Measures Are Response to
Audit Management Report
By KERIN MAGILL
SC Online Content Editor
Fenwick Island Town Council outlined new financial policies designed to ensure that the financial blunders that occurred during the past four years do not re-occur, at its meeting on Friday, March 7, 2003.
Council members said during the meeting that they have installed a new computer system. They also voted to hire an outside firm to handle the management of the town's finances. A budget workshop held earlier on March 7 won praise from residents who called it an important step toward renewing the public's trust in its government.
Despite those measures, however, residents at the meeting also expressed doubts as to the council's sincerity in its efforts to move forward in the wake of revelations of financial mismanagement, including failure to have the town's books audited, failure to reconcile town checking accounts, and failure to file state employee withholding taxes over a four-year period.
Council member Peter Frederick reviewed the steps, recommended by the town's auditor, Sombar & Co., that the council has taken or plans to take to ensure that the mistakes of the past four years do not happen again.
The hiring of Business Systems Consultants to handle the town's financial management was one such step. Frederick said hiring BSC and two part-time office employees would cost the town less than the $50,000 the town had been paying former Town Finance Administrator June Truitt, who was fired in January.
At the March 7 meeting, the council distributed its own version of the management letters written following the audits of the town's books from 1999 to 2002. The actual management letters, as submitted by Sombar, will be made available to the public, council members said.
The town's response to the report includes 16 points made by Sombar & Co., whose president, Thomas Sombar, was at the March 7 meeting. Fifteen of those points included recommended actions by the council, some of which have been implemented, council members said. They include:
- New Financial Software, Computer Upgrades -- The town will install the Mind Your Own Business software program, create an in-house computer network, and expand the memory on the town's computers so more software can be installed. Frederick said the old software was "antiquated, inefficient, and basically not very good," and that Truitt "was not comfortable with it. We had a problem. We had a very, very big problem," Frederick said.
- Cash Reconciliation -- Sombar said the audit revealed that cash accounts were not routinely reconciled. He recommended that all cash accounts be reconciled on a monthly basis to assure all checks and deposits are recorded. Council said all of its accounts have been entered into the MYOB software, which performs account reconciliation and print a reconciliation report.
- Blank Checks -- Sombar said the audit revealed that checks were being endorsed before they were needed to pay expenditures. He recommended that in the future, blank checks should never be endorsed. He said the payee and amount should be recorded on the check before signing. Council said all checks will now be printed with the check writing facility of MYOB and that the individual who prepares the check will not have check signing authority.
- Invoice Authorization -- Sombar said that during the audit it became evident that invoices were not approved prior to payment. He recommended that the person approving the invoices not be the same person writing the checks. Under the new system, a "financial assistant" -- one of the part-time positions approved by the council -- will attach incoming invoices to purchase orders, which will be approved by the town administrator, department head, or Council Commissioner.
- Withholding Taxes -- To avoid a similar situation to the town's failure to submit or pay state withholding taxes from early 1998 to 2002, the town will use the MYOB software's payroll function to prepare the town's weekly payroll. The software automatically writes a check for the amounts withheld from the payroll checks. The town has also applied to the Delaware Division of Revenue for electronic processing of payments.
- Annual Audits -- Council will institute a system adopted in August 2002 in which four people are responsible for assuring that audits are begun no later than 60 days after the end of the fiscal year. Those four people are the council president, the town treasurer, the commissioner of administration (a position created in August), and the town administrator. The town's version of Sombar's report "recommends" that "annual audits be conducted as close to fiscal year end as possible" and that work on each audit "should normally begin" no later than 60 days after the fiscal year-end. The town's charter requires that annual audits be conducted.
- Telephone Transfers -- The same four people responsible for the audits will also be the only ones authorized to make telephone transfers of town funds; the town administrator will make the transfers after written authorization from one of the other three. Sombar said the audit revealed that proper procedure was not followed for telephone transfers. He said when telephone transfers are necessary, a withdrawal slip still needs to be signed by two authorized signers, the same signers as authorized to sign checks from that account.
- Miscellaneous Expenses -- Less use of "miscellaneous" accounts in the town budget by requiring each department to create new categories for "historically repetitive and predictable expenses." Any expenses over $200 that do not fit into a previously established cost category or sub-category will be placed into a newly established sub-category.
- General Ledger Proofs -- Monthly proofs of the general ledger should be made to rectify variances among debits and credits. Council said the contract financial specialist will provide monthly reports that will be produced to "prove the general ledger".
