Imagine two businesses. In Business A, running totals are kept continuously on all bank accounts, listing all deposits, expenditures and balances. Employees have to turn in detailed receipts in order to get reimbursed. No one is allowed to take office equipment home, or if they do, they have to sign it out with a guard and then prove they returned it before they get their next paycheck. The people who order supplies are different from the ones who check them in and pay for them. Checks are reviewed monthly by someone other than the one writing them. All borrowings have a detailed ledger showing the amount and purpose of every expenditure from that borrowing.
Things are different at Business B. Checks are written without maintaining a current balance. Employees are reimbursed with or without detailed receipts and dunned for them later. Portable computers are not tagged with identifiers, and when “lost” are replaced from inventory with no charge because no one knows who last had control over them. The same person orders supplies and pays for them. Expenditures are made from borrowed funds without a detailed running ledger, but are explained as needed by scrambling through receipts, notations and unrecorded memory of transactions.
You can’t pitch multi- billion dollar serial borrowings for supposedly the same thing without running into “The Boy Who Cried Wolf” syndrome. That is the ultimate cost of the administration’s financial incompetence.
At the end of the year, auditors come in and can’t find what happened to $100,000 at one business. They don’t know whether it was stolen, mistakenly deposited in the wrong account, mistakenly paid to the wrong vendor or never existed in the first place, being the result of arithmetic errors by someone handling the checkbook.
Which business suffered this loss, A or B? The answer’s obvious. The entire point of Business A’s no nonsense approach is to send a message: “Don’t mess with us. We’ll find you and hold you accountable.”
The current City Hall scandals involve two separate kinds of accounting “errors.” The first one, involving a missing $27 million is extremely serious. It has been pooh-poohed by both high level city officials and by the outside accountant hired to figure out what happened to it. That accountant was already paid $500,000 to locate $6,000,000 of what was originally a missing $33 million.
The second error involved a discrepancy of nearly $1 billion between what the city has listed as assets, liabilities and equity and what the correct numbers for those categories are. This is not cash but is nevertheless important. It would make a big difference, for example, if the city owned $1 billion of real estate, or whether it was $2 billion, or zero. The scandal here is that the city is supposed to get this right, and then have its work validated by the controller. Instead, the city has for years depended on the controller to actually work out this number, which means that there is no independent body validating the work. It also is a symptom that the city doesn’t have enough people, and the right technology to really understand its financial position, or manage its money.
Since 2010 the Controller’s office has highlighted this problem every year in its annual financial audit. Finance Director Rob Dubow has regularly responded that the city is working on it, is going to add staff and upgrade technology. That response is being repeated now by the Kenney Administration. That response would not be acceptable to Business A. We need to be like Business A.
Restoring staff sufficient to do the monitoring and testing of the city’s spending will save millions more in precious tax dollars than cutting out the people who do the watchdogging.
Unfortunately, this is only the tip of the iceberg of the city’s financial management crisis. The city regularly misstates mid-year estimates of costs. Fire house brownouts, for example were supposed to save $3 million. Instead they cost $3 million. Soda tax receipt estimates missed their target by nearly $20 million. Major decisions are therefore being based on wishful thinking.
All of this is dwarfed by the School District, which pitched $3 billion in borrowing on the basis that 75 schools would be built. Nowhere near that number was built and it would have been impossible to build that many for that price. The School District’s liabilities now exceed their assets by about $3 billion, which were largely used for operating expenses. Now we need $7 billion to fix or replace sick school buildings. You can’t pitch multi- billion dollar serial borrowings for supposedly the same thing without running into “The Boy Who Cried Wolf” syndrome. That is the ultimate cost of the administration’s financial incompetence.
What is the solution to all this? Between 2010 and 2018 the Finance Department staff was cut from 169 to 118 employees. During that same time the Treasurer’s office was cut from 13 to 8 employees. Fraud experts teach that there is a general 5 percent risk of fraud. So in a $4.7 billion budget like Philadelphia’s, about $235 million is at risk of theft or fraud if strong financial controls are not in place.
Restoring staff sufficient to do the monitoring and testing of the city’s spending will save millions more in precious tax dollars than cutting out the people who do the watchdogging. At the same time, the city needs to do a comprehensive technology upgrade instead of continuing its practice of patchwork fixes that have already caused tens of millions of dollars in wasted spending on systems that don’t work.
Alan Butkovitz was Philadelphia’s City Controller from 2006 to 2018.Header photo: Pixabay