Ann Arbor Audit Clean, But Issues Identified

Audit report notes some concerns with internal controls; follow-up reveals city attorney Postema made "double dip" mileage claims

News of an essentially clean audit for the fiscal year 2012 was delivered to the Ann Arbor city council audit committee late last year by Mark Kettner, a principal with the auditing firm Rehmann. The audit culminated the work that had begun in preliminary meetings on July 10. The fiscal year 2012 ended on June 30, 2012. [.pdf scan of letter from Rehmann]

From left to right: Chuck Warpehoski (Ward 5); Mark Kettner with Rehmann, city CFO Tom Crawford, accounting services manager Karen Lancaster, Sally Petersen (Ward 2).

The Dec. 20, 2012 meeting of the city council’s audit committee, from left to right: Chuck Warpehoski (Ward 5); Mark Kettner with the auditing firm Rehmann; city CFO Tom Crawford; accounting services manager Karen Lancaster; Sally Petersen (Ward 2).

The auditor’s report concluded that the city’s financial statements are presented fairly and accurately – but as Kettner stressed, that was not meant to express an opinion on the city’s overall financial condition or anything about what a great place Ann Arbor is. “I never want somebody walking away who says, ‘The auditor said everything’s okay,’ because the auditor doesn’t say that …” Kettner noted.

Also presented to the committee was the comprehensive annual financial report (CAFR). The report included the year-end numbers for the city’s general fund, which were positive. Actual revenues were about $76.5 million, which was $2.2 million more than the budgeted revenues of $74.3 million. And actual expenses were $73.5 million, or $2.1 million less than the budgeted expenses of $75.5 million. That came out to an increased fund balance of $1.6 million – from $13.7 million to $15.3 million. The city had budgeted to tap the fund balance for around $2.7 million. That meant that the general fund did about $4.3 million better than budgeted. [.pdf of CAFR]

Although the audit report was unqualified – that is, clean – some problems were identified with the city’s internal controls. One was deemed to be a “material weakness” – the most serious classification. It related to the representation of the federal portion and state portion of funds involved in revolving loans. A second problem, identified as a “significant deficiency,” involved the reconciliation of subsidiary ledgers for customers’ utility bills with the city’s overall financial system.

Not rising to the level of an actual deficiency were several other matters that Kettner felt still warranted consideration, including: payroll process (no direct supervisor signatures on timesheets); employee expense reports (instances of “double-dipping” on vehicle allowances and mileage reimbursements); related-party transactions (family member of employee with city contract); internal staff auditor reporting relationship (currently reports directly to CFO); and information technology (password and disaster recovery policies).

The auditor’s report does not include the names or positions of any of the employees involved in those matters of concern. Records provided to The Chronicle by the city, responding to a request made under Michigan’s Freedom of Information Act, indicate that one of the employees who claimed both mileage and vehicle allowance in violation of city policy was city attorney Stephen Postema. The records indicate he claimed $1,043.37 in mileage reimbursements dating from June 23, 2011, despite his vehicle allowance of $330/month. Postema’s vehicle allowance has since been eliminated by the city council, as a result of his most recent performance review. It’s not clear at this point if the city will require that the mileage money be repaid. [Updated: City administrator Steve Powers has reached a different conclusion from the auditor's on this point. See below.]

Kettner and the city’s chief financial officer, Tom Crawford, indicated to the audit committee that the material weakness and significant deficiency had been corrected so that recurrence would also be prevented. For the other matters, Crawford assured the audit committee that the goal was not to see a repeat of those same items in future years, especially for the most serious issues – involving payroll and expense reports.

The related-party transactions, Crawford told the audit committee, are currently the subject of review in the context of possible revisions to the city’s procurement policy. Kettner suggested that the city’s part-time internal auditor report directly to the audit committee, instead of to Crawford. And Crawford encouraged committee members to share any concerns with the city’s internal auditor, the city administrator, or the auditor himself – if they did not feel comfortable approaching him. Crawford indicated that the city was currently working on a disaster recovery plan for information technology, but didn’t anticipate that it would be completed by the end of this fiscal year.

The presentation by Kettner was delivered to a short-handed committee. Because just two of the five members were able to attend – Sally Petersen (Ward 2) and Chuck Warpehoski (Ward 5) – the committee didn’t achieve a quorum necessary to vote to recommend the adoption of the audit by the full council. Two audit committee members were out of town – Sumi Kailasapathy (Ward 1) and Margie Teall (Ward 4). The third absentee, Stephen Kunselman (Ward 3), was suffering from the flu. City staff present were chief financial officer Tom Crawford and accounting services manager Karen Lancaster.

Audit Overview

Some of the presentation at the Dec. 20 audit committee meeting dealt with a general orientation to the idea of an audit and the logistics of how the audit was conducted. The two committee members present, Chuck Warpehoski and Sally Petersen, were just recently elected in November. Since being sworn in, the full council has held three meetings.

