Council Audit Committee to Strengthen Role

The Jan. 24, 2013 meeting of the Ann Arbor city council’s audit committee signaled a more actively engaged role for that group in the future. It was prompted in part by a report submitted by the city’s outside financial auditor late last year – on which the committee did not appear to have a unanimous consensus at the Jan. 24 meeting. The audit was conducted by the firm Rehmann, which is now in the first year of a five-year contract to perform auditing services for the city.

Listed among other relatively minor matters in Rehmann’s report was a note identifying three instances of an employee who had claimed mileage reimbursement despite receiving a vehicle allowance. At a scheduled Dec. 20, 2012 meeting of the audit committee, the dual claims were described by Rehmann’s Mark Kettner as a “double dip.” Those claims were also cited in Kettner’s written report as a violation of city policy.

The Chronicle’s write-up of the auditor’s presentation late last year to the audit committee – which did not achieve a quorum on that occasion – included the result of additional reporting: Mileage claims made by city attorney Stephen Postema caused the auditor to flag the issue in his formal report.

But at the Jan. 24 committee meeting, Kettner revealed that he’d been convinced to change the wording of the note. The new wording will not indicate a “violation” of city policy. At the meeting, however, Kettner indicated that a note about this issue would still be included – with the exact wording yet to be settled. City CFO Tom Crawford’s written response to the auditor’s report includes email messages that show it was Crawford and Postema who made a successful effort to convince Kettner to alter the report’s wording.

The wording of Postema’s employment contract factored into arguments made by Postema and Crawford for a revision to the auditor’s report. When Postema made his reimbursement claims, his contract at that time provided for “travel” expenses in addition to a vehicle allowance. Postema’s vehicle allowance was eliminated late last year, as a result of his annual performance review. Also factoring into the argument for revising the auditor’s note was Crawford’s contention that the city’s written policies don’t provide clear guidance on the question.

However, at the Jan. 24 committee meeting, Sumi Kailasapathy (Ward 1) challenged Crawford on that point. [Kailasapathy was elected to the council in November 2012 – running a campaign that stressed her credentials as a certified public accountant.] She reviewed the logic and specific wording of each of the city’s relevant policies, with particular attention to the meaning of the word “travel” – and reached the conclusion that the mileage reimbursements had not conformed with city policy.

And even though Kettner has agreed to change the wording of the note in his report, Kettner wrote in a Jan. 18 response to Postema and Crawford: “… from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance.” Kettner’s response also indicates that his conclusion of inappropriateness was not based on a review of Postema’s employment contract.

At the Jan. 24 meeting, Crawford interpreted the fact that he and Kailasapathy reached different conclusions about the appropriateness of the mileage claims as evidence that the written policies didn’t provide clear guidance.

Stephen Kunselman (Ward 3) seemed to reflect the general sentiment of the two other committee members present – Chuck Warpehoski (Ward 5) and Margie Teall (Ward 4) – in concluding that he didn’t think anyone had been trying to “game the system.” Kunselman indicated little enthusiasm for delving into the wording of Postema’s contract or existing city policies. He was more interested in making sure that the relevant policies would be revised and applied in the future – not just for the travel and mileage policies, but for the other issues identified in the auditor’s report.

Kunselman also indicated that he was keen to see the audit committee take a more active, engaged role – throughout the year, not just once a year on the occasion of the auditor’s report. The committee as a group also seemed favorably inclined toward adopting a more proactive approach. The committee’s extended conversation about the relationship of the city’s part-time internal auditor indicated that while the internal auditor would still report to Crawford, the audit committee would be looped into the ongoing issues that emerged throughout the year as they arose – instead of six months after they happened. It could result in meetings of the committee at other times besides the occasion of the annual auditor’s report.

That reflects a transition from the role that the audit committee has played as recently as two years ago. The committee did not meet at all during that year, even to review the FY 2010 auditor’s report – because audit committee chair Stephen Rapundalo declined to call a meeting. Kunselman complained at the time about the lack of a committee meeting. Rapundalo was not re-elected in 2011 – when he had faced Jane Lumm, who received more votes than Rapundalo that November.

