Auditor General preliminary report criticizes nonprofits associated with Reichert House, GRU’s debt, and calculation of the General Fund Transfer

BY JENNIFER CABRERA

Sherrill Norman, the Auditor General of the State of Florida, has issued 18 “preliminary and tentative” audit findings and recommendations that may be included in a report to be prepared on the Auditor General’s operational audit of the City of Gainesville. The document states it is “not an audit report.”

The full document can be read here.

For Gainesville Regional Utilities (GRU), the auditor found that debt levels are “significantly higher than comparable municipal utilities” and that the City has not established a “reasonable and consistent methodology” for determining the amount of the annual General Fund Transfer (GFT) from GRU to the City’s General Fund. The audit also found that the City overcharged indirect costs to GRU because the City’s indirect cost allocation worksheet contained an “input error” that would have overcharged GRU by $1 million in 2019-20; GRU was actually overcharged $700k in 2017-18 and $600k in 2018-19.

The audit found that these findings “represent significant challenges to GRU’s financial sustainability.”

For the Reichert House Youth Academy (RHYA), the audit found that the City “did not effectively oversee or control RHYA Program operations.” The audit also found that the City’s use of a nonprofit entity, Reichert House, Inc., “resulted in less accountability and transparency of RHYA Program operations” and that the City did not “effectively oversee Reichert House, Inc. operations.” The audit found that the City’s use of other nonprofit organizations to solicit, receive, and disburse grantor and donor funds “resulted in diminished transparency and accountability for those resources.” Specifically, regarding a $20,000 grant from the National Police Athletic/Activities Leagues, the audit says, “City records did not demonstrate that… grant proceeds were expended for RHYA Program purposes.”

For the City’s Administration and Management, the audit found that “The lack of City personnel’s knowledge and capability for compiling financial statements that comply with generally accepted accounting principles… resulted in additional costs.” There were other specific findings about deficiencies in City financial record-keeping, detailed below. 

For Payroll and Personnel Administration, the audit found that the City needs enhanced policies and procedures for performing background checks of applicants for employment and that contrary to City policy, the City does not always conduct annual employee performance evaluations, “and when evaluations are conducted, did not always promptly communicate the results of the evaluations to the employees.”

For “Use of Public Resources, Purchasing Cards, and Travel,” the audit found that GRU did not “use a competitive process to select certain professionals who assisted in the bond issuance process,” that controls over City-issued purchasing cards need improvement, and that GRU needs to improve its travel policies and procedures.

GRU

The audit compared GRU’s debt to four other utilities: City of Lakeland Utilities, City of Tallahassee Utilities, Jacksonville Electrical Authority (JEA), and Orlando Utilities Commission (OUC); these were selected because they were the utilities selected by a consultant hired by the City of Gainesville to provide alternate methods to calculate the General Fund Transfer.

As the audit points out, “Higher debt-to-net-position ratios indicate the degree to which an organization is financing its operations through debt rather than with available assets. As shown in Table 2, GRU’s long-term debt-to-net-position ratio of 4.3 is approximately 5 times higher than the .94 average of its 4 peers.”

The report also compared GRU’s rates as of August 2021 to the other utilities. As this article points out, GRU’s residential rates have increased over 20% since that date.

The auditor recommends that GRU management and the city commission “jointly establish a long-term debt management plan.” 

The preliminary report also goes through a detailed criticism of the City’s contract with a consultant hired to develop a formula for the General Fund Transfer, including a requirement for a minimum transfer of $38.3 million that was apparently made verbally, a draft presentation that “did not appear to comply with the contract’s scope of work,” and the commission’s resolution to decrease the GFT by $2 million a year for the next 7 years instead of setting a formula based on the long-term ability of GRU to pay the transfer.

Regarding the overcharged indirect costs, the auditor reports: “In October 2021 we again inquired whether the indirect costs overcharges… would be refunded to GRU or credited against future indirect cost assessments; however, City personnel did not provide a response.”

Reichert House

The auditors found that while the City has web pages titled “Open Budget” and “Open Checkbook” that are intended to allow users to view City expenditures, “we noted discrepancies… for the RHYA Program, as well as discrepancies between budget documents provided to us and the amounts on the Web pages.”

The report further states, “In response to our inquiries, City personnel indicated that it was not practical for City personnel to timely update actual expenditure amounts reported on the City Web site.”

The section regarding the nonprofit Reichert House, Inc. notes that it was founded in February 2006, and the original registered agent was the Police Chief. It initially had six board members, but there were only four board members in 2018, and only one board member remained as of July 2020. In April 2021, the City notified the Auditor General’s office of the last board member’s resignation, and the nonprofit filed for voluntary dissolution on August 29, 2021. 