Audit Overview: What the Opinion Means

Mark Kettner of Rehmann explained that the audit report is just an opinion on the financial statements. “I never want somebody walking away who says, ‘The auditor said everything’s okay,’ because the auditor doesn’t say that … The auditor says that the financial statements are fairly presented, and gives an opinion solely on the financial statements – that they are not materially misstated. That means that it’s not an opinion on your financial condition, not an opinion on what a great place Ann Arbor is. Or on your internal controls.”

That’s the highest level of assurance that can be given by certified public accountants, Kettner said.

Audit Overview: General Praise

Kettner regretted there was not a larger audience to hear it, but told the committee that “You have some very talented, very dedicated people that are working for you. You are fortunate to have – these are just a couple of them [Tom Crawford and Karen Lancaster] – really quality people who know their job and do it really well.”

Crawford echoed that praise, telling the audit committee that Lancaster is “one of the best you’ll find in the business.”

Kettner allowed that the audit, in the first year of a new contract with Rehmann, had taken longer to complete than he expected it would in future years. He thought next year he would arrive at least a month earlier than this year, and that the presentation to the audit committee might take place in early October, instead of mid-December.

Audit Overview: Logistical Elements

Kettner noted that in previous years, the comprehensive annual financial report (CAFR) was a collection of 12-16 files – Microsoft Word, Microsoft Excel and .pdf files. The files were based on downloads out of the general ledger and the trial balance. What Rehmann has done is to take all the individual files and incorporate the entire report into a single MS Excel file – cover to cover.

He allowed that it’s not quite at the optimal level, in terms of linking between the trial balance to the financial statements and the notes, the management discussion and analysis (MD&A) and the stats section. When a change is made, it “ripples through,” he said. When numbers are included in a narrative, he explained, Excel formulas can concatenate the text with the numbers. A lot of efficiency will be achieved for future years’ work – but he allowed that this year it was very inefficient to set all that up.

By way of background, this is the first year of Rehmann’s contract. Previously the city’s auditing had been done by Abraham & Gaffney. At its April 16, 2012 meeting, the city council approved the selection of Rehmann over Abraham & Gaffney and other firms that had bid. Rehmann now has a five-year contract to do the city’s audit, with the possibility of two one-year extensions.

Responding to a question from Sally Petersen, Kettner indicated that the MD&A was written by city staff – he characterized it as mostly boilerplate. It’s constrained somewhat by Governmental Accounting Standards Board (GASB) rules, he said.

Kettner pointed to the discussion that’s included in some of the bulleted items – like the fact that tax revenues were lower because taxable values were lower: “Property taxes declined 3.0% in fiscal year 2012 and 4.0% in fiscal year 2011 due to decreasing property values.”

History of Total Taxable Value in Ann Arbor: Real and Personal Property

History of Total Taxable Value in Ann Arbor: Real and Personal Property. The decline has slowed. But 2012 levels were still lower than 2011. The peak year was 2009.

Audit Overview: Governmental Accounting

Petersen asked Kettner for clarification of the distinction between proprietary funds, enterprise funds, and internal service funds. Kettner and city accounting services manager Karen Lancaster confirmed Petersen’s understanding – that proprietary funds are made up of enterprise funds and internal service funds.

Kettner noted that proprietary funds are accounted for on an accrual basis – as contrasted with governmental funds, which are on a modified accrual basis.

The modified accrual basis is used, Kettner said, because “government … is a strange business that gives away its money. It goes and taxes people in a non-exchange transaction and turns around and gives it away in free services – police, fire, elections, that whole thing.” So it doesn’t account for long-lived assets, he explained. When the city buys a fire truck, that’s a use of its in-flow of money. But on its balance sheet, he said, the asset (of the fire truck) is not accounted for. And those become adjustments under the GASB Statement 34, which converts modified accrual statements to the full accrual statement.

Kettner explained that the two-system approach stemmed from a debate by GASB about whether government accounting should continue on a modified accrual method or change to a full accrual method. GASB couldn’t decide, he said, so concluded that two sets of financial statements should be presented.

General Fund

Kettner walked the committee through results for the FY 2012 general fund – budgeted versus actual. He pointed out that the general fund balance had increased by $1,577,246 – from $13,720,048 to $15,297,294. That was $4.3 million “better” than the final amount budgeted, he said. That’s the difference between the budgeted use of $2,736,089 in fund balance compared to the actual addition of $1,577,246.

The $4.3 million difference was split fairly evenly between revenues and expenditures. Actual revenues were $76,445,864, which was $2,159,382 more than the final budgeted revenues of 74,286,482. And actual expenses were $73,479,312, or $2,044,692 less than the budgeted $75,524,004. That reflects a standard, conservative approach to budgeting – go low on revenues and high on expenditures, Kettner said.

