A finding in the City of Jackson's 2016 state audit has resulted in major financial implications for the police department and has city officials scrambling to find short-term and long-term solutions.
The city's 2016 state audit, which was publicly released on Tuesday, Oct. 3, includes a "finding related to financial statement" which is labeled as "noncompliance and material weakness."
It is not a "finding for recovery," which involves cases of public property being misspent or misappropriated and requires their repayment. However, it is a potentially serious situation as it involves how the city is allowed to use a large portion of utility funds which can legally be moved to the city's General Fund, which, among other things, funds the police department. Mayor Randy Heath indicated that if a solution is not reached, it could result in "major" layoffs in the police department.
Heath called a press conference on Friday morning, Oct. 6 to address and explain the audit report and its impact and implications for the city. He indicated his administration would be proposing a short-term solution to plug the newly created funding shortfall at a Jackson City Council meeting, which he has scheduled for Tuesday evening, Oct. 10.
The issue involves the amounts the city has been charging its utility funds for the use of rents and rights-of-way on city-owned properties. These charges have been labeled as "fees" with the money going to the city's General Fund.
The General Fund also receives ongoing money from the city's utility funds through cost allocations, which is an assessment for services provided by General-Fund operations. However, cost allocations were not part of the finding in the most current audit.
Basically, the audit finding states that the amount the city is charging the city's utility funds for rents and rights-of-way fees for the General Fund "are not reasonable, nor are they based on costs the City's General Fund has actually incurred, nor can the city clearly demonstrate they are, or can be, properly allocated and assigned to the occupancy or use of a public way."
The audit report concluded: "The failure to clearly document support of the fairness of the assessed charge can indicate that utility fund revenues are being used to subsidize the city's General Fund and can result in future findings for adjustment to remove amounts back to the original fund....The city should maintain sufficient documentation to support the fairness of the assessed rents and right-of-way fees."
The rents and rights-of-way amount mentioned in the audit report was a total of $1,260,548 for the year, but the finding will only affect the period from June 8, 2017 forward, as June 8 was the date state auditors first conferred with city officials on audit report.
According to the audit report, the city and state "mutually agreed" on a solution which involves the creation of a designated fund where rents and right-of-way fees will be deposited until transferred to the General Fund. City officials also agreed at that time to discontinue directing rent and right-of-way revenue in the manner that was referred to in the audit report. For the most part, the finding involves the police department, which is by far, not only the largest expense in the General Fund, but the past fund recipient being questioned in the audit report.
"Right now, we can't use this money for the police department," Heath explained, which is critical since the police department funding has depended heavily on the city's ability to use cost allocation and rents and right-of-way fee revenues to pay the freight.
As he has often pointed out in the past, Heath notes that Jackson is the only city in Ohio without either a city income tax or a property-tax levy designated for the police department. Voters rejected a proposed 1 percent income tax proposal by a wide margin in the 2016 general election. City Auditor Brett Reed recently warned city council at a recent meeting that the city faces a major shortfall in the General Fund if additional revenue is not provided. The alternative, of course, would be major cuts within the General Fund.
Mayor Heath Responds
In his media conference, Mayor Heath stated the city would comply and cooperate with the state audit finding, but he was also quick to point out that he believes the city's practices and policies regarding rents and right-of-way fees was established by ordinance in 2009, in consultation with the state auditor's office shortly after he first became mayor. As part of this process, a third-party firm, Maximus, was hired to determine the method and documentation needed to justify the amounts of cost allocations and rents and right-of-way fees.
Heath says the city has not deviated from these policies or practices since 2009 and says he does not know why the state auditors called out a problem in the 2016 audit after previous audits from 2010 forward were approved without this same finding being made.
Heath produced a copy of a 2010 letter from the state auditor's office which was in reply to the city's request for a written assurance that its system involving rents and right-of-way fees was legal and permissible. The answer from State Auditor Mary Taylor's office was that the state auditor's office could not "render legal advice," but that state auditors would review the city's methodology to calculate right-of-way amounts in its regular audits.
Since that letter, no previous state audits of the City of Jackson have established any such issues or problems - that is until now.
"We don't know why there is a change now," Heath told the media. "But there is no finding for recovery here and we have not done anything illegal. They (the state auditors) are just telling us that we have to refine how you're doing it."
Short-Term Solution Proposal
Heath revealed that his administration's short-term solution is actually one which has been utilized in the distant past by the city, which is a legal method for utility funds to be used for General-Fund needs. It involves the city making a request to the Jackson County Common Pleas Court for a transfer of funds. If the court approves, the transfer then must be approved by the state tax commissioner.
Heath confirmed this method was regularly used by the city in for decades in the 1900s and was most recently used in 2002 when the city was dealing with the negative financial impacts of a state special audit. He said the proposed ordinance or resolution requesting this transfer would be presented to city council at its meeting on Tuesday evening.
The requested figure for the transfer will be $751,000, which is the amount which will make up for what the city is losing in rents and right-of-way fees as a result of the state-audit finding. With this money, plus the anticipated carryover funds from this year which can be used to boost 2018 budget, Heath feels the city will be able to operate without major financial problems through 2018.
And what if the transfer through the court and tax commissioner is rejected?
"Then we will have to start dismantling the police department," Heath responded. When asked about the extent of the cuts and employee layoffs, he used the words "major" and "catastrophic."
And if layoffs occur, he warned that since the city is self-insured, the city would have to come up with the money to pay unemployment compensation to laid-off police department employees. Worse than that, he said he fears that crime and drugs would become a much greater problem if the police department is gutted due to a lack of funding to pay officers.