Audit shows county ran $7.4 million deficit

April 13--One year ago, county administration officials stood before Luzerne County Council and revealed gloomy spending figures showing the government had run a $1.1 million deficit.

But numbers released at a council meeting last week blew that out of the water -- a months-long audit revealed the county had in fact run a $7.4 million deficit, far surpassing some council members' expectations by millions of dollars.

The drastic disparity prompted Councilwoman Kathy Dobash to question why the administration was operating outside its means, saying it is supposed to spend only what council approves.

Council Vice Chairman Edd Brominski echoed those sentiments Friday, saying Dobash had a good question that he can't seem to get answered.

"I firmly believe that there's some serious cooking going on there," Brominski said. "They're moving funds around from different places to different places, and we don't know about it. There's no transparency whatsoever."

But Brian Swetz, the budget and financial services division head, said the number presented to council last year was an unaudited report provided at council's request based on the information available at the time.

"I can understand the concern with the number changing by so much," Swetz said. "That's just due to the fact that the county did not have the accounting staff. The county has hired some people and we've actually posted for two more positions. With more accounting staff, things can get done quicker in a better manner."

'Transition time'

The audit, conducted by accountants for ParenteBeard for $121,000, showed that actual general fund revenue for 2012 was $4 million less than what was budgeted -- property taxes came in $2.8 million short and licenses and permits were $924,000 less than budgeted, according to a draft report released last week.

The reason for the tax shortfall, according to the report, is that the county sold off some of its delinquent tax revenue and brought in $3.5 million in each 2011 and 2012, although the county planned on collecting the full amount in 2012.

County expenses were also $4.5 million over the budgeted amount, the report shows. Corrections salaries and expenses went over budget by about $2.4 million because workers slated to be furloughed in December 2011 were not placed in that status until March 2012, according to the report. The related overtime to staff the Luzerne County Correctional Facility contributed to the excess as well, the report says.

Overall, the county had a deficit of $7.4 million for the year, up by $1 million from 2011, according to auditors. A major portion of the general fund -- 19 percent -- went toward paying down the county's $397.7 million debt. Auditors said a "healthy organization" would be spending about 10 percent of its general fund budget on debt.

As a result of the high debt, Luzerne County property taxes make up 87 percent of general fund revenue, compared with about 60 percent that is typical in other governments, according to the auditors.

Council Chairman Rick Morelli noted the audit represents the first year of the county's now two-year-old home-rule government, and said council had only about a month to revise a budget created by commissioners who did not implement a tax increase.

He added that $3.5 million in revenue the commissioners anticipated didn't come through and that the county jail was significantly over budget.

"It was a transition time of a commissioner budget handed over to a brand new government, and us trying to find our way," Morelli said. "Basically to summarize, a good portion of that budget was bogus."

Councilman Jim Bobeck said the revised 2012 budget was founded on speculation based on bad numbers that were creating "massive deficits" under the commissioner form of government. That is why a comprehensive audit was essential -- to establish a baseline showing where the county really is and how best to move forward, he said.

"The projections were based on a decade's worth of financial malfeasance," Bobeck said. "This is what you have when you switch forms and you're left with the old bones of a financial government that had no checks and balances, that had no accountability, that had no processes or procedures in place."

Lack of oversight

Former county Controller Walter L. Griffith Jr., who continues to work as a citizen watchdog over government, said there are a number of reasons for the inflated deficit, including delayed layoffs and failure to budget for buying out accumulated time off.

Griffith said county Manager Robert Lawton "clearly overspent his budget" and that he should not be allowed to overspend, but that he does have the right to transfer money between departments.

The home-rule charter gives the county manager authority to transfer money within "any division, department, bureau, office, agency, board, commission, other administrative unit, or budgetary function subject to his/her control."

The only requirement is that the manager must notify council and the county controller within five days after the transfer.

But Griffith said there are some significant problems with that system. For one thing, council should be notified immediately, he said.