The city’s chief financial officer, Tom Crawford, explained to the committee that he’d not been trying to be overly conservative. The budget component that includes state shared revenue had been budgeted that way – $1,293,611 less than the amount the city actually received – because “we didn’t know where the bottom was,” Crawford said. The city was not sure how much it would receive through the state’s new economic vitality incentive program (EVIP), which has replaced what used to be called statutory state shared revenue. Crawford said he was not sure if the city would receive all of the money that was potentially available through EVIP.

State Shared Revenue

The concept behind the state shared revenue system is that local municipalities in Michigan have a restricted ability to levy taxes, so the state reapportions to local municipalities some revenues out of the 6% sales tax that it collects. The state can redistribute 4% out of that 6%. Up until the EVIP legislation was passed in 2011, reapportionment came in two flavors: the constitutional portion (15% of the 4% gross collections of the state sales tax); and the statutory portion (up to 21.3% of the 4% gross collections of the state sales). The EVIP legislation replaced the statutory portion with an incentive program, whereby municipalities would be required to demonstrate compliance with certain metrics in order to receive their share of the state’s sales tax.

In reviewing the evolution of state shared revenue, Tom Crawford – the city’s CFO – noted that over the last decade, the legislature had not appropriated the full amount in the formula, as the legislature struggled with its own state budget issues. After Gov. Rick Snyder was elected, statutory state shared revenue was eliminated. Sally Petersen (Ward 2) ventured that now cities have to “earn” the money they previously were allocated. Crawford allowed that the city “earns” the money by meeting the standards that the legislature sets in a given year.

Mark Kettner of Rehmann described it as a “stick and carrot.” Going back even before a decade ago, he said, back in the 1950s and 1960s cities and counties were able to levy local taxes – inventory taxes, for example. Some of those levies were eliminated in favor of the state’s single business tax (SBT). So as the state now is looking to reduce the state shared revenue, it’s important to remember that the legislature has, over time, eliminated much of the ability of local municipalities to generate their own revenue.

Crawford agreed with Kettner, saying that cities could, years ago, impose an entertainment tax – which could have applied to University of Michigan football tickets, for example. The right to impose that kind of tax was taken away from locals, in exchange for the state shared revenue program.

Kettner felt that the next piece of local funding to disappear would be the elimination of the personal property tax (on business equipment).

Crawford added that the reason the EVIP was conceived as it was – linking certain actions by local municipalities to state funding – was to avoid creating an “unfunded mandate.” And according to the state attorney general, said Crawford, the EVIP program is technically not an unfunded mandate.

Responding to a question from Petersen about whether the city incurs costs to achieve compliance with the EVIP, accounting services manager Karen Lancaster described compliance as “resource intensive.” She described the “performance dashboard” as the first element of compliance. A second component is evidence of consolidation and collaboration with other governmental entities. The third element involves employee health care and retirement benefits, she said.

Petersen ventured that over time, EVIP compliance could become somewhat “boilerplate.” Crawford told Petersen it’s hard to judge, because the program has only existed for two years, and the state legislature could “change direction and pivot” any year they want. Crawford suggested that committee members take a look at the performance dashboard and the citizens guide to finance and budget – as they contain some “neat metrics.”

Ann Arbor: Projected Budget Surplus/Deficit (includes elimination of personal property tax approved by the state legislature)

Ann Arbor: Projected Budget Surplus/Deficit (includes elimination of personal property tax approved by the state legislature). The first year, 2012, reflects actual figures. Subsequent years are projections based on the city’s projections, as presented at a Dec. 10, 2012 planning session.

Pension & VEBA

Kettner pointed audit committee members to the multi-year schedules in the CAFR related to the city’s pension plan and retiree health care. He said he was not so much interested in zeroing in on specific numbers as he was in alerting the committee to the biggest change in GASB rules that are coming: GASB 67 and GASB 68. The first applies to the plan itself. The second one applies to the city, as the employer and the plan sponsor. The new standards will need to be implemented for FY 2015 for the city and for FY 2014 for the plan, he said. Kettner called that a short time for planning.

It would be quite a task to assemble all the additional required disclosures, Kettner said. And the “kicker” is that a liability would need to be booked for the unfunded actuarial liability, he said.

The liability to be booked, Crawford said, will be bigger and more volatile than what’s currently on the books. Kettner noted that this applies to defined benefit pension plans, and two years after that, it would be required for VEBA (Voluntary Employees Beneficiary Association) for retiree health care.

Petersen wanted to know if the change would be required for organizations that have a defined contribution plan, instead of a defined benefit plan. Lancaster pointed out that it would be too late for the city to change to a defined contribution plan – because the liability would have to be recognized until everyone in the plan is deceased.

Control Problems

When Mark Kettner of Rehmann reviewed highlights from the single audit, he noted the two findings – one a “material weakness” and the other a “significant deficiency.” The letter to management also included discussion of other issues that did not rise to the level of a deficiency.