Travel versus Mileage

The note in the auditor’s formal letter, previously conveyed to the city last year, reads:

Employee Expense Reports. We reviewed various employee expense reports to ensure reimbursements were properly supported and approved. We noted in three instances, that an employee was requesting and receiving mileage reimbursement while also receiving a car allowance, which violates City policy. After further inquiry, it was determined that the City became aware of this situation during the year and has since implemented procedures to address this issue.

Travel versus Millage: Background

As The Chronicle previously reported, a request of the city made under Michigan’s Freedom of Information Act revealed that city attorney Stephen Postema made three claims for mileage reimbursement, despite having a vehicle allowance. One was for a professional meeting in Grand Rapids, while the other two were for court appearances in Cincinnati and Lansing. [.pdf of city of Ann Arbor response to initial FOIA request] [.pdf of follow-up city of Ann Arbor response with additional, corrected data on vehicle allowance amounts]

Up until his performance review in November 2012, Postema’s employment contract provided for a vehicle allowance:

Section 2.14 Car Allowance. Employee shall receive a car allowance calculated at $330/per month.

The resolution approved by the city council as the result of the city attorney’s performance review – which included a salary adjustment upward that is just slightly less than the value of the car allowance – explained the elimination of the car allowance this way:

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;

Even though the “whereas” clause seems to invite the conclusion that city administrator Steve Powers also had a vehicle allowance specified in his contract, and that it was also eliminated in the context of a regular performance evaluation, that’s not the case. Previous city administrator Roger Fraser had such an allowance, but Powers, who took over the city’s top job in the fall of 2011, never had such an allowance in his contract.

The initial discussions of the city attorney’s performance review are handled by the council’s administration committee. It currently consists of Sally Petersen (Ward 2), Margie Teall (Ward 4), Christopher Taylor (Ward 3), mayor pro tem Marcia Higgins and mayor John Hieftje. At the time of Postema’s performance review, former Ward 2 councilmember Tony Derezinski served instead of Petersen. Higgins did not respond to an emailed query from The Chronicle asking if she was aware of the issue with Postema’s mileage claims at the time of Postema’s performance review. Hieftje responded to that same query saying he was not aware Postema had made mileage claims.

In his response, Hieftje also insisted that the current review of travel and mileage policies was not caused by Postema’s mileage reimbursements:

I should note that going forward there will be a clarification of city policy regarding mileage reimbursement. However, this was not triggered by Stephen’s being reimbursed but as an overall response to something that came up as a minor issue in a “clean” audit.

In an interview with The Chronicle on Jan. 11, 2013, Hieftje explained his written assertion in part with the idea that Postema does not report to the city administrator but rather to the city council. [Under the city charter, the city council hires and evaluates two positions – the city attorney and the city administrator.] From that, Hieftje concluded that whatever policy revisions might be undertaken now by city administrator Steve Powers would not affect Postema’s reimbursements, because Postema’s reimbursements would be governed by his employment contract.

However, Postema’s employment contract explicitly states that reimbursement is to be made under standard city procedures:

Section 2.2 Business Expenses. Employee is authorized to incur such reasonable budgeted travel, cell phone expenses, entertainment and other professional expenses as are necessary in the performance of his duties. The City will reimburse Employee for such expenses in accordance with standard City procedures.

Hieftje seemed unaware during the Jan. 11 interview that the city’s response to The Chronicle’s record request had linked Postema’s mileage claims to the auditor’s note. At the conclusion of the interview, after being shown the records, Hieftje conceded the connection between Postema’s mileage claims and the policy review.

Travel versus Mileage: Significance of the Note

Tom Crawford, the city’s chief financial officer, led off the Jan. 24 meeting of the audit committee by establishing some context for the auditor’s note. He referred committee members to a written response he’d provided them. [.pdf of Crawford's response to auditor's letter]

Crawford reviewed how the basic result of the audit, communicated in the SAS (Statement of Auditing Standards) No. 114 letter, had been essentially a clean audit with two deficiencies. This year the letter had included notes on other matters, of a type that Crawford said he wouldn’t normally expect to see: “I don’t usually look for these comments down here.” The letter typically includes things like a material weakness or other deficiencies, but this year the letter included some other matters, that in Crawford’s experience are usually mentioned orally to staff – the CFO or the city administrator.

