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HomeMy WebLinkAboutItem B - Ind. External AuditorEUGENE CITY COUNCIL AGENDA ITEM SUMMARY Work Session: Discussion of Independent External Auditor Meeting Date: July 28, 2004 Agenda Item Number: B Department: City Manager's Office Staff Contact: Mary Walston www. cl. eugene, or. us Contact Telephone Number: 682-5406 AGENDA ITEM SUMMARY This item has been placed on the council agenda at the request of Councilor Bettman. It is to discuss the placement of an independent external auditor hired by the City Council on the November 2004 ballot. BACKGROUND Council Action History At the City Council work session on July 12, 2004, Councilor Bettman requested a work session with the stated goal being "to discuss putting the independent external auditor on the ballot; to forward the recommendation of Charter Review Committee." On July 10, 2002, the City Council held a work session to review the recommendations of the Citizen Charter Review Committee (CCRC). One of the recommendations was to create a new section in the City Charter requiring that the City Council appoint a city performance auditor. At that meeting, the City Council decided not to forward this proposed amendment to the ballot. In essence, this is a reconsideration of that action. Policy Issues In the agenda item summary for July 10, 2002, the policy issue is stated as follows: "These charter issues lay the foundation for the authority and power of the mayor, council, and executive arm of city government. Changes in the document and structure most likely will raise policy issues at a later date." Council Goals A review of the City Charter was included in the 1999 - 2000 Council Goals. This work, in the form of a committee to review compensation for the mayor and council, was begun in 1999. The work on this goal has continued, even though it is no longer a council goal. Financial and/or Resource Considerations If this item is referred to the voters for the November 2004 election, there would be no election cost to the city; there would, however, be the cost of a voter's pamphlet and any other associated public information efforts. If it is referred for a special election, the City will bear the cost of the election plus the expense of a voter's pamphlet. L:\CMO\2004 Council Agendas\M040728\S040728B.doc At the time the auditor proposal was discussed by the Citizen Charter Review Committee, the cost estimate was placed at between $150,000 to $200,000 in initial start-up costs and then approximately $85,000 to $100,000 for each ensuing year. Other Background Information The Citizen Charter Review Committee discussed the concept of a performance auditor over the course of several meetings during 2001. The final language proposed for the charter amendment is as shown below. City Performance Auditor. The city pe~ormance auditor shall be appointed by the City Council. The performance auditor shall conduct or cause to be conducted performance audits and may conduct studies intended to measure or improve the performance of city functions following generally accepted government auditing standards. The performance auditor may be removed from office with or without cause by the City Council. The performance auditor shall possess adequate professional proficiency as demonstrated by a relevant certification such as a Certified Public Accountant, Certified Internal Auditor, or Certified Management Accountant, which shall be retained throughout tenure in the position. All audit reports are public records. The City Council shall provide for the creation of an audit committee to oversee the performance auditor. The audit committee shall include the city manager and other members as defined by ordinance. Among its duties, the committee shall forward candidate recommendations for the auditor position to the City Council. The CCRC reviewed a number of documents related to performance auditing, including a meeting with the auditor from the City of Portland and the service profile and performance management work being done by the City of Eugene. This information was contained in the report from the CCRC. Timing If the City Council wishes to place this proposed amendment on the November 2004 ballot, it must take final action not later than August 9, 2004, in order to meet several filing requirements and to allow time for possible appeals. OPTIONS The council may act to place this on the November 2004 as currently written, or may modify it and make subsequent decisions about placing it on the ballot. STAFF RECOMMENDATION In 2001 and 2002 when the CCRC and the City Council discussed the proposals related to an internal performance auditor, both then-City Manager Jim Johnson and City Manager pro tem Jim Carlson expressed strong concern regarding the proposed position. The concern was that a council-appointed performance auditor is not appropriate for a council-manager form of government. In a memorandum to the City Council on this topic, Jim Johnson said the creation of a position hired by and reporting to the City Council would create a "situation ripe for conflict." This same concern continues today. It is recommended that the language proposed by the CCRC not be submitted to voters. It should be noted here that the City Council has the authority at this time to direct the City Manager to conduct audits and reviews on city programs without the