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The Division of Local Government Services [DLGS] has decided the state’s Local Finance Board will not allow Asbury Park to bond $1 million to cover a shortfall in the budget, as detailed in a three-page letter addressed to the mayor and members of the city council as well as city manager Terence Reidy.

Instead, the DLGS is approving the city’s request for an emergency appropriation, “but significantly less than the amount sought by the city because there are amounts that can be transferred from other items of appropriations to cover partial expenses,” the letter reads. To finance the emergency “would essentially allow borrowing for operating expenses and reward an inadvisable decision,” the letter reads.

Reidy said he will likely request the council withdraw the ordinance bonding for $1 million at tomorrow night’s council meeting. City officials are currently trying to determine the actual amount needed after transferring, and the city will likely seek to borrow that amount of money in a short-term loan and pay it back by raising funds in 2013, Reidy said.

The DLGS also faulted Reidy for allowing the approval of the budget with insufficient funds to cover costs.

“The City Manager, and no other employee or former employee, ultimately bears responsibility for an inadvisable decision to allow the budget to be adopted without increasing the appropriation for health insurance liabilities,” the letter from DLGS reads. “The decision runs counter to the requirement of the Local Budget Law which requires appropriations in adopted budgets to be sufficient to cover known liabilities. The decision to adopt in violation of the Local Government Budget Law is not a criminal violation of law, did not unduly enrich anyone, and did not increase or decrease any expenditures of the town that would not have been borne absent the decision.”

Reidy said he agrees with the DLGS’s assessment.

“The budget was adopted that had a shortfall in an appropriation and that responsibility lies with the city manager,” Reidy said. “In this form of government, the buck stops with me … I accept that and I agree with them.”

The DLGS will play “an active role in the recruitment and selection of a new CFO” [chief financial officer] for the city,” the letter reads, “and will prohibit the city from terminating the new CFO for a period of three years, so that the new CFO “will feel confident to aggressively assert their concerns to all those involved in the city’s budget process, including elected officials, the Division, and the public.”

The DLGS is also continuing to recommend the city move out of its current health care plan, which it calls “inappropriately and needlessly more expensive than the State Health Benefits Program.”

All of the city’s unions’ contracts expire at the end of this year, and Reidy has already notified the various union presidents that the city will be moving them into the state’s insurance plan, Reidy said.

The $1 million shortfall in the health insurance line item of the 2012 municipal budget was first made public at the Sept. 19 council meeting. The city planned to bond $1 million to make up for the difference.

Following the announcement, current city officials and former chief financial officer [CFO] Juan Uribe traded charges regarding who was at fault. Next, Senator Jennifer Beck called for an investigation of the city’s finances, calling the situation “mind-boggling.”

The DLGS called the $5.8 million health insurance line item “inadvisably low,” and said it was based on “a collaborative work product of various officials and there is no written record of any internal debate that the appropriation needed to be increased until the week before the budget adoption on Aug. 1.” The estimate “appears to have gone largely ignored by city officials through March, April, May, June and into July,” the letter reads.

The letter, which bears yesterday’s date, is addressed from Department of Community Affairs [DCA] director Tom Neff; assistant director for financial regulation Gerry Seneski; and Al Feit, fiscal oversight officer for Asbury Park. It appears below, verbatim:

The Division of Local Government Services has reviewed a request made in September by the City Manager for the Division of Local Government Services to approve an emergency appropriation of $1.2 million for 2012 health care expenses and an additional request to the Local Finance Board to finance that special appropriation over a period of several years. The review was given additional scrutiny in light of public reports that a former CFO alleged the City Manager knew that funds appropriated in the budget adopted August 1, 2012 were insufficient to cover health care liabilities. As part of the Division’s review:

• The Division interviewed certain City officials (the City manager, Treasurer, and Auditor).

• The Division interviewed the former CFO, Juan Uribe.

• The Division reviewed statements made by Terry Reidy and Juan Uribe published in the Asbury Park Press.

• The Division reviewed emails shared by the Auditor and Juan Uribe.

• The Division reviewed related work documents and material at the offices of Asbury Park City Hall.

It is important that this review be placed in context. Most importantly, there is no allegation by anyone that any actions involved in this matter were nefariously designed to enrich any employee or vendor. Secondly, the officials involved in this matter are responsible for hundreds, if not thousands, of decisions every year. This review concerns one component (albeit an important one) of the adoption of the City budget: one of those many decisions.

