Is Twinsburg Correctly Distributing Employee Healthcare Benefits?

Generally Acceptable Accounting Principles (GAAP) followed by most local governments require all direct and indirect costs be allocated to the departments and program activities which incurred the costs. An example would be the Police Department, Fire Department, and Dispatch Department are separate departments or cost centers that should be classified and combined into the program called ‘Public Safety’, sometimes referred to as 'Security to Persons & Property'. GAAP require that all cost be allocated on a uniform, consistent, and accurate percentage or direct costing methodology to the department(s) which incurred the benefits of any funds expended. Employee payroll and fringe benefits are required to these cost allocation principles due to funding sources which have specifically intended and lawful purposes as authorized by Law(s). An example would be property taxes collected for a Police levy could only be used for only Police services and cannot be comingled or spent on say Parks & Recreation.

If these accounting principles are not present in your communities financial reporting; accurate budgeting and financial reporting is not comparable to other governmental agencies and the credibility of those financial reports could not be relied upon by taxpayers to accurately determine the real costs of specific government programs for compliance as to the various revenue sources (income taxes, property taxes, sales taxes, etc).

The reason(s) program cost allocation accounting is essential in governmental fund accounting is described in the GFOA Best Practices (Government Finance Officers of America); so that all costs in providing government program services must be consistently applied and reasonable so that true and accurate program costs are measureable and accountable for reporting, budgeting, and comparative purposes.

The City of Twinsburg provides us an example of how distorted the actual costs of various departments and programs such as Public Safety can be in relation to total budgets and actual costs of services: Twinsburg’s General Fund does not have the costs of employee healthcare, workers compensation, and unemployment benefits allocated to the appropriate departmental program cost centers because $3,174,350 is currently budgeted, appropriated, and expensed incorrectly in the ‘General Government’ department on their General Fund financial reports (see report below). This is not according to GAAP because, ‘General Government’ is not a proper department classification but is a ‘Program Activity’ comprised of multiple departments like Mayor, City Council, Law Director, Building, etc.

If you examine the Sewer Revenue Fund and the Gleneagles’ Golf Course Funds departmental Wages & Benefits reporting (see Sewer Revenue report below) you see all employee costs are included correctly including Healthcare and Workers Compensation.

Why is the reporting different in Twinsburg's General Fund? The City Charter, clearly states that the Mayor and Finance Director are in charge of the budgeting and financial reporting. Concerned citizens should demand answers from the Mayor and Finance Director. The question should be asked: Why are healthcare, workers compensation, and unemployment in the General Fund not appropriately broken out into the departments where those costs are incurred? Why are they incorrectly labeled as ‘General Government’ which is a ‘Program Activity’ and not a department classification?

Citizen Auditor Sengstock has prepared an example on a percentage of costs analysis report (see the report below) that shows the financial impact of budgeting, appropriating, and spending the unallocated $3,147,350 dollars budgeted currently in ‘General Government’ with the costs allocated on a percentage basis by employees within the departments where the services were rendered. Why the Mayor, Finance Director, or Council members would not accurately allocate these costs to the appropriate department(s) where they are actually incurred remains a mystery, since Mr. Sengstock has made the issue public over the last several years! Why the city chooses to make labor negotiations or determining actual department program costs more difficult to determine is confusing, unless the goal is to create confusion or mislead the public; which is certainly not needed today with a growing lack of credibility for many government agencies!

It is not reasonable or accurate accounting to leave $3,147,350 dollars un-allocated in the General Government cost center incorrectly for healthcare and other benefits that should be allocated and appropriated based on either a percentage basis or actual costs per employee in the appropriate department. What possible reason would the Mayor or Finance Director have for leaving these costs reported in the wrong department or account classification? It appears the audited annual financial reports correctly and accurately report the departmental cost allocations; it just makes no sense to not have the cash basis accounting system setup to report the same cost allocations by department! Granted, Mr. Sengstock is asking these questions, because it is not typical of most communities to not allocate the costs in the departments where they are incurred. It also makes tracking specific revenue sources dedicated for paying for specific services difficult to track. This also drives up auditing costs needlessly for taxpayers. There are multiple reasons to support Mr. Sengstock’s argument(s) however as the old adage goes ‘you can take the horse to the water but can’t make’em drink’.

The results of not accurately allocating costs correctly means current reporting of healthcare, workers compensation, and unemployment in the General Fund is as Citizen Auditor Sengstock has repeatedly said ‘cooking the books’ or in actual accounting terms; the city is overstating the costs of General Government Program services and understating the costs of Public Safety, Leisure Time Activities, Public Works, and other departmental services.

Examine the report of the Police Department budget below and you will see that the city does not currently budget 20.4% of the total police departments actual costs (39 FT Police / 149 FT Employees in the General Fund) because they do not budget $830,870 for healthcare, workers compensation, and unemployment because this amount is lumped into the 'General Government' cost center incorrectly. This is a material amount because the current Police Department budget in the General Fund is $4,078,230 when it should be $4,909,100 if all costs were allocated.

