, losing the city $200,000 in revenue. “We knew that before the auditors brought it to our attention (in December 2011),” Harris explained, “ but we certainly didn’t know that during the fiscal year.”

City records misstated how many employees there are, in some case the date that they were hired and in one case the city doesn’t have record of an employee’s contributions to the pension plan.

The audit shows the city didn’t fully comply with requirements of a grant it received as part of the American Recovery Act because it didn’t account for the grant in a separate fund.

The management of the cemetery was able to cash out a certificate of deposit worth $100,000 “without the knowledge or approval of the Treasurer (who by law is required to be the custodian of all City accounts).”

“Well yeah, I am responsible for it all,” Harris responded when asked if he was responsible for the findings in the audit. “What I am certain of is that we’ve reduced the losses and what I’m hopeful of is that we’ve eliminated the losses for the current fiscal year.”

Harris points out that the cause identified in the audit for a number of the negative findings is too little staffing. And he says that's not an uncommon thing for municipalities in Michigan.