LIHU‘E — County General Funds revenues have dropped four years in a row, while expenditures keep climbing, according to an independent audit presented to the Kaua‘i County Council Tuesday morning. But that’s only part of the problem; the Comprehensive Annual
LIHU‘E — County General Funds revenues have dropped four years in a row, while expenditures keep climbing, according to an independent audit presented to the Kaua‘i County Council Tuesday morning.
But that’s only part of the problem; the Comprehensive Annual Financial Report for the county’s Fiscal Year 2012, prepared by N&K CPAs, found many irregularities with the administration’s financial handling. The 2012 fiscal year ended June 30.
“I’m just going to be frank and honest; this is probably the worst audit (findings) I have seen while serving on this council,” said Councilman Mel Rapozo, who has served on council for eight years.
N&K senior auditor Blake Isobe said the audit found several irregularities pertaining to financial statements and single audits, including an $6.8 million discrepancy in the county General Fund, over- and under-payment of vacation and sick leave, procurement issues, mishandling of federal funding requirements and procedural faults in a purchasing-card program that is about to expand.
In FY 2012, the county took $80.7 million in real property tax revenues, a $3.25 million reduction from the previous year. The county also receive $1.4 million less in Transient Accommodation Tax revenues compared to FY 2011. Some additional revenues softened the loss of revenues in the General Fund to $2.72 million.
Meanwhile, payroll costs increased $3 million and General Fund transfers to various departments totaled $16.9 million. Employee benefits, which in FY 2009 were at $22.1 million, increased to $27.8 million in FY 2012.
For the past 19 years, the county has been awarded a Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada. The certificate is good for one year.
County Finance Director Wally Rezentes Jr. wrote in a summary report to the council and to Mayor Bernard Carvalho Jr. that he believes the latest CAFR continues to meet certificate requirements, and will submit it to GFOA to determine eligibility for another year.
N&K principal partner Ron Shiigi said the county is doing OK regarding a potential GFOA re-certification, despite the errors. The problems are more like a “red flag,” he said, but if the administration can resolve them, it shouldn’t affect the county negatively. He was more concerned with meeting requirements for federal funding.
Federal grants
The county has failed in ensuring that federally-funded employees complete a semi-annual certification, according to Isobe. There is also a problem with accountability and transparency reporting for the American Recovery and Reinvestment Act, which happened across the state, he said.
Other problems with federal funding involved control over matching funds and reconciling federal expenditures, Isobe said. Such problems included being unable to reconcile amounts documented in federal reports; failing to include in report expenditures the county’s share; and meeting a cost-threshold of $10,000.
And as far as procurement processes, the auditors revealed irregularities with county’s Anti-Drug Program entering into an independent contractor agreement with an individual and her company.
The auditors found that prior to the execution of the contractor, there was no determination of availability of funds, as required by the Kaua‘i County Charter, and the tax clearance and certificate of good standing was not obtained. The county’s Purchasing Division determined the error was due to unintended omission and provided guidance and information to the program coordinator.
Also, it was unclear if the contracted services were exempted from procurement process — the contract was approximately worth $40,000. Use of federal funding requires compliance with procurement procedures, and although the program claimed exemption under HRS Chapter 76-77, this is not a qualified exemption under HRS Section 103D-102, according to the auditors.
The auditors recommended that the county review its process for independent contractors to ensure compliance.
RPT revenues, employee benefits
A property tax paid in FY 2011 and appealed in FY 2012 caused a discrepancy of millions of dollars in the General Fund.
Isobe said that in FY 2011, the landowner of two large parcels made a late payment of $3.6 million in real property taxes, to avoid accruing penalties. Those monies were transferred from the RPT Trust Fund into the county General Fund for FY 2012, when the landowner appealed the tax rates, it caused the discrepancy, according to Isobe.
Adding to that, there were $3.2 million in assets from the Housing Agency that should not have been counted as liquid funds, Isobe said.
“Our recommendation is that the account should be reconciled monthly,” Isobe said.
What seemed to bother council members the most were the irregularities in the manual recording of employee benefits, which was not standard across the board in all personnel departments from the various county agencies.
Council Chair Jay Furfaro said he was “shocked” to find out that all counties in Hawai‘i use a manual system to reconcile payroll.
Rapozo said that in 2009 the county allocated $395,000 for the administration to develop a payroll personnel system, and the money remains unused in the current budget.
Councilwoman JoAnn Yukimura said that it’s “insane in and on itself” that the county still does manual reconciliation and does not have a standard processing for all departments.
Isobe wasn’t sure of how much the county lost in over-paid vacation and sick leave. But the loss goes both ways, he said.
“Either way it’s wrong,” Yukimura said. “A loss to the county is terrible; a loss to the employees is terrible.”
She said it’s “mind boggling” that such practice is statewide.
“It’s not a matter of money because there is money in the budget; it’s a matter of the administration moving on this,” Yukimura said.
Pre-approval of pCard
Another hot topic was the county’s pCard, a program rolled out in February that allows departments to handle purchases of up to $1,500. However, the program, which is about to expand, does not change county procurement process, Isobe said.
The county’s policy is that any purchase made by pCard must be pre-approved. For purchases of more than $500, documentation of quotes is required.
“Documenting of pre-approval is not the best,” said Isobe, adding that forms were inconsistent and did not allow for documenting the approval, even though it may have been given verbally in some of the instances.
He said the procurement process, including three phone calls, has been documented; the problem was with the approval.
Councilman Ross Kagawa said he used to work for the state Department of Education, and he does not agree with many of its strict rules, especially for smaller items.
“But it’s something we have to comply with,” he said of the rules.
The auditors recommended review policies and procedures and consider include mandatory training for personnel handling transactions.
Visit www.kauai.gov and click on CAFR 2012 for the full report.