The detailed trial balances of all funds can be viewed at the ACT (Active Citizens of Twinsburg) website at this link: www.activecitizensoftwinsburg.com and Citizen Auditor analysis reports are available at: www.citizenauditorohio.com

If the city were allocating the costs Police, Fire, and Dispatch (Communications) the three major departments that comprise the Public Safety program costs in the General Fund you can see a major change in the reasonable and accurate costs for these services. The budget for the Public Safety programs should be $10,942,326 which includes $1,746,958 more than the $9,195,368 currently budgeted by the city because the city does not include all costs for employee benefits. This same methodology should also be applied to all other programs in the General Fund such as Public Works, General Government, Leisure Time Activities, and Community Development.

It is argued by Mr. Sengstock, that when the city does not utilize correct cost allocation accounting principles, the city is making a material misstatement(s) in the overall cost for programs in the General Fund. The General Fund financial statements should be restated to reflect the proper cost allocations for healthcare and workers compensation to the proper program cost centers like Public Safety, Leisure Time Activities, and Public Works, etc…. with the corresponding offset reductions to General Government costs. If the city applied consistent, reasonable, and accurate cost distribution of costs of departments and program activity within the General Fund it would then also be consistent with the accounting in the Sewer Fund and Gleneagles Golf Course Funds.

Reporting and account structure in any community is a duty of the Finance Director; they have the authority to change any incorrect, misleading, or inconsistent accounting issues, simply by changing the account numbers and department classification. The finance department should have an accounting procedures manual with the account number structure defined and if not, it should be done so that issue(s) like the one Mr. Sengstock is referring to can be avoided in the future. The annual audited financial report submitted to the auditors will usually have the adjustments for proper classification of costs by department and program activity, auditors should demand the report be correct or a citation would be issued. So why would a Finance Director not correct their account structure to accurately reflect cost allocations in the cash basis reports most citizens see online, that is a good question for your Finance Director? The most frequent answer will most likely be ‘it has always been done that way’; this is not acceptable, if your Council members are doing their job they would demand accurate accounting for your tax dollars on all financial reports, where on a cash or GAAP basis!

Taxpayers should expect and are entitled to have all the reasonable and accurate costs of operating their police, fire, public service, and parks & recreation departments reflected on all financial reports and consistently reported in all funds, including the General Fund.

Another issue that the Mayor, Finance Director, and City Council should address is how the city budgets and records Fund Transfers. Currently Fund Transfers are recorded in the General Government department within the General Fund. This is another improper departmental classification of fund Transfers, fund transfers are correctly reported in the annual audited financial report as ‘Other Financial Sources’ and they should be reported similarly in the cities reports. The Finance Director can and should confer with the city auditors regarding the proper departmental classification and implement the appropriate changes to the chart of accounts to resolve this simple re-classification of cash basis Fund Transfers to correctly report transfers in the appropriate classification.

It is understandable that many reading Citizen Auditor Sengstock’s report might wonder why there so much concern over allocating employee benefits to the correct costs centers? Well, this is exactly what ‘Citizen Auditors’ do for the public; we attempt to enlighten and inform the public; we do not intentionally mislead or provide half the story as many politicians do regularly. Citizen Auditors investigate questionable financial reporting issues, because when one area of a financial report is incorrectly structured, it can and often does lead to other weaknesses or inconsistencies which always raise concerns.

One reason an accounting system might not be setup to accurately record and report the actual costs of any governmental programs could be that the finance director does not know how to properly setup and operate the accounting system. Especially true if there were no finance department procedural manuals for maintaining chart of account descriptions and definitions of account structure! Another reason could be that the Finance Director has no experience with the specific accounting software applications, or lacks adequate training, all of which would leave the readers of the financial reports feeling mislead or questioning the credibility of the reports. The taxpayers in Twinsburg must decide for themselves how to respond to the issues raised in this article; It is hoped that the Mayor and Finance Director or even a Council member might insist that this allocation be done; Voters could elect new Council members that would be willing to challenge the inaccuracies and inconsistencies in the financial reports; Voters could also chose to accept ‘this is the way it has always been done’ and continue in blind loyalty to the Mayor and Council. Change requires time and dedication to the principles of accounting and disciplined financial planning, that requires informed citizens/taxpayers being constantly vigilant in the pursuit of knowledge and understanding of their government’s operations and commitment to transparency and accountability. Remember, as Thomas Jefferson would say ‘In a Republic we elect the government we deserve’ and ‘Information is the currency of Democracy’, so let’s all become Citizen Auditors and make sure we are not being short changed by our government.

