When the city of Hastings adopted its $6.2 million budget for the new fiscal year, the spending plan included $350,000 in American Rescue Plan Act funds.
It's a problem, but the city can easily resolve it, interim City Manager Gregg Guetschow told The Hastings Banner Wednesday,
During the council meeting Monday, Guetschow said the federal ARPA money, the first allocation of a total $765,000 that the city expects to receive, was included in the budget “like any other unrestricted revenue.”
“These funds are not unrestricted, however, and can only be used for limited purposes: Addressing the impacts of COVID-19; recouping lost revenues due to COVID-19; infrastructure investments related to water, sewer and broadband; and a few others,” Guetschow noted. “It is likely that the majority of ARPA funds would be used for projects that would not be accounted for in the general fund and that would likely occur in future fiscal years.
“In recognition of this, the Michigan Department of Treasury is encouraging accounting for the receipt and use of ARPA payments in a separate fund.”
The city will have to move that money out of its general fund and segregate it in a separate account.
And, since the city has not yet applied to receive those federal funds, there is no problem with setting up a separate account to ensure they follow the accounting practices established by the Treasury Department, he noted.
The 60-day window for the city to apply for the funds doesn't open until July 6, Guetschow said.
Without those federal funds co-mingling with general fund money, and “assuming all other revenues and expenditures occur as budgeted, the general fund appropriation from the available fund balance would need to increase from $550,000 to $900,000.”
And, while the projection for the following fiscal year, 2022-23 did not include the city’s anticipated ARPA amount, that fund balance appropriation was already at $867,000, he noted.
This means that, over the next two fiscal years, the fund balance would decrease from $3.8 million to $2 million, he said.
A $2 million fund balance “is a very healthy reserve for a $6 million budget,” Guetschow noted.
Yet “the rate of use of these funds, however, is not sustainable,” he added, pointing as an example to the rising costs of pension funds, which are expected to double over the next 20 years.
“Other capital needs – a new public safety building, for example – must also be considered when evaluating the city’s long-term fiscal health.”
Guetschow said of greater concern is pension and OPEB (Other Post Employment Benefits) that the city will have to consider the corrective steps that will need to be taken to meet those obligations in the future.
$791,300 in changes end fiscal year
During Monday’s meeting, the council OK’d amending the $6.2 million general fund budget before closing out the 2020-21 fiscal year, which ended June 30.
But city Clerk Jane Saurman’s request, which involved 18 separate appropriations totaling $791,300, elicited some displeasure from Councilwoman Deb McNabb-Stange.
“No. 1, there are way too many modifications to be presented this late in the year,” McNabb-Stange said. “I don’t understand most of them. So I need some explanation going through what we’re doing here.
“But, also, I don’t like leaving it ‘til the last meeting. Basically, we have a choice of either approving these or being in violation of state law. And I don’t like being put in that position.”
Saurman pointed out that some of the changes she requested were necessitated by financial information that the city didn’t have until June.
“I think what should come to this meeting should be a final tweak of what needs to be made,” McNab-Stange said. “And then these (recommendations) should come sooner.”
Guetschow interceded in the discussion, pointing to the fact that there are a lot of changes in the plan that occur during the year.
“The budget that you adopt is a spending plan that doesn't elapse until … 14 months after you adopt it. There are lots of variations in that.”
Guetschow pointed out that the way in which the council adopts a budget is not on a line-item basis.
“It’s not even on an activity basis,” he said. “I think you're adopting largely on a fund basis. So there's latitude within that for the administration just to make variations in spending as it goes. And we're just not that good at guessing to figure out, you know, even within thousands of dollars, oftentimes in any given department, where we're going to end up.”
Guetschow suggested that city administration provide the council with a summary of anticipated budget adjustments on a monthly or, at least, quarterly basis. So that “we're coming back to you and saying we still want to go forward, (but) this is going to require a budget adjustment at the end; it may mean that we're going to take more money out of fund balance than when you originally forecast.”
“I think that I'm understanding – and I see some other heads nodding – that you just want to kind of a running tally, as we go with the significant variations,”
he said.
“Right,” McNabb-Stange replied, saying that she had made a similar request before. “… I wanted some sort of a tally -- and then got nothing.”
Her concern, she told Guetschow, is to keep track of where funds have been spent and “what other things have we done where we didn't spend significantly and we decided, well, it's better spent over here. So that's exactly what I want. Thank you for the questions.”
Upon reaching that understanding with the city administration, the council unanimously approved final amendments to the 2020-21 fiscal year budget.
But the issue of money handling – and problems with the protocol currently being used – cropped up again at the end of the meeting.