need to revise the charter via an election. L:\CMO\2004 Council Agendas\M040728\S040728B.doc SUGGESTED MOTION Staff is not suggesting a motion as staff recommends against place a council-appointed performance auditor on the ballot in November 2004. ATTACHMENTS A. Excerpt from the City Council Work Session of July 10, 2002 FOR MORE INFORMATION Staff Contact: Mary Walston Telephone: 682-5406 Staff E-Mail: mary. f. walston~ci, eugene.or.us L:\CMO\2004 Council Agendas\M040728\S040728B.doc ATTACHMENT A EXCERPT FROM MINUTES Eugene City Council Work Session McNutt Room--Eugene City Hall July 10, 2002 Noon COUNCILORS PRESENT: David Kelly, Gary Papd, Nancy Nathanson, Scott Meisner, Pat Farr, Betty Taylor, Gary Rayor, Bonny Bettman. CITY COUNCIL WORK SESSION In the absence of Mayor James D. Torrey, Council President Kelly called the meeting to order. A. WORK SESSION: Discussion of Recommended Amendments to the Eugene City Charter Mary Walston of the City Manager's Office was present for the item. She indicated that the council must take action by August 12, 2002, if the council wished to have the charter-related amendments on the November 2002 ballot. It was possible to take action on August 14, but that would be very close to the deadline for filing the measures. City Manager pro tem Jim Carlson distributed the motion the council passed on July 8 related to the City Attorney position. Regarding the issue of a city auditor, Mr. Carlson noted that the City already conducted performance audits and staff did not oppose such audits. They were a legitimate management tool. He was concerned about having a performance auditor appointed by the council, thus establishing a second position that was hired and supervised by the City Council. Mr. Carlson believed that there were potential pitfalls in such a situation, and noted the continued opposition to a city auditor expressed by former City Manager Jim Johnson, who had worked in such a jurisdiction with such a position, and did not find the approach effective. Mr. Carlson referred the councilors to an option distributed at their places that was similar to the approach the council took to the charter amendment related to an in-house city attorney. He said that the option developed by the Citizen Committee on Charter Review (CCRC) went extensively into details, such as the types of professional proficiencies required. Staff recommended that those not be included in the charter because they could change over time, and the charter was intended to be more of a guiding document. Mr. Carlson referred to a sentence in the CCRC recommendation that read, All audit report; are public record,'. He asked City Attorney Jerome Lidz to comment on how the recommendation conflicted with Oregon Public Records Law. Mr. Lidz anticipated there would be rare times when there was an audit report on a topic that was not suitable for public disclosure. He cited as an example an audit of the City's computer security system, or security at the airport. He reported that technically, under State law, every document in the possession of a State agency or local government was a public record, but some were exempt from disclosure. Mr. Lidz believed that most people, using a common sense interpretation of the term "public record," would read the sentence and believe that they had access to those exempted records. He suggested that the sentence in question could be deleted, or alternatively, the text included in Appendix W of the council's notebook regarding the amendments could be used. Mr. Carlson reported that the City Council formerly had an Audit Committee composed of councilors that oversaw the details of the City's financial audit. The council discontinued the committee because of a lack of interest. Mr. Pap~, seconded by Ms. Bettman, moved to refer the proposed new section creating the position of a city performance auditor to the ballot in the November 2002 election. Ms. Bettman, seconded by Ms. Taylor, moved to amend the motion by revising the sentence that read "All audit reports are public records" to read "All audit reports are public records and are subject to disclosures required by and in accordance with State law pertaining to disclosure of public records." Mr. Kelly called for council comments and questions. Ms. Nathanson preferred the City Manager's approach, which was to adopt text parallel to that used for the City Attorney position, as opposed to the more detailed recommendation of the CCRC. Mr. Farr indicated support for the amendment but said he did not favor the main motion because of the complexity of the text being proposed. Responding to a question from Mr. Pap~, Mr. Lidz said that the amendment ensured that audits were subject to State law regarding public records. It did not add substance in that the requirements for disclosure would be the same under State law, but it did provide assurance to a member of the public reading the charter that the reports would be treated like other public records, and not placed where they could not be reviewed. He believed that it would be a rare instance in which a report was exempt from disclosure. Mr. Pap~ opposed the amendment, saying he preferred the charter remain simple. Ms. Taylor thought the amendment accomplished the simplicity Mr. Pap~ was seeking. Mr. Lidz concurred. Mr. Kelly believed the amendment was responsive to the legal counsel's concerns. He also