Control Problems: Material Weakness

Kettner began by saying that “requirements that the feds have versus what I see in reality sometimes don’t actually match up.” The biggest federal program the city has comprises $8.2 million in federal funds, he said, and $6.4 million of that is due to revolving loans from the state of Michigan. What happens, he said, is that a cost submitted for the program is returned to the city with the money and a letter that says, “There’s no federal funds in it!” or “It’s 100% federal funds!” or “It’s this!” or “It’s that!” It’s constantly changing, he said. So it’s something that has to be monitored closely. The portion that’s attributable to federal funding can change from one period to the next, he said. From the single audit:

Finding Type. Material Weakness in Internal Control over Financial Reporting.

Criteria. OMB Circular A-133, §___.300, requires that the City “identify, in its accounts, all Federal awards received and expended and the Federal programs under which they were received. Federal program and award identification shall include, as applicable, the CFDA title and number, award number and year, name of the Federal agency, and name of the pass-through entity.” In addition, the City is required to “prepare appropriate financial statements, including the schedule of expenditures of Federal awards in accordance with §___.310”.

Condition. While management was able to provide us with a substantially complete schedule of expenditures of federals awards during our audit fieldwork, large adjustments were needed to one of the programs so that only the federal expenditure portions were reported on the schedule. These adjustments totaled approximately $1.8 million.

Cause. A breakdown in communication between departments resulted in the total activity of a certain federal grant being shown on the schedule of expenditures of federal awards, rather than just the federal portion.

Effect. The activity shown for one of the federal grants included on the schedule of expenditures of federal awards included State-funded amounts. Adjustments were needed to adjust the activity for this grant so that only the federally funded portions of the grant were reflected on the schedule of expenditures of federal awards.

Crawford characterized the problem as a reporting issue that is not difficult to fix.

Control Problems: Significant Deficiency

The second issue involved the reconciliation of subsidiary records – broken out by detail by individual customers of utilities (e.g., water and sewer) – and the control accounts on the general ledger. There should be an interface between the two ledgers – control and subsidiary, Kettner explained, and they should match. “They didn’t – they were off a bit,” he said. From the single audit:

Finding Type. Significant Deficiency in Internal Control over Financial Reporting.

Criteria. In order to determine whether balances in the general ledger are accurate, the City should perform periodic reconciliations of subsidiary ledgers to the related general ledger control accounts.

Condition. The general ledger amounts for certain utility receivable accounts did not agree or readily reconcile to the subsidiary detail.

Cause. This condition was caused by the absence of a standard procedure for reconciling subsidiary detail to the related control accounts.

Effect. As a result of this condition, the City’s accounting records were initially misstated by amounts which in certain instances were significant to the financial statements. In addition, such unreconciled balances increase the risk that amounts may be materially misstated, whether by error or fraud, and remain undetected by management.

Lancaster clarified that the public services area turns in the reconciliation on a monthly basis for the utility system. They reconcile to the utility system and to the city’s financial system; however, the step that was not being completed was the reconciliation of the subsidiary ledgers. That’s because the subsidiary ledger “doesn’t talk to the accounting system inside the utility system,” Lancaster said. An extra step will now be implemented, so that Lancaster can see that the subsidiary ledger reconciliation is taking place.

Crawford pointed out that the reconciliation that the city had already been doing ensured that revenue recognition was correct overall. It’s not difficult to correct, he said, and the city has already started with implementation.

Kettner assured the audit committee that this type of issue was not unusual – many organizations have similar types of issues.

Control Problems: Other Matters

Kettner described the management letter as a combination of different types of communication. The auditor is required to talk about the responsibilities for the audit and any problems found with conducting the audit. The answer was no, the auditors didn’t have any problems with city staff during the audit, he said.

Kettner described a hierarchy of problems that an auditor can find: deficiencies, significant deficiencies, and material weaknesses.

There are also “other matters” that an auditor is not required to put into writing, he said. But they have to be communicated at least orally, and you have to document who was told and what they were told. So Rehmann’s practice is to include other matters in the management letter, because it’s easier to write down the information.

Other matters included issues with payroll process, expense reports, related-party transactions, internal auditor responsibilities, and IT policies:

  • Payroll Process. Some timesheets are not signed by a direct supervisor. Kettner characterized it as a “procedural thing.”
  • Employee Expense Reports. Some employees who have a vehicle allowance were also claiming mileage reimbursements. Kettner characterized it as maybe more serious than the timesheet signing issue, but involved what he called “trivial dollars.” Claiming mileage reimbursement when you have a vehicle allowance is a “double-dip,” he said. Kettner indicated that the city had itself actually identified the issue earlier in the year, and implemented corrective measures.
  • Related-Party Transactions. Some vendors who have family members working for the city also hold contracts with the city. Kettner noted that this situation was actually prohibited by the city’s conflict-of-interest policy.
  • Internal Auditor Responsibilities. The city’s internal auditor reports to the CFO, when it may be more appropriate to report directly to the city council’s audit committee. Kettner suggested that by having the internal auditor report to the committee, it would give that person more organizational independence – it was not meant to reflect negatively on the CFO, he said.
  • Information Technology. Lack of some controls in the information technology department, including no regular changing of passwords and no disaster recovery plan. Kettner didn’t elaborate on this item.

