City to face audit on cost allocation to utility funds

In response to complaints from city staff and several citizens, the State Auditor’s Office will conduct a performance audit involving employee payroll costs allocated to the city’s utilities in recent years.

A letter from Chris Cortines, who is the principal auditor for the office’s local government performance audits, informed interim City Manager Brenda Bauer that he would contact the city next week to schedule an entrance conference.

Jan Jutte, director of legal affairs for the state office, said the audit would begin this fall and conclude in spring 2011.

Jutte said Bainbridge is one of eight cities – including Tacoma and Spokane – that will be involved simultaneously in performance audits focusing on either cost allocations or change orders. The audits will be conducted in accordance with the required elements of Initiative 900 (approved by voters in 2005), said Jutte.

“Our audit objective is to determine whether selected cities shared overhead costs among the general fund and the utilities in accordance with leading practices and state law,” Cortines said in his letter. “If not, why and what was the impact on the general fund, the utilities and utility ratepayers? Our goal is a product that helps your city improve its cost sharing practices...”

Jutte said the office had done some survey work involving Bainbridge and some of the other cities involved. She said there had been “a lot of discussion” in Bainbridge about cost allocations regarding the city’s utilities.

“Yes, we’ve had some feedback about it,” she said, adding that she was aware of the pending lawsuit filed against the city by the Bainbridge Ratepayers Alliance that alleges illegal cost allocation practices among other issues.

“There could be a violation of the law at any of the cities involved, where there’s an over-allocation to the level of noncompliance,” she said. “That’s one of the reasons we do these performance audits. But we’re also looking at the overall picture so the audit can help the municipalities achieve the best practices in accounting.”

One of the complaints was sent to Jutte’s office by a city staff member who was interviewed for this story and then asked to remain anonymous because he assumes he will eventually be interviewed by the state.

Referring to the city’s change in cost allocations practices, the source said:

“It started after the first round of budget cuts [late 2008]. The idea was that by shifting the employee allocations from the general fund to the utility funds, we would avoid layoffs because utilities would be paying for a bigger piece of the pie for salaries and benefits. With less coming out of the general fund we would be able to keep everyone on staff. In a way, they were also trying to protect what they had built.”

The employee said supervisors began to encourage employees “to fudge a little on how much time was spent on utility stuff.”

The city was having revenue problems at that time, the source said, “primarily with tax-supported funds, not the utility funds. Managers were trying to preserve their work forces and we [employees] all understood that this was a way to do that.”

The allocations were eventually projected at the beginning of the year, the source said, “and all we had to do was write down our hours and then the allocations would be placed by the finance department. We noticed that there was an overall increase in our utility hours, even when we weren’t doing any work for the utilities.”

The staff member said Public Works interim Director Lance Newkirk has moved away from the practice and is using work orders more now to identify allocations, but added that the Information Technology, Finance and Planning departments continue to use the recently established method.

The city’s financial difficulties also led to an interfund loan of $3 million from the water utility, which is still outstanding. The money was transferred to the general fund and used primarily to pay bills.

The Ratepayers Alliance’s lawsuit includes the following complaint that the city was in violation of state law: “RCW 43.09.210 relates to local government accounting and requires, among other things, that inter-departmental charges ‘shall be paid for at its true and full value.’ The city has a practice of allocating personnel costs from tax-supported funds to the utility funds without compliance with the ‘true and full value’ standard.”

Sally Adams, secretary for the Ratepayers Alliance, said in a statement: “The utility audit is the first sign of a check-and-balance that we’ve seen. The state’s now doing something that the city administration didn’t want to do and that only a couple council voices advocated for. We’ll be interested in finding out how far this audit will go.”

In a related matter, the city has asked Kitsap Public Utility District to investigate the possibility of taking over the water utility in an effort to cut costs. KPUD is expected to send its due diligence report to the city sometime next week.

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