Twinsburg residents deserve 1st class financial reporting because they have always supported the City of Twinsburg with their tax dollars; even when leadership has lacked credibility and may not have deserved that support; Twinsburg voters did not as the old adage goes ‘throw the baby out with the bath water’. My experience over many years has proven that when group(s) of concerned citizens become energized and garner enough public support for change, often newly elected representatives dedicated to the ‘Rule of Law’ will arise that will challenge the ‘it has always be done this way’ and status quo folks, then change will happen.

Since the audit work papers of private sector accounting firms, whom are controlled and appointed by the State Auditors Office, are not public records according to the Ohio Revised Code. We must hope that the auditors can persuade the Finance Director(s) to change account classifications to coincide as closely as possible with the audited financial reports; however, we cannot mandate such actions in the State of Ohio. We must rely on the credibility and professionalism of our Finance Directors and possibly our Mayors to resolve these sorts of issues. Some states like Indiana have legal restrictions on the use of account number structures/classifications and that does help eliminate incorrect account classifications and confusing financial reporting, however, Ohio has chosen not to legislate this endeavor except for Townships and Villages which at least have prescribed guidelines.

Without consistent accounting and reliable reporting in the monthly financial reports released by the City, the taxpayers in Twinsburg cannot readily determine the total costs associated with all the program services their tax dollars pay for in the General Fund. Citizen Auditors exist to help enlighten the public and elected representatives in understanding the complexities of governmental accounting. Politicians too often just tell the public how dedicated and hardworking they and the city employees are which only serve to prolong the incorrect financial reporting or lack of adequate policies and procedures. Politicians rarely admit their ignorance in governmental fund accounting and too often resort to verbal abuse or intimidation of anyone whom would dare challenge or question their authority. Unfortunately our elected representatives often forget their sworn oath of office, to serve ‘We the People’ and that any authority given them is provided by ‘We the People’. The abuse of power witnessed in current times by elected political leadership in Twinsburg is a constant reminder of how ‘Power corrupts and absolute power corrupts absolutely’.

When people questioning a decision or direction taken by their government are attacked in public meetings, quickly labeled as a troublemaker or malcontent and never given an equal opportunity to defend or tell their side of any issue or opinion: isn't that is how dictatorships operate. Also, when groups of concerned citizens organize with common issue(s) and then begin questioning political leadership or the actions of their government they should not be quickly vilified and found guilty by association as seems the standard operating procedure in Twinsburg; all in an attempt to intimidate and chastise the very people whom they took an oath to serve!

A goal of many finance directors in my day would be to align budgeting and accounting for all departmental cost allocations in the various programs and thereby provides consistent accounting in all funds. Our primary objective was to provide accurate and comparable financial reporting and assure the taxpaying public we were providing accurate and consistent reporting of where tax dollars were sourced and on which programs they were used; we called it professionalism! A goal that many in government finance would be wise to reaffirm again, if they wish to restore credibility and confidence in government financial reporting.

Here is some good advice to all concerned taxpayers in the great State of Ohio; become informed, become knowledgeable about what your local government is doing to provide consistent, accurate, and reasonable cost allocations of all government programs. Remember that auditors opine on the materiality and accuracy of the financial reports submitted to them by the Mayor and Finance Director; they generally do not assume responsibility for discovering all fraud or embezzlement; that falls upon your Mayor, Finance Director, Department Heads, employees, and City Council members. You may not always have a ‘Citizen Auditor’ helping you watch your government (which some Council members I am sure hope for); do you really want to depend only on elected leaders only? Citizen Auditors prefer to use President Ronald Reagan’s philosophy of ‘trust but verify’!

My friends, when the day arrives, that any citizens/taxpayers disagreeing or opposing the opinions or actions of our elected representative(s) are treated or labeled as malcontents, troublemakers, or ignored as unimportant; that is the day America will cease to be a ‘Free Country’. Citizen Auditors have to be tough skinned and as a polio survivor, life has taught me what discrimination feels like, what being treated as a 2nd class citizen feel like, and what it is to be seen as someone to be isolated and forgotten. Those of us dealing with disabilities have adapted too many unique challenges in life, including abusive and intimidating politicians, and we have overcome those challenges. We refuse to be intimidated or labeled anymore by anyone, especially by self-serving abusive and bullying politicians. Americans have learned over the years and now understand that treating anyone with injustice is treating everyone with injustice!

Complacency of Voters is responsible for most of the many troubling challenges we face today and only Voting will allow ‘We the People’ to confront those challenges. As Citizen Auditors, we encourage everyone to vote and make sure all your family and friends vote too. Voting is one of the major rights that our founding fathers knew could keep government abuse and corruption in check. They knew that freedom is not free but that it is fought for and paid for, often with the lives of our fellow Americans laid upon the Altar of Freedom. Let us never forget or take for granted what so many have fought to save for our posterity.

If anyone has questions on this subject, please contact me.

Loren Sengstock, Citizen Auditor

(330) 888-9459