Crawford’s portrayal of the notes in the letter is consistent with that of auditor Mark Kettner’s remarks about them – when he presented the report to two audit committee members on Dec. 20, 2012. From The Chronicle’s report:

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.

On Jan. 24, Crawford indicated that typically, the staff just deals with the orally-communicated notes in this category. But because this year the notes were in writing, Crawford said, he wanted to respond in writing. He indicated that a response would be sent to the auditor as well. He wanted the committee to understand that “We take this stuff seriously.”

Crawford welcomed any comments the audit committee members had on the written response. He continued by drawing a distinction between “council policies” and “administrative policies.” Crawford was recommending that the policies be reviewed and he indicated that the revisions to the policies were included in the written response that he’d provided to the committee. He invited questions from the audit committee.

Travel versus Mileage: Definitions

Sumi Kailasapathy (Ward 1) led off questions by focusing attention on the second page of Crawford’s written response. It portrays a lack of consensus among city finance staff about the appropriateness of the mileage claims. But Kailasapathy focused on Crawford’s contention that the city’s written policies don’t provide clear guidance. From Crawford’s written response [emphasis added]:

In evaluating this issue, staff first looks to legal contracts as a guiding document and secondly to administrative policies for guidance. The above employee with 3 trips had an employment agreement (see attached) with the city at the time of travel that included two separate provisions for an auto allowance and for reimbursement of travel expenditures. A review of the travel & mileage policy (see attached APP #504 & #505) revealed they do not provide clear guidance on how to handle this situation. Some finance staff reasonably believed a mileage reimbursement appeared like the same expense was being reimbursed for twice and raised the issue to the CFO. Meanwhile some supervisors and administrators operated with the belief that the vehicle allowance was for ordinary and customary travel within the city/county but not for less frequent out-of-town trips necessary for travel, training, etc.

Kailasapathy indicated that she’d reviewed the administrative policy on travel and on employee mileage reimbursement. She quoted from Policy 505:

The City of Ann Arbor shall pay mileage reimbursement for authorized business travel when an employee uses their personal vehicle.

Kailasapathy said that for her, that sentence is unambiguous: If you use your personal car, then you will be provided reimbursement and that is called “mileage reimbursement.” But in Crawford’s description of the issue, he’d used “travel” repeatedly, Kailasapathy pointed out. That, she felt, was incorrect, because you could come to different conclusions depending on whether it’s considered mileage reimbursement or travel.

By way of additional background on the issue of travel versus mileage, in response to an initial request made by The Chronicle under the FOIA, the city of Ann Arbor did not produce any official “City of Ann Arbor Travel Expense Report” forms for the three mileage claims made by Postema. For other claims, however, such forms were produced. Because the wording of the request had been somewhat vague, The Chronicle made an additional request asking specifically for those forms, if they existed.

After additional back-and-forth with the city in connection with that request, The Chronicle was able to establish that “City of Ann Arbor Travel Expense Report” forms were not submitted for Postema’s claims. Instead, an electronic submission was used, consistent with reimbursement for mileage by city employees who use their personal vehicle for city business. In terms of the distinction Kailasapathy was drawing, the claims appear to have been considered mileage reimbursements, as a opposed to travel expenses. [.pdf of records associated with Postema's mileage claims].

Kailasapathy then appealed to the city’s travel policy, which defines travel in a way that she indicated is consistent with IRS rules, which includes the need to stay overnight:

2.2 General Travel Limitations – Subject to budget limitations, all employees are permitted to attend, subject to authorization by the service area administrator or his/her designee, City work-related overnight conferences, seminars, training, certification programs, continuing education, or other similar work-related educational or professional events. The number of employees from a service area allowed to attend the same travel function will be at the service area administrator’s discretion. Overnight travel will be used only for opportunities that cannot be achieved locally.