Regarding the “double-dipping” issue, Kettner did not name individuals or their job titles who had claimed mileage reimbursements while also getting a vehicle allowance. Responding to a request made under Michigan’s Freedom of Information Act, the city provided to The Chronicle records showing that two employees had claimed mileage reimbursements over the last few years, even though they had vehicle allowances.

One was a staff member who works in the city assessor’s office, and receives a monthly vehicle allowance of $180/month, but also claimed $246 in mileage reimbursements. Those instances appear to have taken place in the previous fiscal year.

Records also indicate that Stephen Postema, Ann Arbor’s city attorney, had claimed $1,043.37 in mileage reimbursements since late June 2011, despite his vehicle allowance of $330/month. [.pdf of city's response to request made under the FOIA]

In the records provided to The Chronicle, the earliest set of mileage claimed by Postema included $558.96 of total mileage for a trip to Mackinac Island, for a Michigan Association of Municipal Attorneys (MAMA) conference and for the Biennial Mackinac Policy Conference.

Postema’s $330/month vehicle allowance was eliminated as part of the outcome of Postema’s annual performance review – which was approved by the city council on Nov. 8, 2012. The city attorney reports directly to the city council. From the resolution passed by the council:

Whereas, The City Attorney has offered to eliminate his contractual car allowance of $330/month as of January 1, 2013, as has been done with the City Administrator’s contract;

At that meeting, the council also adjusted Postema’s salary upward for the first time since 2007, by 2.4%. According to the city’s human resources office, Postema’s salary before the increase was $141,538. The 2.4% increase on that base brought his annual salary to $144,934, just under that of city administrator Steve Powers, who is paid $145,000. The city attorney and the city administrator are the two positions that report directly to the city council. [.pdf of form used by councilmembers to evaluate Postema's performance]

The salary increase for Postema, when balanced against the elimination of his vehicle allowance of $330/month, gives a net loss in total annual compensation of $563 [141538*.024 - 330*12]. That does not factor in the mileage reimbursements for which Postema is now able to claim, in conformance with city policy.

Control Problems: Response from City Administrator

Updated at 3:45 p.m. Jan. 9 after initial publication.

On Wednesday afternoon, Jan. 9, city administrator Steve Powers sent the email below to The Chronicle in response to a query that had been made before the publication of this article. It reaches a different conclusion than the one contained in the auditor’s letter.

However, when The Chronicle asked auditor Mark Kettner in a telephone interview if he had received any “pushback” from city financial staff during the auditing process – about his view that the identified mileage claims were against city policy – Kettner indicated he had not. Kettner went on to characterize the city’s financial staff as having been cooperative in allowing him to do his job as auditor. He indicated that he did not assume that the city staff necessarily agreed with every conclusion in the auditor’s report and that those conclusions could be subject to judgement and interpretation in light of closer investigation. From Powers’ email:

Vehicle allowances are provided to employees for use of personal vehicles during their daily job requirements within the city or when specified in an employment agreement. I have discussed the auditor’s comments with Tom Crawford and I believe the instances were not against city administrative policy. The few instances mentioned by the auditor of mileage reimbursement were for employees who used their personal vehicle to travel to a meeting outside of the county.

The interpretation of the City’s administrative policy was that the mileage reimbursement was appropriate because the travel was beyond the person’s daily job requirement. The instances were for trips for professional or state meetings, such as in Lansing. The outcome from the audit is that the City’s administrative policies will be clarified to specify the reasons for mileage reimbursement. During the past year, I have removed vehicle allowances from the compensation for service area administrators.

The remaining vehicle allowances are for employees, such as property appraisers, where the use of personal vehicles with an allowance is more advantageous to the City than paying mileage or using a city vehicle.

Postema’s mileage claims, which the city administrator is characterizing as beyond the daily job requirement of the city attorney, include one to cover mileage to drive to Lansing, in order to represent the city in a lawsuit.

Other Matters of Concern: Discussion

About the other matters listed out in the management letter, Kettner said that the notes are not meant to say, “Thou shalt not do …” but rather to convey that the auditor had noticed these things. Kettner noted that he’d already had conversations about them with Lancaster and her staff. The city needs to decide what the cost and benefit of having those controls is, he said.

Kettner suggested that the audit committee should ask the city staff for a recommendation on a course of action on these other matters.

Crawford indicated that his goal – especially with the more serious issues – is to make sure they don’t have a repeat in the following year. He told Kettner that he did not expect that Kettner would see instances of the same problems next year with payroll process and employee expense reports.

Some of the other issues wouldn’t necessarily be addressable within the timeframe of a year – like the IT disaster recovery plan. It’s something the IT department is working on, but Crawford didn’t think it would be ready by the end of June.