The report found that the City did not have a written contract with Reichert House, Inc., and the nonprofit did not have appropriate policies and procedures for financial controls. In fact, reports on Reichert House, Inc. financial transactions were made available to City personnel through the Community Foundation of North Central Florida (CFNCF) web site, but those reports were not made available to the city commission or to the general public. Requests from the Auditor General for Reichert House, Inc. financial statements were not fulfilled.  City personnel were also unable to provide copies of Form 990s filed with the IRS for the 2018-19 and 2019-20 fiscal years. 

In addition, auditors asked if any residual assets of Reichert House, Inc. existed when the nonprofit filed for dissolution, and they were told that all Reichert House, Inc. assets “belong to CFNCF and that CFNCF representatives stated that they are willing to ‘move in whatever direction is desired for the funds to support Reichert House.’”

The report also found that Reichert House, Inc. did not comply with Florida’s Sunshine Laws.

Other nonprofits, such as CFNCF, Palm Breeze Youth Services, and the National Police Athletic/Activities Leagues, Inc. contributed to the support of the RHYA program, and the audit found that the City’s relationships with these organizations lacked transparency and accountability. Attempted audits of RHYA transactions with each nonprofit found discrepancies in the amounts deposited and paid out for RHYA funds.

The report recommends that all RHYA funds be placed in City bank accounts and that the City “Obtain explanations and supporting records for all unexplained RHYA Program transactions.”

Administration and Management

The report states, “Our examination of City records and inquiries with City personnel disclosed that City personnel did not have the knowledge and capability required to prepare GAAP (generally accepted accounting principles) financial statements.” As a result, the City had to pay an independent CPA over $200,000 over 3 years. The City explained that these deficiencies resulted from staff turnover. The report continues: “Notwithstanding, the City is responsible for preparing annual financial statements in accordance with GAAP, and the City’s staffing issues resulted in the City incurring significant additional financial audit costs.”

The auditor found that budget-to-actual reports were not provided to the city commission between June 30, 2018, and the beginning of the 2020-21 fiscal year.

Regarding Ironwood Golf Course, the audit found that it had operated at a significant loss for a number of years, and the City has now stopped discretely presenting Ironwood’s operations in the City’s financial audit statements, making Ironwood’s financial position less transparent. The report recommends that the City provide periodic financial reports of Ironwood’s operations to the city commission for discussion in a public meeting.

Regarding the Gainesville Community Reinvestment Area (GCRA), the report found that “By dissolving the Gainesville CRA and creating the GCRA, the City effectively removed its redevelopment activities from State law accountability and transparency requirements.” The report recommends several changes, including a separate annual audit of the GCRA, ordinances prescribing specific purposes for which GCRA trust fund moneys may be expended, and some performance reporting requirements.

Payroll and Personnel Administration

The report finds that the City’s policies on background screenings on applicants prior to employment are not specific enough, and this “increases the risk that individuals hired for positions of special trust and responsibility may not be suitable for employment in such a position.”

One employee, for example, was found to have convictions for two second-degree misdemeanors and one first-degree misdemeanor. The auditor asked for documentation showing that these results were considered by the City personnel who review screening results, but “City personnel indicated that notes evidencing such consideration were not prepared because the applicant was deemed acceptable.”

The audit also recommends periodic screenings of “employees in executive-level positions, in positions of trust, and who work with vulnerable populations.”

An audit of employee evaluations found that of the 30 sample evaluations provided, the evaluations for six employees were not promptly communicated to the employee. The evaluations were communicated to the employees an average of 307 days late. These were explained by City personnel as being caused by a change in supervisors during the rating period, but City policies indicate that annual evaluations are required at the end of each fiscal year.

Expenditures – Use of Public Resources, Purchasing Cards, and Travel

Regarding the hiring of professionals by GRU to assist with debt issuance, the audit states that “Insofar as GRU has significantly higher debt leverage than its peers… it is especially important for the City to contract with the most qualified professionals.” The audit found that between February 2017 and February 2020, the City did not go through a competitive selection process in selecting these professionals, including the municipal advisor, who was paid $505,925, and the bond counsel, who was paid $798,004.

Regarding purchasing cards (P-cards), the audit found that 98 City general government P-cards and 157 GRU P-cards had “excessive credit limits, ranging from $2,000 to $35,000.” The audit found that the City and GRU did not review the use and the credit limits of these cards because no policy exists to require those reviews.

A sample of P-cards for separated City employees were deactivated 17 to 182 days, or an average of 65 days, after the employees’ separation dates. Three GRU P-cards were deactivated from 24 to 32 days after the employees’ separation dates. No charges were found subsequent to the cardholders’ separation, but the audit notes that prompt cancellation of P-cards reduces the risk that unauthorized charges will occur.

Regarding GRU travel expenditures, the audit found that travel vouchers for 23 GRU expenditures were not signed by travelers “to certify that the expenditures incurred were necessary in the performance of official GRU duties.” GRU indicated that their procedures do not require travelers to sign travel vouchers, but the audit notes that State law requires the signed statement.