Purchasing rule ignored
The city has a rule that any expenditure above $5,000 requires council approval, Guetschow noted, yet he is finding numerous examples in which this rule is not being observed.
In a June 23 memo to the council, he cited “three purchases made in apparent violation of purchasing ordinances requirement.”
A variable frequency drive motor was purchased without council approval. And an additional service not originally included in a contract for tree trimming and removal service bumped the cost above the $5,000.
At Guetschow’s request, the expense – for an additional service of stump removal – was negotiated to bring it down below that $5,000 threshold.
A third example he cited involves the city’s Nativity scene being refurbished at Bronner’s in Frankenmuth at a cost of $13,060.
“Authorization was given for the work to proceed,” he reported. “All figures are expected to be completely refurbished within the next few weeks. I have been told that fundraising efforts were initiated to pay for this work. I have been unable to ascertain to what extent this is accurate. The last donation to the Manger Scene Fund occurred in 2009. I do not believe that any significant effort was put into soliciting donations.”
Guetschow said he spoke with a representative of Bronner’s, saying he was just made aware of the situation and asked for their patience in paying the bill so fund-raising efforts could be completed.
“I have discussed the matter with Mayor (Dave) Tossava. He and I will be heading up an aggressive fund-raising effort with a goal of $15,000, sufficient to cover the cost of the refurbishing work and transport back to Hastings. My goal is to complete this fund-raising before my time in Hastings is over.”
Even if the funds had been raised, however, Guetschow pointed out that this project still should have been authorized by the council before the work had commenced.
“These three instances reflect weaknesses in administrative policies and procedures employed to manage the purchasing function. These must be corrected. I will be meeting with key staff members involved in this function to discuss changes we can make to tighten up our practices. I will also be emphasizing with the Executive Team the requirements of city code related to purchasing, my expectations for their efforts to comply, and the consequences of continued failure to adhere to these standards.”
Problems with procedures
These problems with financial procedures were compounded last week when a clerical error resulted in bids for lawn mowing, landscape maintenance and city janitorial services being opened two days before the published deadline.
The intention, the interim city manager said, had been to make a recommendation to Council for its meeting Monday.
But, after the bids were opened last Wednesday, someone called to request a bid packet. When the vendor was advised that the deadline for submitting bids had passed, he pointed to the bid advertisement in The Banner that reported a Friday, June 25, deadline.
Guetschow said the information had been changed in the bid specifications, but not in the information given to The Banner for the ad.
As a result, Guetschow decided to schedule a second bid opening.
“The bids that were opened were secured,” he told the council, “with instructions not to provide information about amounts bid to anyone who might inquire. I also instructed staff to contact each of the vendors whose bids had been opened to alert them to the situation and the actions we were taking. One of those contacted has reached out to Mayor Tossava to express her concerns and has spoken to me now as well.”
“Vendors have good reason to be concerned as our actions are contrary to one of the reasons sealed bids are solicited: To ensure that no one has information that provides an unfair advantage over the competition,” Guetschow wrote in a memo to the council. “I believe that our actions mitigate against this. Further, information from the bids that have been opened would be available to the competition if bids were rejected and new bids sought.
“The situation is far from ideal, however, and could result in a challenge at the time bids are recommended for award. At that time, Council can decide whether it wishes to waive irregularities when awarding bids or reject bids and solicit new ones.”
Guetschow told the council Monday night, “I apologize for the error that’s been made here.”
But the overarching problem – of not following the city’s purchasing procedures – is a fundamental flaw, he emphasized.
“We don’t seem to be able to get this right,” he added, saying that there are a number of possible causes. “The one step we are going to be taking is Jane and I and the individual involving in our accounts payable, and who sees a lot of the purchase orders and how they come through, we’re going to be talking about what steps we can take to really reform our processes here.”
Guetschow said the city has “way too many ways we have allowed for people to ignore the requirements.”
The system needs checks early enough in the process to make sure rules are being followed.
In at least one instance, he noted, the problem occurred at “a very high level of the organization,” when the city manager at that time did not come to council for approval of a purchase. Instead, an email was sent approving an expenditure that the council did not authorize.
“So it’s a little hard to say you’re going to catch 100 percent of these.”
But the rule limiting purchases to no more than $5,000 without council approval is in place for good reason.
“This is one of those things I’ve talked about, the need for us to focus on the fundamentals. We don’t have this right yet. I don’t want to convey this in a sense to let the public think that we’re spending money, willy-nilly.
“There are safeguards, but they’re not in the right spot… They need to be in place earlier in the process so that there is somebody looking at this every single time.
“I want to assure you, assure the auditors, assure the public that we’re being good stewards of the public’s money.”