Town Council Needs To Designate Use of $10.75 Million Windfall

$10.75 million of remaining ARPA funds yet to be designated for use

The Town of Oro Valley has $10.75 million in federal ARPA funds to designate for use. The town received these funds last fiscal year. The town has until the end of 2024 to assign these funds, obligate them to specific projects. The town must spend these funds by the end of calendar 2026.

The town received a total of $15.4 million of ARPA funds

This is truly a windfall. The town didn’t need this money. The Town of Oro Valley thrived financially during the pandemic. Many communities like Oro Valley are struggling to figure out how to spend all of the ARPA funds by the 2026 deadline.  The panel [below right] shows the total funds received and how they have been used to date.

The use of  $10 million of these fund is mostly unrestricted,  It can be used for replacing town revenues lost during the pandemic

$10 million of these funds can be used on a broader basis to replace “revenue losses” caused by the pandemic. This money can be spent on a broad range of general government expenses. For example, some communities are spending the money on what one would call welfare payments. Others are using it to replace shortfalls in capital spending.

Town staff designated $4.65 million of these unrestricted funds to pay for replacing the town's El Conquistador and Canada Golf Courses' Irrigation

The total cost of the irrigation replacement on the town's two 18-hole golf courses is estimated to be $9.15 million.  $4.5 million of this is being paid for from the $25million Parks Bond; the rest, $4.65 million, from the ARPA funds. 

Town Council did not approve, by resolution, the use of the ARPA funds for that purpose

Nor has the Town Council designated the use of the remaining $5.35 million of unrestricted funds. 

According to town staff, these funds are sitting in the capital improvement fund, waiting to be used to fund future capital projects.  Town staff, without a formal council resolution, used $4.65 million to pay for golf course irrigation replacement.

The use of  $5.4 million in ARPA in funds is restricted

These funds can be used to improve drinking water and wastewater infrastructure.

It is the town council’s job to obligate all ARPA funds. They have not done so.
The town budget does not define the specific use of these funds. Thus, the town council must decide this.  It is then the responsibility of the town staff to spend it as directed. 

Until the town Council meeting of December 7, this council has not focused on fulfilling their responsibility. Thus, Council Member Tim Bohen, prior to and at that meeting, requested that staff to respond to eight questions that he asked regarding these funds. Town staff responded.

None of the restricted funds have been obligated by the Council    

Town Council has not directed staff on how to spend the $5.4 million in restricted funds. LOVE has advocated that the town use theses funds to extend the reclaim water system to the south part of town, thus saving millions of acre feet of drinking water from being used on town parks. The town council rejected this at the last meeting, preferring to wait for the answers to the eight questions asked by Bohen. The answers given by staff don't tell the council how to spend these funds; but their response did clarify one thing.

Town Outside accountant confirms that restricted funds can’t be laundered through the water utility... so that they could be used for another purpose
The Town Council has been terribly misinformed regarding the use of the unrestricted funds for water. Town staff, under the leadership of former town manager Mary Jacobs, current town finance director David Gephart and with some misinformation provided by the town’s independent auditor, suggested laundering these funds through the water utility so that the town can use the funds for non approved purposes. The scheme was to lend money to the water utility, have the utility use it for an intended purpose and then to pay the loan back to the town. Then, the town could use the funds paid back for a non approved use. This is called money laundering. It is illegal. It is chicanery.

As it turns out, LOVE was correct when we identified this as a laundering scheme when Jacobs proposed it to Council in September. In one of the responses to Bohen’s request, the independent accountant recognized that the funds must always be used for the intended purpose, even if they are paid back. The independent accountant concluded this after consulting with a third party organization with which they have recently become affiliated. Frankly, we question the competence of the independent accountant.

Big question still remains: How to spend $10.75 million in remaining ARPA funds?

The clock is ticking. At some point, the council will have to obligate these funds or return them to the federal government.

Is It Time For New Town Outside Auditors?

11 years as auditor and counting
The town's current outside audit firm, Heinfeld Meech,  has been auditing the town's books for 11 years. That's a long time. Too long, in fact. Not because the firm may or may not have been doing a good job. But because 11 years is just too long a time period to have the same firm audit the same town staff.

Though the auditor does report to the council, they have to work with town staff for 11 years. It's really the same town staff in place. The auditor has developed relationships over 11 years with them. At this point, they trust town staff. That's nice. However, trust is not an auditing standard!

The same firm auditing the work of the same people simply does not provide the critical eye and independent thinking that is required in today's compliance oriented world.