believed it provided philosophical assurance related to the public nature of the audit reports. Mr. Carlson said that the amendment was actually a restatement of State law. The motion passed, 7:1; Mr. Pap~ voting no. Mr. Farr indicated opposition to the amended motion, saying the audit process currently in place was sufficient and met the needs of the citizens. He said that if something was to be placed on the ballot, it should be simple. Ms. Nathanson also opposed the motion on the table. She said that there were performance audits and financial audits, and they had different purposes. The committee's focus was on performance auditing. However, she believed the mechanisms forwarded by the committee, such as an audit committee, were more appropriate for a financial audit. She noted that the Budget Committee approved motions to fund an audit of City services, and she did not think there was a pressing need to include the auditor position in the charter. Mr. Rayor also preferred language that paralleled the text adopted for the City Attorney position. He was concerned about the impact of the motion on the council/manager form of government. He questioned getting into the level of education and the qualifications the auditor must have in the charter, as there was no precedent for that elsewhere in the charter. He also questioned establishing a committee through the charter. He indicated that he had developed an alternative motion he would offer when appropriate. Ms. Bettman said a city auditor was a means to get the City more respect. The council currently had no way to evaluate how the City Manager was implementing City policy. There was no independent oversight of the manager. She wanted to give voters an opportunity to vote for an independent auditor supervised by the City Council. There would be value to the position only if the auditor were independent. She believed an independent auditor would build credibility for the council because the council now lacked the needed information to adequately supervise the manager. She believed that voters would reject a watered-down version of a city auditor and then the vote could be considered by some as justification for not having one. Mr. Meisner said he would not support the motion or the approach suggested by the manager. He did not recall that the committee was charged to examine the issue by the council. Mr. Meisner said he did not find a great deal of public interest in the concept. He was very concerned about creating an unfunded mandate for the council to fund at a time when it had no money. Mr. Meisner said there was anecdotal information but no guarantee the City would save money from having such a position. He was not impressed with the performance of such positions in the jurisdictions of which he had knowledge. Mr. Meisner wanted independent performance audits but believed that they could be secured without creating a city auditor position. He added that the background materials the council received clouded rather than clarified the issue as half of the materials did not address the position of a performance auditor. Regarding the issue of respect for City government, Mr. Meisner agreed that it was an issue, adding it was an issue at the council table as it was clear that there were councilors that did not respect or trust Eugene's city government. He did not think the position would enhance trust in the City. He also referred to and commended the work being done by some City departments, in particular the Department of Library, Recreation, and Cultural Services, as it attempted to do more work with less resources. Ms. Taylor did not think that the council knew what kind of job the executive staff did except through secondhand reports. She said that Portland had a very successful performance auditor that saved that city money immediately. She emphasized that the focus of such a position was performance as opposed to monetary savings. She pointed out the auditor would report to the City Council, which was a way of being responsible to the public. Ms. Taylor said the performance auditor would be able to respond to citizen questions about the way things work, and could find ways to improve City operations. If the auditor position was responsible to the City Manager, "there was no point to it at all." The person would feel constrained to give the manager positive reports about issues and personnel. Ms. Taylor asked Bob Cassidy and Ken Tollenaar of the CCRC why the committee recommended the auditor position. Mr. Cassidy said the key reason was the independence of the position. The CCRC felt the position would have an impact only if independent. He was sure the committee would oppose a motion that modified its recommendation. Mr. Pap~ asked if the committee's support for the proposal was unanimous. Mr. Cassidy said yes. Mr. Pap~ thought the council should ask the voters if they supported an audit position. He hoped the council put something on the ballot. He was concerned, however, about hiring a full-time auditor to assist the council, which was not a full-time body. Mr. Pap~ was also concerned about the impact on the council/manager form of government of having someone with independent authority, and suggested having the auditor report to the audit committee. Mr. Kelly believed that there was great value to having an independent auditor because it promoted transparency, openness, and