Other Matters of Concern: Discussion – Conflicts of Interest, Ethics Policy

On the question of related-party transactions, Sally Petersen ventured that there’s only so many companies in the city. She wondered if the policy really meant that if someone’s spouse works for the city, then that person can’t have a contract with the city? She felt that was “very limiting.”

Tom Crawford indicated that the city is currently revisiting that policy, and he’s seen so many drafts he was not certain if Petersen’s characterization was accurate. But he indicated that the issue concerns ownership interest as opposed to employment. He said the intent of revising the policy is to define more clearly which relationships would be allowable, but he couldn’t say what the final draft of the policy would be. He told Petersen that it’s intended to be somewhat restrictive.

One of the elements of the policy, Crawford said, would be to ensure that disclosures are obtained from vendors – if there are conflicting interests. He said the issue should be approached from multiple angles. You want people to have the responsibility to disclose relationships, he said, and you want to have the ability to find out internally. And if no one identifies a conflicting relationship at the time, but someone later finds out, it’s important that the policy has a mechanism for dealing with it.

Peterson ventured that such a policy makes it hard to “think local first.” Crawford allowed Petersen’s “think local first” point, but also noted that the city needs to have a very high standard so that people trust that the city is spending their money wisely. It’s been a difficult policy to revise, he said.

Petersen asked if all city contracts needed to be competitively bid. Not all, Crawford said – small contracts are not bid out. Petersen asked how many contracts the city had. Karen Lancaster guessed it was on the order of 500-600 contracts.

Mark Kettner suggested that the city council might want to have the ability to grant exceptions, but that would need to be balanced against the city council looking into every contract. Crawford indicated that the approach being considered with the policy revision is that even if the contract is small, any conflicting relationships need to be “daylighted.” Crawford summed up his perspective on the issue by saying there’s now a good opportunity to update the policy.

Kettner added that one of the duties of the auditor is to make inquiries in the organization – not just of management, but a smattering of high-level, mid-level and low-level employees. It was during one of those inquiries that Rehmann had heard about people having contracts or side businesses or something. So Rehmann didn’t ignore it and went back and asked some questions. The issue did not have a significant impact on the financial statements, Kettner said.

Chuck Warpehoski said he understood that it could be a slippery slope, but observed that if someone works at a swimming pool for a summer job, that person won’t have influence over who the city hires as an IT vendor. So he asked if there was a way to require disclosure, but consider what the potential is for actual influence.

Crawford indicated some agreement with Warpehoski’s idea, saying that disclosure is essential, and that after disclosure, some relationships would have the result that “you just say no” and for other situations, you might say that it needs further consideration.

As an example, he gave a parent who is part of the immediate family, but not part of the household of a city employee. That needs to be balanced against the general interest in making sure that the city gets the lowest cost for the work delivered. If that parent is willing to do it for less, do you want to exclude that person from contracting with the city? Crawford asked.

Lancaster suggested that “it feels better” if a relationship involves a completely different department from the one involving the contract and it’s just coincidental. It’s more complicated if it’s in the same department, she said.

Some of the issues that the committee had just then discussed were those that Crawford wanted to see incorporated in a revised policy.

Petersen asked if the city had some sort of ethics policy. Crawford indicated that city staff have an ethics policy, but he was not sure if the council had a separate one. He indicated that the city hired a procurement professional about a year ago, and he was looking at a lot of updates to procurement procedures.

Petersen asked Crawford if he could make a case for a full-time internal auditor – as opposed to part-time. Crawford said he didn’t think the city needs a full-time auditor at this time. He encouraged audit committee members to bring any concerns they had to the internal staff auditor – Ken Bogan – if they didn’t feel comfortable coming to him, or to city administrator Steve Powers, or to Rehmann.

Kettner suggested that it might be worth considering the possibility of collaborating with Washtenaw County on hiring a full-time auditor.

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  1. By Mark Koroi
    January 9, 2013 at 12:22 am | permalink

    On the mileage “double-dip” issue, several questions need to be answered.

    Is anyone saying it was inappropriate for an employee to collect mileage and a vehicle allowance together according to city policy? Or rather it is a municipal policy deficiency that may be the city’s fault in allowing such an employee to claim?

    If the mileage reimbursement was to cover depreciation and gasoline costs associated with vehicle use on city business and the vehicle allowance reimbursement was to defray the pro rata costs of insurance, finance charges and other fixed costs of a vehicle that an employee at least partially dedicates to his job – then those would represent different interests. Is someone rather is saying that mileage reimbursement are intended to cover all employee transportation costs? Is anyone saying Steve Postema did something improper?

    As to ethics issues being raised – great!

    I find it a clear conflict of interest if an Ann Arbor City Council member who is also a University of Michigan employee votes on a matter
    involving the university – such as leases or service agreements or other matters – like the Fuller Road property which affect the University.

    Ann Arbor needs a coherent ethics ordinance with teeth.