Summary findings:

1) An inadvisably low appropriation for health insurance liabilities was included in the budget introduced in February and a similar inappropriately low amount remained in the budget adopted on August 1, 2012. That appropriation was based on a collaborative work product of various officials and there is no written record of any internal debate that the appropriation needed to be increased until the week before the budget adoption on August 1.

2) An appropriate early estimate of a need for $7 million for health insurance liabilities was made in February by the Treasurer. It was later reduced by other City officials including Juan Uribe, though it is not entirely clear which official ultimately recommended the amount of $5.8 million as reflected in the budget introduced in late February with the approvals of the City Manager and CFO.

3) The inappropriate low estimate appears to have gone largely ignored by City officials through March, April, May, June, and into July. Regardless of who was to blame for the initial low appropriation, all City officials should have known early in the year that the appropriation in the introduced budget was far too low and should have more vocally acted to increase the appropriation by the time the budget was adopted. These discussions did not appear to have taken place until late July when the City officials began finalizing a budget to recommend for adoption.

4) The City Manager recommended in late July that the Mayor and City Council adopt a 2012 budget that he knew contained a deficient appropriation for health insurance liabilities. The City Manager made a decision to do so in the hopes that: (1) speculative savings (through less expensive optional health plans offered for the first time) would help offset the deficiency, and (2) that any remaining deficiency could be addressed through year-end transfers from remaining funds available in other items of appropriations.

5) The Division did not learn of the underappropriation until September when the City decided to seek an emergency appropriation and approval to finance the appropriation over a period of years.

6) Savings from employees shifting to cheaper optional plans is essentially nonexistent.

7) The Division believes that some transfers will be able to partially offset the deficiency.

8. The City Manager, and no other employee or former employee, ultimately bears responsibility for an inadvisable decision to allow the budget to be adopted without increasing the appropriation for health insurance liabilities. The decision runs counter to the requirement of the Local Budget Law which requires appropriations in adopted budgets to be sufficient to cover known liabilities. The decision to adopt in violation of the Local Government Budget Law is not a criminal violation of law, did not unduly enrich anyone, and did not increase or decrease any expenditures of the town that would not have been borne absent the decision.

Summary Decisions of the Division of Local Government Finances and Future Actions Related to Oversight

1) The Division will approve an emergency appropriation, but significantly less than the amount sought by the City because there are amounts that can be transferred from other items of appropriations to cover partial expenses. These transfers are appropriate and will become unavailable for surplus generation in support of 2013. In conjunction with the need for the City to increase the health insurance appropriation in 2013 from the artificially low appropriation in 2012, additional spending restraints will be needed to develop the 2013 budget.

2) The Local Finance Board will not consider allowing the emergency to be financed as it would essentially allow borrowing for operating expenses and reward an inadvisable decision.

3) The Division is playing an active role in the recruitment and selection of a new CFO and none can be hired without Division approval. The Division will insist the City hire an extraordinarily experienced CFO. Furthermore, the City’s Transitional Aid MOU will provide that the new CFO may not be terminated without the Division’s approval for a period of three years (even if the City ultimately exits the Transitional Aid program.) This will ensure that the next CFO will feel confident to aggressively assert their concerns to all those involved in the City’s budget process, including elected officials, the Division, and the public.

4) The Division is adding a provision in the MOU that governs every municipality receiving Transitional Aid (including Asbury Park) to ensure that auditors perform only audit functions, and not functions related to the preparation of the budget or financial statements to the extent their level of involvement may pose a conflict pursuant to Generally Accepted Governmental Auditing Standards. This addresses a long-held concern in New Jersey that auditors assume work responsibilities that may pose conflicts if they are caused to “audit their own work.”

5) The Division will continue to insist that the City move out of its current health care plan which is inappropriately and needlessly more expensive that the State Health Benefits Program. Past collective bargaining concerns have made this extremely difficult to achieve. However, the City will have an additional tool to do so with rules recently proposed by the Local Finance Board that prohibit the execution of new collective bargaining agreements that provide health plans more expensive than the State Health Benefits Program. All current employee contracts terminate in the near future and the City should immediately begin planning to enroll all employees in the State Health Benefits Program. If it fails in the effort, aid will be significantly cut as the State has no interest in continuing to subsidize health benefits that are needlessly more expensive than the benefits received by State employees and many local employees throughout the State.

This report concludes the Division’s review of this matter.

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