The city of Santa Fe’s seemingly chronic financial management problems lingered into the 2019 fiscal year.
A newly released outside audit of the city’s finances for the fiscal year ending June 2019 uncovered “significant deficiencies” and “material weaknesses” in its internal controls, including failing to perform a year-end reconciliation that resulted in misstatements of about $1 million in the city’s utility receivable accounts.
Auditors also issued a “qualified” opinion on federal programs, meaning that in their evaluation, the city has not completely followed general accounting and reporting standards — potentially jeopardizing future federal funding.
State Auditor Brian Colón said Thursday the situation is so serious his office is going to keep a close eye on Santa Fe.
“The red flags that I learned about early on were deeply concerning,” he said in a telephone interview. “After the audit has now been completed, I am still deeply concerned.”
The unflattering audit comes about three years after a blistering report of the city’s finances, known as the McHard Report, which similarly found inadequate internal controls and other problems. The McHard Report was followed months later by the state-mandated annual financial review, which uncovered additional financial issues. At the time, Mayor Alan Webber said he would use the McHard Report and the state audit to help guide the city.
But challenges persist.
The city was six months late in providing the latest financial review, and it also failed to timely respond to certain requests made by the Office of the State Auditor, which was conducting fact-finding procedures in response to an unspecified misconduct allegation, according to the audit.
The city’s tardiness and failure to respond to requests were among 21 deficiencies, weaknesses and other compliance issues identified in the audit, which was conducted by the Albuquerque firm CliftonLarsonAllen.
Mary McCoy, the city’s finance director, did not respond to questions the city requested be sent by email, including why the Comprehensive Annual Financial Report was submitted late.
But in a statement, the city said the audit itself received an “unmodified” opinion, or what it called “the equivalent of the best ranking and the highest level of assurance, for the second consecutive year.”
“An unmodified opinion/unqualified opinion is an independent auditor’s judgment that an organization’s financial statements are fairly and appropriately presented, without any exceptions, and in compliance with accounting standards,” the city said.
Colón said the city has nothing to brag about.
“They are still having a challenge managing, maintaining, reporting out, reconciling and meeting their obligations for for federal funds. That’s a huge issue,” he said. “They had a qualified opinion on the [Community Development Block Grant Program] for noncompliance with their requirements. They had a qualified opinion on the airport improvement program. Why? Noncompliance with the requirements.”
Noncompliance results in the potential for decreased federal funding, as well as possible undercharges or overcharges to the grants, the audit found.
Colón said it “remains to be seen” how the city’s shortcomings will affect its ability to obtain federal funding.
But he cautioned “these are the types of findings that jeopardize federal grants and limit your ability to get future federal grants.”
During testing of federal revenue, auditors found the federal share of expenditures “were more than revenue recognized in the financial statements by approximately $3.5 million.”
“The city did not claim reimbursements for incurred federal expenditures within the city’s availability period (60 days),” according to the audit. “As of June 8, 2020, a period of over 11 months after year-end, the amount owed to the city from the federal government was still outstanding.”
In response to the findings pertaining to federal grant money, the city wrote it is in the process of implementing a Grants Management Division to try to resolve the issues. The division is part of a sweeping reorganization proposed by Webber but has not yet been approved by the City Council.
The city’s bookkeeping problems could be affecting residents in their wallets.
The audit identified material weaknesses in a category called “accrued liabilities — guarantees and customer deposits.”
The city’s accounting records reflect a nearly $3.2 million liability for deposits related to land use.
“Customer advances in the amount of $1,389,802 are included in the city’s accrued liabilities on the accompanying statement of net position. When testing these balances, it was determined that, in the past several years, the city has not performed a comprehensive reconciliation,” the audit states.
“The city may be holding funds that should be returned to customers and residents of the city of Santa Fe,” according to the audit, which identifies lack of reconciliation as a recurring problem.
“This city lacks an effective internal control structure over the financial close and reporting process to allow for timely and accurate financial reporting,” the audit states. “Specifically, the city is not adhering to a monthly or quarterly accounting close schedule.”
Auditors reported observing “a low level of collaboration between departments, which contributed to the challenges in obtaining audit evidence.”
Although it wasn’t identified as a problem in the audit, the city’s Finance Department has had a high level of turnover under McCoy, who has headed the city’s finances since July 2018, a few months after Webber was elected.
Colón said a lack of consistent staffing, in addition to inadequate internal controls, could open the door to fraud and other problems.
“What’s concerning is that these types of situations lead to bad actors having an opportunity to abuse New Mexico’s taxpayers,” he said. “I have no reason to believe that that’s going on right now … but it is true that when you have circumstances like this, this is what opens the door for people to make really bad choices, and that hurts taxpayers.”
Colón said he will continue to monitor the city. He said he has been especially involved in Santa Fe’s financial reporting.
“I was concerned enough that periodically through this and because they were ultimately six months late on their audit, I had been requesting regular updates on this audit work,” he said.
“We do anywhere from 800 to 1,000 audits and agreed-upon procedures on any given year. I sit in on just a handful of entrance conferences and a handful of exit conferences,” Colón added. “The city of Santa Fe is concerning enough that I sat in on the exit conference. That gives a sense of my level of concern with their financial house and lack of order.”
In the audit, the city wrote that it would implement corrective procedures for the findings by June 2021.