- Insurance Liability Accounts -- Sombar recommended that employee insurance withholdings be evaluated on a monthly basis to identify increases or decreases in premiums. Council members said the town treasurer, town administrator, and finance specialist will discuss the implementation of this recommendation with the town auditor.
- Realty Transfer Tax -- Sombar claimed in his management report that Sussex County began assessing a Realty Transfer Tax on property beginning in Sept. 1999, and that money from such taxes was sent directly from the Recorder of Deeds to Baltimore Trust Company for deposit into an account titled "1 1/2% Realty Transfer Tax". Sombar said that account had $291,141 in it as of Jan. 31, 2003, and that no money had been taken from it since the state authorized municipalities to institute a real estate transfer tax of up to 1 1/2 percent. Sombar recommended that the town open two accounts for its transfer tax -- a 1% Realty Transfer Tax account and a 1/2% Realty Transfer Tax account. The town said it has applied to the Delaware Local Government Investment Pool (DELGIP) to establish a new 1/2% Realty Transfer Tax fund at Wilmington Trust by the end of March and that it will re-title its 1 1/2% Realty Transfer Tax fund to a 1% Realty Transfer Tax fund to remain at Baltimore Trust. The town said tax deposits will be divided 1/3: 2/3 monthly.
- Realty Transfer Tax Withdrawals -- Sombar said it became evident during the audit that the town had made periodic transfers of funds from the 1 1/2% Realty Transfer Tax account to the General Fund checking account and/or savings account without council's prior approval, despite a July 31, 1998 directive from council that all transfers are to be approved by council. Council said it should adopt a resolution to re-emphasize that no transfer of funds over budgeted amounts out of either of the Realty Transfer Tax accounts shall be made without Council's prior approval.
- Voided Checks -- Sombar said that numerous checks had been replaced without properly voiding those checks. He said properly voiding a check means to cut off both signatures, the account number and/or write VOID on the face of the check. Council said it has instructed its staff to follow those procedures when voiding checks.
- Journal Entries -- Sombar said all journal entries should include a description as to their purpose for inclusion in the general ledger activity. Council said the journal entry function in MYOB will be used for this purpose.
- Consistency -- Sombar said the audit revealed that similar journal entries were not handled in a consistent fashion. Council said the MYOB software should correct the inconsistencies.
The final note in the report states that the town is in "a strong financial position as a result of five consecutive years of surplus operations," which the council pointed to several times in response to criticisms from residents about the handling of the town's finances.
Town treasurer Richard Griffin, for example, said he resented references by the Fenwick Island Concerned Citizens to a "financial crisis" in Fenwick Island. "There was no fiscal crisis," Griffin said. "Some of the comments and criticism were, truthfully, irresponsible," he said.
Council president Peg Baunchalk recalled that when she was first elected to the council 10 years ago, the town had a $40,000 deficit and had to borrow money in June and July to make its payroll. "We're a lot more fiscally responsible now," she said. Her comment was met with laughs from the audience.
While resident Elsie Weistling congratulated the council on its "monumental efforts" to correct past mistakes, she disagreed with Griffin. "You really were in a fiscal crisis," she said. Because there had been no audits or reconciliation of accounts, Weistling said, "you had no clue whether you were or not."
Weistling continued that she believed the council's lack of action constituted "total mismanagement of the main responsibility you have," and said, "if you all were working in business, it would be almost negligence."
Regarding the town's apparent fiscal health -- it has a surplus of about $400,000 in the bank, according to Sombar -- Weistling said it is "by the luck of God you came out smelling like roses with your reports."
When Weistling began asking Frederick questions about the town's finances, he became combative, and later apologized for being "exercised."
Frederick said although the town has paid the $98,000 in back employee withholding taxes, it still owes about $21,000 in interest. Negotiations are "ongoing" with state officials regarding the interest on the withholding, which was not paid over a four-year period. He said the town has also paid $4,752 in federal withholding taxes not paid in 2001.
Still to be paid: $7,343 in state unemployment insurance not paid during 1999 and 2000. That figure does not include interest and penalties, Frederick said. "We are clearing that mess up slowly," he said. The town hopes to convince state Rep. Gerald Hocker and state Sen. George Bunting to speak to state financial officials on the town's behalf regarding the interest payments, Frederick said.
FOIA Remediation on Hudson Hiring
Frederick expressed frustration with the stream of Freedom of Information Act (FOIA) complaints against the council, pointing out that each one costs the town about $1,000 in attorney's fees. "Fenwick Island used to be a nice, small town," he said. "There's no need to get nasty."