Also, the account numbers used by the county's financial software system provided by New World Systems Inc. are not the same as those used in the budget, he said.

As a result, council members don't always know what money is being transferred where, he said. And being able to transfer money between line-items can conceal the source of overspending because the account won't reflect a negative balance, he said.

"Consequently the council's blind on the budget," Griffith said. "They're approving a budget with the understanding that he's only allowed to spend a certain amount of money. Well, all he has to do is transfer money in there and he is never overspending that line item, so council never really knows."

He said council needs to ensure that the administration is following the intended spending plan, and there should be a system of checks and balances to make sure positions aren't staying open with the money being used elsewhere, for instance.

"It's strictly poor management on budget and finance, and it's strictly poor oversight on council," Griffith said. "There's a lot of things going on that make it very difficult to track what's going on in the administration over there, but I think the lack of oversight by council is huge. And the lack of oversight by council is because the manager is not telling them."

Lawton did not immediately return cellphone messages seeking comment Friday.

'Less time on chickens'

County administrators have made no secret that they transfer money to cover costs. Early this year, the county was in a cash-flow crunch.

Property tax bills were delayed this year because council reopened the budget and debated whether to return to a system of elected tax collectors. In the end, they voted to return to using the tax collectors at a reduced rate and to strip funding from the Luzerne County Transportation Authority, although an 8 percent tax hike was not altered.

But the resulting late tax bills meant that tax revenue was slow to start flowing. Swetz has previously said the county was looking to shift finances around internally to keep up with utility payments, insurance and payroll until revenue started coming in.

Morelli said the notion of council being unaware of money transfers could be correct, but that is part of the reason he initiated a system of committees earlier this year -- to ensure the committee members are keeping tabs on budget issues their corresponding divisions are facing.

The administration does notify council members when it makes a funding transfer, but it's a question of them "understanding it or asking the right questions," he said.

"Yes, I agree that in the past, council wasn't aware because of the way we were structured," Morelli said. "Now we have a setup but just because we have a setup, it still comes down to council members asking the appropriate questions and focusing on the real issues."

He noted many meetings in recent weeks have focused on sending letters to state lawmakers or whether to permit residents to keep chickens in their yards.

"Less time on chickens and more time on focusing on the budget," Morelli said.

Swetz said that although the account numbers have changed in the new financial system, the account names are the same so council should be able to recognize them.

The issue of council potentially being unaware of line-item transfers is moot -- members couldn't do anything about the transfers even if they knew about them because the manager has that authority, Bobeck said.

"In the end, this is about how much you have coming in and how much you have going out, regardless of account numbers," Bobeck said.

'Death spiral'

Mike Giamber, a former council candidate and county watchdog, noted that the audit was supposed to have been completed by last June and said that releasing it now ensures it will be little more than "another doorstop" because it is too late to act on the results.

The budget issues are not going away because nobody is addressing the root cause of the problem -- the county has been "kicking the can down the road" by borrowing money and selling delinquent tax revenue for quick cash, he said.

The solution, he said, could be relying on the private sector to do tasks that are not "inherently governmental." The tasks should be put out to bid, and whoever can do them faster, cheaper and better should win, he said.

That will reduce taxes and "get control of the budget," he said.

"The more you raise taxes, the more you drive people out of the area," Giamber said. "The more you drive people out of the area, the less your revenue. It's a death spiral."

Morelli, meanwhile, said he "highly doubt(s)" that the extent of the 2012 deficit will repeat itself in the 2013 budget audit, which is slated to begin next month.

Leaders now have a good understanding of what the county's true expenses and revenue are, and Morelli is confident the government is getting on the right track, despite nay-sayers lamenting things don't seem any better now than under the old form of government.

"When you have to make tough decisions financially, obviously it's not going to get better," Morelli said. "We're not borrowing money anymore to pay for jobs and the things that aren't needed. We're now living in our means."

[email protected]

570-821-2058, @cvjimhalpin

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