After the Enron financial fiasco, public company best practices regarding auditors changed. It was no longer wise is to keep the same auditor forever, as Enron had done. The auditor, regardless of who it is, gets too comfortable with staff.  Post Enron, it is a best practice to change auditors every 4 to 6 years.

Trust is not an audit standard
During last week's meeting, Corey Arvisu, partner in the Heilfeld firm, responded to several probing questions by council member Nicolson. Nicolson wanted to know how the firm detected the error and whether or not they extended their audit procedures. The auditor did not know exactly how the error had been detected. He surmised that it was detected through conversations with town staff. Really, trust town staff to tell you what may be wrong?

The auditor should have known this was an area ("Developer Credits") to be investigated since it was the result of a change in policy the town in 2016. The auditor should have known of this change. They should have developed audit procedures to test that this change is being properly recorded. They did not. Instead, they trusted staff. The auditor also did not extend their audit procedures to identify all possible errors, in this year or by looking into the past.

Being the best of the worst is not good enough for Oro Valley
In continuing his response to Nicolson, the auditor went out of his way to point out that  the $3 million reporting error which his firm detected (see our posting last week) and identified as "significant" was "... not a significant concern at this point." His said that his firm has found worse in other places.  So what?

Being best of the worst is not good enough. This isn't other municipalities. This is Oro Valley. The auditor's point of reference (worse communities) is simply not good enough.

Take it behind closed doors
The council did not but should have met with the auditor is special session, with no town staff, no public attending. This has three advantages:

• The auditor can speak freely without having to temper comments because staff is watching
• Council members can ask any question they want to ask, without fearing that they are going to "offend" or in some way "impugn" town staff
• Showboating is eliminated. There is no need for any council member to use the discussion as a vehicle for pointing out how great the town is doing financially or how great the staff is.

Yes. It is time for a change, in both who is external auditor and how they report to council.
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Outside Audit Finds Errors In Town's 2018 Reported Financial Result

Town financial internal control procedures in question
According to an audit report of the Town's 2018 financial statements, the internal controls surrounding the recording of economic transactions that occur outside the Town of Oro Valley's finance department have been found to be insufficient.

This finding was part of the annual audit report by independent town auditor, Heinfeld, Meech. The auditor will present these and other results at tonight's town council meeting.

Not material?
The lack of internal control resulted in a restatement of previously reported 2018 financial results.  According to town staff: " It is important to note that these findings did not cause a material misstatement of the Town's financial statements." The term "material" is their judgement that the errors detected were a relatively small portion of total town budget.

The auditors, however, did not provide judgment on that. What they did say is that the deficiency is significant. (source)

Impact fees not properly recorded
There were three errors uncovered by the outside auditors:

• Street infrastructure contributed to the Town was not captured in capital asset records.
• Impact fee credits issued to developers were not recorded in the Town’s general ledger
• A cash contribution received was incorrectly recorded as deposits payable.

Significant amount of error: $3.2 million
The amounts of the misstatement are significant:

• The Town received $2.5 million in street infrastructure in the current year which was not added to the Town’s capital asset records. 
• $630,830 in impact fee credits were issued in exchange for the contributed infrastructure. Of these credits, $199,000 were drawn on and used by developers during the fiscal year. The Town did not record transactions related to the impact fee credits, resulting in a misstated general ledger. 
• Also, a cash contribution of $133,000 was incorrectly recorded as a deposit payable. ​

The auditor recommended that "The Town should implement procedures to ensure that all transactions and pertinent financial information is being communicated to the Finance Department and captured in the Town’s financial records."

Procedures being put in place
According to town staff, "...procedures will be completed by mid-February, and will be followed by training with all key staff involved in collecting, approving, managing and accounting for impact fees and impact fee credit agreements." (source)

Independent party review required
We understand that mistakes happen. Occasionally, a transaction does get incorrectly recorded.

But this is more than a mistake in recording a transaction. It is a mistake in not even knowing that a transaction occurred. That is a situation that is ripe for fraud. It is wrong to shrug off the situation by saying that it does not have a material affect on the financial statements. That is because it is a serious breach of the integrity of the accounting system.

It is not sufficient that the same people, town staff, who failed to recognize the breach in the first place be the same people to design, write and train in the procedures to fix the lack of internal control.  The fix should be one that considers all economic transactions that originate outside of the finance department. The town council should retain a third party unrelated to the town and to the town's auditor to evaluate and opine on the "fix." And then to test the "fix"  thoroughly. That person should be retained by and directly report to town council, not town staff.