Audit reveals $17.6M shortfall in water and sewer, $3.8M shortfall in sanitation

JACKSON, Miss. (WLBT) - Members of the Jackson City Council are finally getting a look at the city’s expenditures for 2021 – and the numbers are not good.

Monday, auditors went over findings in the 2021 Comprehensive Annual Financial Report (CAFR), which outlines the city’s financial activities for fiscal year 2021.

According to findings, the city’s water and sewer department experienced a roughly $17.6 million shortfall that year.

Meanwhile, sanitation was short about $3.8 million “and that was subsidized by $3.8 million from other funds, primarily the general fund,” said Scott Hodges, with Tann Brown and Russ CPA.

Hodges also said roughly $4.8 million in general fund dollars were transferred to Parks and Recreation, in large part, to keep the Jackson Zoo afloat, while another $4.16 million in one-percent sales tax revenue was used to cover water and sewer bond debt.

Jackson took over the Jackson Zoo in late 2019. The park reopened to the public on August 22, 2020, amid the COVID-19 pandemic.

Findings were discussed at a Council Finance Committee meeting Monday afternoon. It was the first time details of the 2021 audit were made public.

Ward 6 Councilman Aaron Banks, who chairs the committee, says he was unaware of the council authorizing transfers to cover sanitation costs.

“In order to do that, it has to come before the council,” he said. “Did that come before the council? Yes or no... I’m asking anybody. Somebody here should know the answer.”

After about 15 seconds of no response, Banks continued. “Mr. Malembecka, I find it problematic if money’s being moved without the council’s knowledge, especially when we talk about it coming from the general fund over to the enterprise fund,” he said.

Banks was directing the question to Fidelis Malembecka, the city’s chief financial officer. Banks said the city runs several “risks” in transferring general funds to enterprise accounts, including having the city’s bonds called.

Jackson has approximately $169 million in outstanding water and sewer revenue bond, which were issued to the city based on its ability to repay them from its water/sewer enterprise fund. It has an additional $114 million in state revolving fund debt.

“The enterprise fund should be self-supporting. As we’re well aware, there have been ongoing conversations where the revenue that has been coming through the enterprise has not been sufficient to cover operating expenses,” Malembecka said. “And there have been multiple requests that have been brought, in fact, before this body, to increase rates.”

The audit was completed by Tann Brown and Russ CPA. State statute mandates the annual reports be submitted to the Mississippi State Auditor’s Office 13 months after the fiscal year ends.

However, work on Jackson’s 2021 audit only recently wrapped up. Hodges said the 2022 audit likely will be late as well.

“If we started today, based on the time it took us to do it last year, we would not have enough time to complete it,” he said. “I’ll also add that the federal grant audit due date... is nine months after the fiscal year ends. So, that is actually June 30.”

Malembecka said the city was not in danger of losing any grants and municipalities were given additional time to complete the financial reports for 2021 in light of the pandemic.

Banks asked who was at fault, whether there were standard accounting procedures the city’s finance department was not following or if the auditors simply “nitpicking... you know, page numbering, commas here, a semicolon here... that keeps causing delays.”

Hodges says he doesn’t nitpick minor details when he’s correcting major problems.

Instead, he said auditors can’t complete their work when they’re not given the information they need in a timely manner.

“There are actuarial reports that were not issued until September 2022 that were required,” he said. “So, there’s no way anything could be finished until those reports were available.”

He said auditors also can’t move forward with the audit until it receives reports from the Jackson Redevelopment Authority, Jackson Municipal Airport Authority and Convention Center. However, those reports didn’t come in until December, he said.

For fiscal year 2022, Hodges told the council the convention center didn’t submit its report until January.

“There’s no reason this document could not be prepared two months after the end of the [fiscal] year,” Hodges said. “That holds up the whole process.”

“We’re just the auditor, so I’m not going to demand that the city do anything by a particular date,” he continued. “But our whole process is driven by the availability of information. And, so, we cannot complete certain procedures until that information is provided.”

Hodges informed the council that auditors are also delayed due to fixing major mistakes not addressed by the finance department.

“The city should be able to hand us a financial report that is accurate, and we might have to make a change here or there. But we should not be having to change two-thirds of the numbers on every page as we do,” Hodges told the council. “I didn’t bring a copy of the draft that I received with my pencil markups, but I can assure you that you will be appalled at the amount of corrections that had to be made.”

Jillian Caldwell, controller for the city of Jackson, said part of the delay is because finance uses the month of October to “close out the books.”

However, she said the Department of Administration is taking steps to speed up the process, including implementing monthly financial reconciliations.

Deputy Director of Administration Sharon Thames says the city also is putting other policies in place, such as ensuring expenditures are properly coded in the system.

“We had over four or 500 moves on the audit that we had to make where people were buying stuff out of the wrong object code,” she said. “What we have now changed in finance is... they’re not allowing you to move money to buy something in the wrong lines.”

Several discussion items were included on the agenda for Monday’s meeting, including a request for proposals, or RFP, for a new audit firm.

“Nothing personal... I think that it is just good city business for us from time to time to review and look at any of our clients or any of our vendors to make sure that we’re getting the best product,” Banks said.

Hodges said switching auditors won’t address the problems that his agency has dealt with. It also would likely delay the completion of next year’s CAFR.

“I understand that’s your prerogative to put out for RFP,” he said. “But you’re already behind. And that’s gonna put you several more months behind. So, that is not the way to fix the problem.”

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