Kailasapathy said it’s important to be clear about what it means for someone to be using their personal vehicle. She contended that if an employee has a car allowance, then it is for operating that car – and to her that’s clear. She told Crawford she was disappointed that he was saying the city policies don’t provide clear guidance. She felt the guidance is clear – and that travel and mileage reimbursements are very clearly defined. If you have a car allowance and you’re asking for a car allowance, then you’re asking for the reimbursement for “one and the same thing.” Kailasapathy ventured that a car allowance is not “to park the car in front of your house to look pretty.”

Travel versus Mileage: Intent of a Vehicle Allowance

Earlier in the back-and-forth, Crawford had asked if Kailasapathy was drawing a conclusion about any employee who had a vehicle allowance – and whether “the vehicle they acquire” is still their personal vehicle. Crawford seemed to indicate a view that, to him, it’s reasonable to interpret the intended use of a vehicle allowance to be exclusively the acquisition of a vehicle, not including the operation of that vehicle for businesses purposes.

Responding to Kailasapathy’s “to look pretty” comment, Crawford again reiterated his position that a vehicle allowance was intended for acquisition of a vehicle, saying that if an employee uses their vehicle allowance to acquire a vehicle, that doesn’t make it a city vehicle. Because it’s still their personal vehicle, Crawford contended, the employee could be reimbursed for mileage. He then allowed that it’s at least not clear if an employee with a vehicle allowance could be reimbursed for mileage – because the mileage policy doesn’t mention a vehicle allowance.

Kailasapathy compared the situation to receiving a house as part of your compensation but still claiming rent as an expense. Crawford said he thought Kailasapathy was assuming that the purpose of the vehicle allowance is for the acquisition and use of that vehicle. Crawford asked her what she felt the point of the car allowance was. “Using your personal car to do business,” she replied, giving examples like going to court to defend the city in a lawsuit. Crawford responded by saying, “That’s interesting … that’s not written anywhere what the allowance is for.”

At that point Stephen Kunselman (Ward 3) said, “It’s an outright perk, basically – right? Monetary benefit, car allowance, no strings attached.” Margie Teall (Ward 4) seemed to chafe at Kunselman’s characterization of the car allowance as a perk, saying, “It’s a ‘perk’ if you want to call it that …” Crawford indicated that the vehicle allowance has been used in different ways by different city employees. He was trying to point out that Kailasapathy’s assumption – that the vehicle allowance was meant to cover the operation of a personal vehicle when it’s used for city business – is not recorded anywhere in a written city policy.

Crawford stated that the mileage reimbursement that Postema had been seeking was subject to his contract, which has two clauses that mention travel. At that point, Kailasapathy appeared ready to argue about whether the clauses in Postema’s contract on travel would, in fact, justify the mileage reimbursement. However, Teall indicated no enthusiasm for that kind of detailed debate: “You know, I don’t want get into a contract issue. … I don’t think we can have that discussion here.” Kunselman also indicated he didn’t want to entertain that discussion.

Kunselman came back to the auditor’s note that indicated there had been a “violation” of city policy. It wasn’t the role of the audit committee to interpret the city policy, but rather to have management address any unclarities. Kunselman said it sounded like there were a lot of changes being implemented with respect to car allowances. By way of additional background, in an email to The Chronicle published previously, city administrator Steve Powers wrote:

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.

Kunselman indicated he felt this was the right direction to go, but didn’t want to spend a lot of time looking back and getting bogged down.

Travel versus Mileage: Revision of the Letter

Kunselman was, however, interested in having the wording of the auditor’s letter revised, because Kunselman felt that the statement that there had been a “violation” of city policy was inaccurate. Based on the material provided in Crawford’s response to the auditor’s comment, auditor Mark Kettner had already agreed to revise the phrase that referred to a policy violation – as a result of a phone conversation he’d had with Crawford and Postema.

In Kettner’s written response to Crawford and Postema, he agrees that the phrase “violates city policy” is incorrect and acknowledges that he was not given Postema’s employment contract for review in reaching his conclusion that the mileage reimbursement was not appropriate. Kettner explained his conclusion this way:

As I also stated in our conversations, from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance. This conclusion is in the absence of knowledge of an agreement that would reasonably identify that payment of both mileage reimbursement and car allowance is acceptable and appropriate.

The question the audit committee was disinclined to settle explicitly is whether Postema’s contract is an employment agreement that identifies payment of mileage reimbursement and car allowance as acceptable.