integrity in municipal government. He thought the philosophical and psychological benefits worth the cost of the position. It could help demonstrate that the council could be efficient and accountable prior to requesting tax increases from the citizens. Mr. Kelly did not think the manager's proposal worth referring to the voters as it could happen now without charter authority. He emphasized the importance of the position's independence. Speaking to Mr. Meisner, Mr. Kelly confirmed that the auditor was in the committee's original charge from the council. Mr. Kelly quoted from correspondence from the General Accounting Office in Appendix M of the final report of the CCRC regarding the need for local government to take steps that ensure an auditor was independent and free from organizational impairment. Mr. Kelly believed there were jurisdictions where the concept worked well and others where it did not, and suggested that the council not attempt to generalize from the experience of individual communities. Mr. Kelly said the CCRC recommended the audit committee as a way to more closely involve the City Manager with the operations of the city auditor. He said that the budget proposal for a temporary audit was a very different thing from a charter-established, ongoing employee appointed by the council. Mr. Farr was specifically concerned about an auditor appointed by the council as he feared that it would become a political position. He did not want to see a council majority dictating the day-to-day operations of the City. He did not believe the council needed another employee. He opposed the motion. Ms. Nathanson quoted from the materials provided to the council by the CCRC on the topic, which stated "Nonetheless, internal auditors should not report directly to the governing board except in highly unusual circumstances, for example, evidence of fraud by top management." She said that much of the information the council received from the committee was conflicting. Ms. Nathanson asked how many people worked in the Portland city auditor's office. Mr. Carlson believed there were a total of 56 people working in the Portland auditor's office. Ms. Nathanson said she heard no clarity in the discussion about the nature of the position envisioned. It was unclear if councilors were talking about a performance auditor or a financial auditor. She believed the public wanted to know there was no fraud in municipal operations, and there were financial audits to ensure that happened. Ms. Nathanson believed that the organizational credibility of the organization relied in part on the credibility of the council, and how well it managed the City's affairs. She asked how Mr. Carlson would characterize the auditor role authorized through the fiscal year 2003 budget. Mr. Carlson characterized it as an independent audit performed under contract by an independent auditor. Ms. Nathanson thought such an independent audit would serve as well in terms of expertise and independence. She said she had too many questions to support a solution when the problem was not yet adequately described. Mr. Rayor, seconded by Mr. Pap~, moved to amend the motion with the following substitute text: "The City Manager shall appoint a City performance auditor, subject to confirmation by the City Council. The performance auditor shall conduct or cause to be conducted performance audits and may conduct studies intended to measure or improve the performance of City functions. The performance auditor shall regularly report the results of their work, as well as the annual performance work plan to an audit committee consisting of the Budget Committee or a subcommittee of the Budget Committee." Mr. Kelly solicited comments on the amendment to the motion. Speaking in support of his amendment, Mr. Rayor said it created a new city auditor position subject to confirmation by the manager. He did not want to create a new committee through the charter that could not be maintained because of funding or one that represented a duplication of efforts. Mr. Farr preferred Mr. Rayor's motion over the previous motion, but still questioned the need for a performance auditor. He agreed with Ms. Nathanson's statement about the City's ability to hire independent expertise. He thought it would be irresponsible, given the economic difficulties facing the City, to refer such a position to the ballot. Ms. Bettman considered council resistance to the concept of an internal independent auditor to be "astounding." She said that such an auditor would assist the council in its evaluation of the manager, and would help inform budget policy. She said that without council oversight, the motion on the floor was just a wordier version of the manager's proposal. She termed it "auditing under the influence of the supervisory chain," and pointed out that it was the supervisory chain of which the council wanted independent evaluation. Ms. Bettman did not think the focus of the discussion was on financial malfeasance but rather on overcoming the personal and professional alliances that existed among staff that make it impossible for staff to move beyond those alliances. An independent auditor could look objectively at the organization and provide the manager with an outside recommendation. She said that the City had "insider management for decades and decades" and she found the auditor a timely initiative. She