In one of those FOIA complaints, Major William Manning, who recently retired from the town's police force, objected to the fact that he had not been allowed to speak at a November 2002 council meeting. Manning had attempted to comment on the council's hiring of Glenn Hudson as officer in charge of the police department.
Others at the meeting were allowed to speak, including another police officer, Cpl. Michael Bruette, who recently left the Fenwick Island department to take a job with the Bethany Beach Police Department.
As a result of the state Attorney General's office's ruling on Manning's complaint, the council was required to put the issue back on its agenda and allow public comment.
Only one resident, Diane Tingle, spoke up, asking if any other candidates had been interviewed for the job. The council refused to answer her question, saying it did not fall within the scope of the required remediation.
Earlier in the meeting, Frederick said the Attorney General office's ruling stated that "there is no legal requirement that anybody has to be allowed to speak." While Deputy Attorney General W. Michael Tupman acknowledged in the Jan. 21 opinion that FOIA does not require public participation at meetings, he noted that Fenwick meeting agendas do include a time for public comment and that council had allowed comment on Hudson's hiring as OIC during the November meeting with the exception of Manning.
Therefore, Tupman concluded, "If a public body chooses to allow public participation in a meeting ... then it must treat members of the public fairly and even-handedly." He quoted a Boston ruling that said allowing one person to speak but not another "raises an equal protection claim that is closely intertwined with First Amendment interests."
Frederick also said the council had been unable to comment publicly on the chief's termination until his hearing was over, and said the council would now "go back into the mode of being open and communicative. We don't have any pending litigation anymore," he said.
When asked, Frederick said former Police Chief George Dickerson's federal lawsuit -- alleging he was fired because he blew the whistle on the council's illegal use of federal grant money -- is "still floating around," but that "we're not players anymore. Now it's up to the lawyers to do whatever they have to do."
In Other Business ...
- Council vice president Harry Haon said he had developed a "formula" for moving the town forward. It involves, Haon said, "not trying to fix the blame for the past, but trying to fix the course for the future." Resident and business owner Chris Clark had some other suggestions. "I beg the council to add recall to the town charter," he said. "I like to hope that I'd run for office again," said Clark, who served on the council for about a year after being appointed to fill the remainder of the term of Richard Mais, who had resigned. Clark said he feels giving residents the ability to recall council members they feel have not fulfilled their duties would help the town.
- Clark also pointed out that Fenwick Island is the only coastal town in Delaware without a comprehensive land use plan -- which would be its blueprint for future growth and development. Baunchalk, meanwhile, is on three subcommittees for Livable Delaware, Gov. Ruth Ann Minner's initiative to promote "smart growth."
- Other residents said they felt the council had not learned from past mistakes when it comes to communicating with the public. Carol Patterson, a resident and business owner, said she is dismayed by the continued "us and them' attitude displayed by the council. "I feel like I'm in high school," Patterson said. "We need to work together." Carol Hughes, also a resident and Patterson's business partner, urged the council to hire a town manager to handle the day-to-day affairs of the town in a statement to council. "We desperately need for our council to become entirely engrossed in policy and comprehensive planning for our town¹s future," she said, rather than micro-managing each town department. "We are one mile long and three blocks wide," Hughes said. "Does it really have to be this difficult?"
- The council introduced an ordinance calling for the replacement of street signs for streets running east and west from Ocean Highway. The new signs will designate each street with an "E" or "W" -- a move encouraged by residents in order to make it easier for emergency vehicles to find their homes. Public works supervisor Neil Hanrahan said the state Department of Transportation agreed to replace the signs -- at the town's expense -- and to maintain the new street signs as well as stop signs along Route 1. The new signs will cost the town $884.
- The council voted to seek bids for a portable sound system for the town hall. It rented a sound system for the recent termination hearings for Dickerson and other meetings, and the council decided to see if buying a system would be more cost effective.
- Public safety commissioner Edward "Buzz" Henifin introduced the town's newest police officer, Cpl. William Boyden. Boyden's initial application to the police department was the subject of considerable testimony during Dickerson's hearing, when the chief said Manning had mistakenly told Boyden there were no job openings. Henifin said one more officer is set to join the force by the end of April, when his training is complete. "That still leaves us quite short," particularly with Patrolman Robert Smull leaving the department March 14, Henifin said. He added that he hopes "to have a new chief on board by mid-May." The council held a special meeting on Monday, March 10, to discuss the procedure for hiring the new chief, as well as what attributes the council should look for in the new chief.
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