At the Jan. 24 meeting, Kettner indicated that he’d be willing to change the phrase “which violates city policy.” After “all the extra stuff that has occurred,” Kettner said he concluded that “there is not a policy per se that says ‘You shall not get a mileage reimbursement if you have a car allowance.’” But he would keep the note in the letter – because even though it involves a small dollar amount, it’s an issue involving policies, procedures and contracts, and he felt the city needs to address it and figure out what to do about it. That’s the whole purpose of it, he said.

In the context of the overall city audit, Kettner said, the mileage issue was really a tiny issue. Crawford indicated he felt that the city’s approach to identifying problems seemed to be working. Crawford indicated that there were differing views by city staff about how the policies should be interpreted, and the fact that he and Kailasapathy had different views on interpretation supported the idea that the policies weren’t completely clear. He said the issue had come to light during the audit – in a minor way – and whenever those issues come to light, the staff re-visits them. Teall added that the review of the policy had already started.

Travel versus Mileage: Recommendations

Recommendations by Crawford responding to the audit note on travel and mileage reimbursements include:

• Clarify and revise the city’s travel policy to reflect expectations for reimbursement when an employee receives a vehicle allowance.
• Clarify and revise the city’s travel policy to require travel reimbursement requests for the city administrator and city attorney to be approved by the Council Administration Committee Chairperson.
• Establish a vehicle allowance policy to clarify expectations for what a vehicle reimbursement is intended to be used for.
• Communicate these policy updates with staff and have Service Area Administrators responsible for ensuring consistent treatment across the organization.

Responding to a query from Kailasapathy, Crawford indicated he did not necessarily think that travel reimbursements for mileage should be tied in the future more explicitly to an overnight requirement – because it could create a perverse incentive for employees to stay overnight, thus incurring even greater expense to the city. Kailasapathy countered that whether the travel expense was appropriate or not was already subject to a supervisor’s review. In the case of the city administrator and the city attorney, Crawford pointed out, the recommendation is that their travel requests in the future be subject to review by the council’s administration committee.

Role of the Audit Committee

The travel and mileage issue took about 25 minutes of the Jan 24 audit committee meeting, which lasted about an hour.

In the remaining time, the committee discussed some of other items in Crawford’s written response. For example, they discussed the challenge of implementing regular password changes by employees, when they must log on to several different systems – the sheer number of passwords could result in a sticky-note strategy of recording passwords, which is also not desirable.

However, the main focus of the remainder of the meeting could be summarized as dealing with the future role of the audit committee. It was prompted by Rehmann’s observation about the way the city’s internal auditor reports:

We noted through inquiries of various City employees that the Internal Auditor organizationally reports through the Chief Financial Officer. We recommend that the City review this procedure and determine if this function would be more effective if the Internal Auditor reported directly to the Audit Committee.

But the consensus of the audit committee at the Jan. 24 meeting seemed to be that the internal auditor should not report in an organizational sense to the audit committee. That is, the city council would not want to explore adding a third employee – in addition to the city attorney and the city administrator – to the two they already supervise. But committee members felt that the internal auditor should be able to communicate to the audit committee, if the internal auditor didn’t feel comfortable communicating a concern to the chief financial officer or the city administrator.

The audit committee as a group indicated a desire to be kept apprised of information that comes to light in the course of the year. For example, Crawford noted that the city has an anonymous fraud hotline, and when tips come in through the hotline, they’re investigated – but he pointed out that not many tips come in. The audit committee would be kept apprised of those tips and the outcome of the investigation.

The committee also indicated a desire to meet again, well before next fall, to review how the recommendations from this year’s audit are being implemented. Chuck Warpehoski (Ward 5) seemed to reflect a consensus, however, that the committee did not want to distract the financial services staff from their current preparations for the budget.

In the shorter term, the audit committee will be meeting again before the next regularly scheduled city council meeting on Feb. 4, 2013. No date or time for that committee meeting has been announced. Audit committee member Sally Petersen (Ward 2) was not able to attend the Jan. 24 meeting, and according to some other members of the committee, the next meeting will give Petersen an opportunity to make sure her concerns are addressed.

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