In September 2011, Baltimore’s outgoing finance director Edward Gallagher admitted that the city had overvalued various municipal assets, such as roads and bridges, requiring the restatement of the Comprehensive Annual Financial Report (CAFR) for fiscal 2010 and 2011.
(CAFR is the bible for Wall Street rating agencies. The statement is a key determinant of the city’s credit rating and, over the long haul, the viability of its capital budget.)
Gallagher portrayed the problem as a small technical glitch that would have no bearing on the city’s day-to-day operations or credit rating. The mistakes, he said, would be corrected by year’s end.
Problem was: He never said what year.
Costly to Taxpayers
Now 13 months later, the short-term direct costs of “CAFRgate” can be revealed by The Brew – $1,432,425.
This figure comprises the additional money that the Board of Estimates has paid Ernst & Young and KPMG to review, restate and (hopefully) approve the city’s new figures for the CAFR.
Reader Alert: CAFR is not to be confused with agency-specific audits, which have not been conducted for any major department for decades. CAFR is a broad-brush “balancing of the books” based on the unaudited figures presented by Finance and other city departments to the outside auditors.
It’s a cost that nobody in city government wants to talk about.
The BOE, controlled by Mayor Stephanie Rawlings-Blake, has approved the expenditures without comment. No heads have rolled from the errors, which Gallagher said was completely the fault of the city finance department.
Harry E. Black, who replaced the retiring Gallagher last January, has been the most forthcoming, if asked directly about the issue.
Asked directly yesterday after the monthly Board of Finance meeting, Black said he expected the CAFR restatements to be completed in a matter of weeks.
“I think we’re done,” Black added. “I’m being super cautious. We won’t know for sure until they tell us with a signature.”
Price of a Fire Company – or 6 Recreation Centers
To be sure, the national accounting firms have pocketed some nice change for correcting the city’s errors.
Last week, the Board of Estimates approved an additional $176,000 for KPMG, making for an overall 57% increase in the price of its original contract to review the 2011 CAFR. Ernest & Young picked up an extra $986,025 for reviewing the errant 2010 CAFR.
By way of comparison, these monies could fund the return of a full fire truck company for nearly a year. (Mayor Rawlings-Blake recently closed the city’s busiest truck company, Truck 15, because of the 2013 budget shortfall.)
Or it could keep six youth recreation centers open for fiscal 2013. (Rawlings-Blake closed four in August; another 6-10 are threatened with future closure if private groups do not step up and manage the facilities.)
The Original Sin
The Finance Department’s failure to include depreciation for certain city assets, such as resurfaced roads, rebuilt bridges and renovated buildings, constituted the first problem. This mistake overvalued the city’s assets by $223 million, or 5% of its total fixed assets.
“The finance department will take responsibility,” Gallagher vowed at the time, which subsequently meant billing the city for many more hours by the national accounting firms.
Then came the water billing fiasco.
Revealed last February by the city Department of Audits, the issue compounded questions over the city’s income stream – and the accuracy of its figures.
Black said that the city auditing department and Ernst & Young – and the Department of Public Works, which conceded that it had overbilled 38,000 customer accounts by $4.3 million in prior years – had huddling for several months to figure out a “methodology” for reconciling the billing errors.
What Will Happen When City Agencies are Audited?
City Auditor Robert L. McCarty Jr. has allocated a great deal of his department’s resources to the water bills, a cost that amounts to an indirect cost to the city and fewer audit reviews of other city programs.
The nonexistence of internal audits of city agencies was a flashpoint all summer as the City Council struggled to approve a watered-down version of a charter amendment that would require major city agencies to be audited every fourth year, beginning in 2014.
The charter amendment on agency audits is up for voter approval on the November 6 ballot.
That’s about the time Black hopes to close the books on 2010 and 2011 CAFRs and begin the review of the delayed 2012 statement.