would not support an auditor that was not independent. Mr. Pap~ said that Mr. Rayor's motion answered the issue of whether the position was focused on financial or performance auditing. He agreed that the City could easily contract with independent financial auditors and there was no reason to increase the City staff for that purpose. He found the motion to be a workable compromise. If a performance auditor was established, Mr. Pap~ wanted the council to see the auditor's reports, but he did not think he wanted the council to manage the auditor. Mr. Meisner opposed the motion for the reasons he opposed the previous motion. He suggested that the notion that an internal employee auditor would not form alliances was ludicrous. If the council wanted an independent audit, he did not see how that could be accomplished internally. Mr. Meisner believed that if the council was dissatisfied with the performance of the auditor and wanted to dismiss that individual, it could encounter great difficulty. He also thought it ludicrous to assume that the council would hire a single auditor who would have substantive knowledge of every program in the city; that person would have to hire or contract outside the organization for assistance. Mr. Meisner said if the council wanted independent audits, it should contract for them. Mr. Kelly expressed appreciation to Mr. Rayor for his motion, but said he could not support it. Other than the confirmation by the council, the motion would add nothing to the charter that the manager could not accomplish now. Speaking to Mr. Papa's suggestion that the amendment to the motion clarified the nature of the auditor, Mr. Kelly pointed out the text offered by Mr. Rayor was taken from the CCRC's proposal, so it was as clear or as vague as that original text. Speaking to Ms. Nathanson, Mr. Kelly said he wished he shared her optimism about the success of contracted audits. He agreed they were valuable for specific purposes. He suggested that a key difference between a council-directed auditor and manager-directed auditor was the perception of independence. Mr. Kelly said that the council could direct the City Manager to contract with an independent auditor, but then staff was responsible for writing and overseeing the contract. It was Ms. Taylor's perception that the focus of the discussion was on performance auditing rather than financial auditing. She did not think the council had the ability to manage the organization adequately now. She pointed out that performance auditors did not audit all the departments at the same time, but rather one at a time. She believed that the issue was not one of fraud, but having someone outside the organization telling the council if the City was run efficiently. The council had no way of knowing that now. She did not believe that the council had a way to manage the manager. With regard to her remarks that the council was not allowed to manage, Ms. Taylor pointed out that the council had been asked not to contact the executive managers directly. She thought the council was a long way from being able to ask the managers the reasons for what they did and suggest alternative actions. Ms. Taylor termed the amendment to the motion "useless" and suggested that the council was setting itself up for a charter amendment proposal for an independent auditor from the voters. Mr. Kelly solicited another round of comments. Ms. Nathanson said she was "astounded" at the resistance to trying the trial performance auditor approved by the Budget Committee. She noted that she had recommended in the past that the Budget Committee form a subcommittee to do performance audits on a serial basis using the service profile process. She suggested that the issue was not "why," it was "how." She reiterated she had sought an increased level of oversight by the committee and council. Ms. Nathanson pointed out that in May 2001 the CCRC received a report from staff regarding 16 internal audit projects undertaken over the past two years that resulted in cost savings, service delivery improvement, increased accountability, additional efficiencies, or additional revenues. She believed that the manager would be receptive to direction from the council for similar audits for specific programs in the future. Mr. Kelly called for further comments. Mr. Farr said he would prefer to hire more police officers or parks staff as opposed to a city auditor and the required staff. He believed that audits could be tailored to a particular activity. Ms. Bettman said that the CCRC did not recommend that an auditor and staff be hired, just a full-time auditor. She thought the discussion the council was having was confusing to the audience, as councilors were confusing auditors and functions. She did not think that the trial auditor mentioned by Ms. Nathanson was the same as what was being proposed though the charter amendment. What was being proposed was an internal independent auditor, and that independence was predicated on that position's being appointed and supervised by the City Council. Mr. Pap~ said that the council owed it to the community to put a measure on the ballot. He supported the motion as a reasonable proposal that addressed his concerns regarding efficiency. The amendment to the motion failed, 6:2, Mr. Rayor and Mr. Pap~ voting yes. The main motion failed, 5:3, Mr. Kelly, Ms. Taylor, and Ms. Bettman voting yes.