  2. By Alan Goldsmith
    January 9, 2013 at 6:40 am | permalink

    “Records provided to The Chronicle by the city, responding to a request made under Michigan’s Freedom of Information Act, indicate that one of the employees who claimed both mileage and vehicle allowance in violation of city policy was city attorney Stephen Postema. The records indicate he claimed $1,043.37 in mileage reimbursements dating from June 23, 2011, despite his vehicle allowance of $330/month. Postema’s vehicle allowance has since been eliminated by the city council, as a result of his most recent performance review. It’s not clear at this point if the city will require that the mileage money be repaid.”

    Thanks for the ‘investigative journalism’! The A A dot com is scooped yet again.

  3. By Alan Goldsmith
    January 9, 2013 at 6:44 am | permalink

    “Petersen asked if the city had some sort of ethics policy. Crawford indicated that city staff have an ethics policy, but he was not sure if the council had a separate one.”

    Does Council have a policy? If not, why? Having everyone serving be required to issue financial disclosure statements yearly would be a step in the right direction for openness and transparency.

  4. January 9, 2013 at 1:53 pm | permalink

    It appears that Postema will have severe difficulty being a candidate for judicial office with this on his record.

  5. By Alan Goldsmith
    January 9, 2013 at 2:24 pm | permalink

    I would think with his less than stellar record as City Attorney combined with this interesting take on funding reimbursement entitlement, his hopes for a judgeship are toast.

  6. By Mark Koroi
    January 9, 2013 at 3:36 pm | permalink

    @Alan Goldsmith:

    No elected official wants an ethics ordinance to come back and bite him or her in the rear end.

    For example, the City of Warren has had a number of elected officials face bribery, racketeering, or other criminal corruption charges in the last two decades, but the strong public call for an effective ethics ordinance has never been adopted by Warren City Council.

    A prominent businessman from Ann Arbor once told me that conflict of interest is the type of corruption that pervades Ann Arbor at the city and county levels. University of Michigan has put a number of elected officials and/or their immediate family members on the university payroll with very lucrative positions and to me it seems that the ostensible reason for this is that these officials are in a position to make decisions that advance U-M’s interests.

    The Steve Postema mileage reimbursement story is something that I agree was a good piece of investigative journalism.

  7. By Mark Koroi
    January 9, 2013 at 10:37 pm | permalink

    “It appears That Postema will have severe difficulty being a candidate for judicial office with this on his record.”

    “I would think with his less than stellar record as City Attorney combined with this interesting take on funding reimbursement entitlement, his hopes for a judgeship are toast.”

    Don’t count on it yet. Remember “Per Diem-gate”? Ken Schwartz was the only Commissioner taking overpayments to be voted out of office – and many blamed his woes on matters other than receipt of the overpayments. Mark Ouimet won a State House seat even though this October Surprise was directed at him specifically – but he survived.

    Taking some cues from the Board of Commissioners members who gracefully survived the per diem controversy, Postema should:

    (A) make a public statement while depicting himself knee-deep in contrition while asserting the double-payments were inadvertent;

    (B)promptly disgorge any monies received in violation of city policy (this will short-circuit possible “Pay-up Stephen” catcalls form the public);

    (C)blame the overpayments to vague language in municipal policies; and

    (D)first and foremost – blame the city disbursement employees who authorized the overpayments to the extent that policy language is crystal clear that the double-payments were not proper.

    Opponents of City Attorney Stephen Postema should:

    (A) use catchy nicknames to identify Postema or this controversy with e.g. “the Double Dipper”, “MileageGate”;

    (B)attend the Public Commentary period of City Council meetings (all of which are televised and attended by Postema) and lecture Postema and City Council about public disapproval over this controversy and demand immediate reimbursement to the city of any overpayments;

    (C)send e-mails to all members of City Council to the extent that citizens are unable to appear in council chambers to let the council members know how the public feels about Postema’s conduct in this matter.

  8. By Alan Goldsmith
    January 10, 2013 at 6:43 am | permalink

    This isn’t about an honest mistake, like an arrogant County Commissioner lining his pockets with expense account dollars and then refusing to pay it back. You would think a good attorney would know how to legally interpret his own employee agreement. So that’s the kind of judge he would be? Postemagate (lol) is a slap in the face of every Ann Arbor taxpayer.

  9. By Alan Goldsmith
    January 10, 2013 at 8:09 am | permalink

    @Mark Koroi:

    As of this morning not a peep from the sleeping puppy journalism dot com, which if we had a real newspaper in this city, might actual be a factor in some of your suggested outcomes. But a tenth story on the death at EMU where they tell us again there’s nothing new to report. And a second article on the death of a police dog. And a comment from a report on an ice cream shop closing apologizing for not covering it in more detail sooner because the reporter didn’t feel well (not making this up).

  10. January 10, 2013 at 1:30 pm | permalink

    Re 9: “if we had a real newspaper in this city…”

    We do. You’re reading it right now. Real newspapers are not necessarily printed on paper. I guess you could argue it’s incomplete, as the emphasis is on local politics at the expense of the fluffier stuff. But what the Chronicle does, it does well.

