City Bond Ratings Tied To Accounting Firm Meeting National Standards
Written by Paola Iuspa on July 5, 2001
By Paola Iuspa
Bad timing could further threaten Miami’s fiscal reputation as the contract with its accounting firm nears expiration and the city delays upgrading its financial-records system.
Problems with the city’s annual report, prepared by independent auditors and due to the governor Dec. 1, or a required conversion to a new accounting system could affect Miami’s bond ratings at the same time it is attempting to emerge from financial emergency status.
Either situation could threaten the city’s capacity to borrow money.
In 1996, with an operating budget deficit of $68 million, Miami finances were declared to be in a state of emergency by former Gov. Lawton Chiles and the state put the city’s monetary affairs in the hands of a financial oversight board.
"Members of the oversight board and members of the Miami Audit Advisory Committee told me they are concerned the city administration may change accounting firms," Commissioner Tomás Regalado told city commissioners. "They also worry the city is not moving fast enough in converting its accounting system."
In addition, a five-year contract with accountants KPMG Consulting is about to end in September. Last month, the city discussed looking for a new firm. But, according to Maria Camila Leiva, a member of the financial oversight board, a new firm would need four to six months to understand how city finances work and its personnel may not be able to produce the 2000-01 annual report on time.
The city’s fiscal year is Oct. 1-Sept. 30 and 2001 is scheduled to be the final year city officials would need to prove to the state that Miami has operated in the black for five consecutive years.
But if the annual report fails to hit Gov. Jeb Bush’s desk by Dec. 1, the city could end up remaining in an official fiscal emergency, Ms. Leiva said.
Because of this, her board recommends extending the KPMG contract for a year until the city "is back on its feet," she said.
"If the city remains in the state of emergency," Ms. Leiva said, "it will not be able to issue bonds to improve the infrastructure or fund special projects."
Miami Mayor Joe Carollo is proposing $320 million in bonds, including $150 million to help pay for construction of a baseball stadium for the Florida Marlins. The remaining, he said, would be used to upgrade city infrastructure.
Consenting with the board’s recommendation, City Manager Carlos Gimenez said he would introduce in July a resolution asking commissioners to prolong the KPMG contract.
"City commissioners will have to make the decision," he said. "We can maintain" KPMG "and hire another to stay for a year, as in a transition" mode.
Mr. Regalado also said he was concerned about Miami’s finance department and its apparent slow pace in converting the accounting system to a Governmental Accounting Standards Board standard, or GASB-34. The deadline for switching to this system is Sept. 30, 2002.
That program, mandatory for state and local governments in the US, calls for adding to the annual financial report information on capital assets, infrastructure, depreciation of fixed assets and analyses of different funds, said Dean Mead, project manager for the nonprofit Governmental Accounting Standards Board. Other cities, such as Orlando and Davie, began implementing the system a year ago, he said.
"The idea is for a city to have the standards in place by the first day of the coming fiscal year," Mr. Mead said.
Robert Nachlinger, assistant city manager overseeing the finance department, assured city commissioners late last month that "everything is fine." But Mr. Regalado said he is finding it hard to trust the finance administrators.
"I am afraid they keep on telling us everything is fine, as Bob Nachlinger told the Homestead City Council before he came to work for the city," he said. Mr. Nachlinger left his position as Homestead finance director in June 2000. "And a year later, Homestead is on the verge of bankruptcy."
Monica Fernandez, chairman of Miami’s Audit Advisory Committee, said her group in April expressed concern the city had not started converting to the new accounting system. She said they wrote a recommendation asking city administrators to hire accountants Ernst & Young to help with computer conversion.
"We thought Ernst & Young could give city employees a readiness assessment," she said. "They could map out what the city would need to do to implement the new system. It is a process they need to follow."
Mr. Nachlinger said the city hired Ernst & Young in May. But city employees said the firm only started working in late June.
"As far as I know, they started working last week," said Victor Igwe, director of the city’s internal auditing department. "It will take Ernst & Young two weeks to do a readiness assessment. They will look at current statements, funds and the resources the city has to implement the program. Then, Ernst & Young will give the city a checklist with things it need to follow to convert the current system."
Mr. Igwe said it would make sense to have the program ready by the beginning of the fiscal year, which starts Oct. 1.
"Three months in business time is nothing," Commissioner Johnny Winton told the commission, "but in government time, it is a decade."
Mr. Mead said it could take "a city of the size of Miami" about four months to get the system in place.
"In order to have the annual report ready on time, government needs to have the system operating in the beginning of the fiscal year," he said. "That way it will be able to start collecting information throughout the entire year."
While no financial penalty is levied on cities that fail to prepare the report under GASB-34 standards, Mr. Mead said, missing the transition deadline would be reflected in the auditor’s opinion at the end of the year. And the bond rating of a city is directly related to the report prepared by an independent auditor at the end of any fiscal year, Mr. Igwe said.
"An adverse opinion from the auditor could affect the city’s ability to borrow money," he said.
Mr. Nachlinger said late last month the city would have the program in place "this summer."
If that’s the case, Mr. Mead said, city administrators would need to start feeding the program information on major capital assets such as bridges, roads, sidewalks and city-owned properties, including depreciation and estimated future maintenance costs.
"Following the GASB-34 requirements demand a lot of work," Mr. Mead said. "But it will make city officials more accountable to taxpayers. The reports from now on will be similar to those the private sector prepares for their investors."
He said many US cities hire teams or state agencies to work on issues such as listing infrastructure assets, estimating assets of historical value, establishing assets’ life expectancy and future repair costs.
Mr. Nachlinger said the city hired three independent companies to start compiling that information six months ago.
Commissioner Arthur Teele told Mr. Nachlinger to prepare a report for the city’s July 10 meeting to explain where Miami stands in the conversion process.