  11. By Alan Goldsmith
    January 11, 2013 at 8:58 am | permalink

    Re: 10. I agree 100%. With the FREEP coverage Sue McCormick/Barnett Jones fraud in Detroit/Flint, the expense account theft in Ann Arbor, both at the County and City levels (reported by both A2Polito and the Chronicle), the article in Forbes about Pell/Gelman ground water poisoning and scores of other events in Ann Arbor, it’s obviously we aren’t going to get any reporting from the Dot Com. But I’m appreciative of the Chronicle and other outlets who have taken up some of the slack.

  12. By Rod Johnson
    January 11, 2013 at 3:52 pm | permalink

    Got a link for the Forbes piece?

  13. By DrData
    January 11, 2013 at 4:25 pm | permalink

    [link 1]


    [link 2]

  14. By Rod Johnson
    January 11, 2013 at 6:05 pm | permalink


    January 12, 2013 at 8:58 pm | permalink

    Be nice if we could see the SPARK audits but they’re secret.

  16. By Alan Goldsmith
    January 13, 2013 at 7:37 am | permalink

    Still not one word on the Sue McCormick/Barnett Jones case in Or a word about the City Attorney’s expense account issue. Or no article on the financial audit in general either.

  17. January 13, 2013 at 9:13 am | permalink

    Re (16) I missed it too, but they (the other online news source) published a story on January 10 about the Detroit/Flint issue (Barnett Jones employed two places at once).

    It is true that we don’t have a one-stop Ann Arbor news source any more (though even when it was the Ann Arbor News, coverage was not complete). Coverage of state and regional news is especially thin here. But there is a plethora of online sources. I’ve been following Detroit News tweets lately with good results, and there is also a grant-funded blog, Mode Shift ( that has some decent reporting. It is frustrating that most legislative news is behind steep paywalls (Gongwer, MIRS) but Detroit News has a statehouse reporter who stays on top of many issues. Phil Power has an online magazine (Bridge) that has some summaries and reviews.

    It takes a lot of work, though, to stay informed. Someone needs to write a summary/directory of a media program. Unfortunately, the idea of a centralized reliable all-encompassing news source seems to be so 20th Century. Even the New York Times has let go many reporters and just closed its environment desk. We’ll all either be ignorant or be really, really busy following all the bread crumb trails.

    Meanwhile, we are fortunate to have Dave and Mary soldiering on to bring us our hyperlocal civic coverage. It is a great benefit to Ann Arbor.

  18. By Rod Johnson
    January 13, 2013 at 10:02 am | permalink

    I read an article about the Jones case, which I pointed out the the Chronicle on Facebook, on Thursday: [link]. Admittedly, it’s mostly reprised from the Free Press story, but that’s kind of par for the course for the dot com. In fact, Alan, you commented there, so I must be misunderstanding what you’re saying in #16.

  19. By Alan Goldsmith
    January 13, 2013 at 12:06 pm | permalink

    @ 18. By ‘not a word’ was nothing other than posting the Freep link and cut and pasting the Detroit reporter’s work. No follow up, no calling any current City officials for comments, nothing you couldn’t have gotten from reading the Free Press. I wouldn’t give the dot com any credit for that. And, the story continues in Flint and Detroit and…of course, nothing further. But if you want to give credit for the paper thin coverage, I see your point. But literally nothing at all on the City Attorney story.

  20. By Alan Goldsmith
    January 13, 2013 at 12:08 pm | permalink

    Re: 17. Thanks for sharing the Mode Shift link. Pretty interesting work.

  21. By Rod Johnson
    January 13, 2013 at 2:33 pm | permalink

    #19: I have to agree, of course. Is there anyone who takes the dot com seriously as a news operation? I hope not.

  22. By Steve Bean
    January 14, 2013 at 11:53 am | permalink

    While the 2012 CAFR shows (on pp. 62-63) that the investments in the Pension and Employee Benefits Trust Funds are somewhat improved relative to 2011 (more higher grade bonds and less lower grade ones, for example), the percentage of cash and short-term bills and notes is still very small, while equities and bonds make up the majority of the portfolio. This is exactly the opposite ratio to hold at this juncture. (See my comment on the “What They Believe” article: [link].)

    The small amount in hedge funds, even assuming that they are fully shorted the market with maximum leverage won’t come close to compensating for the losses that the other categories will experience over the coming 1-3 years.

    By holding cash and cash equivalents through that period, the city could avoid falling much further below 100% funding of the trusts (though a drop is unavoidable). Then, at or near the bottom, those deflation-strengthened dollars could purchase enough assets to possibly fully fund the trusts in subsequent years.

    If the city doesn’t successfully navigate this situation, residents will potentially be on the hook for long-term costs for those increased net liabilities, on top of also compensating for lower property values and increased foreclosures.

    The work of the retirement board isn’t one of those aspects of city government that gets much attention. Now would be a good time for that to change.

    This will be a global depression, and Ann Arbor WILL NOT be immune.