Summary

Audit Scope

The scope of this audit of the City of DeFuniak Springs, Florida, focused primarily on those operating units, programs, activities, functions, and classes of transactions relating to the revenues, expenditures, and assets of the City for the period October 1, 1996, through September 30, 1997, and selected actions taken prior and subsequent thereto.

Summary of Report on Compliance and Internal Control

We found that the City had not, in several instances, complied with provisions of laws, ordinances, and other guidelines governing those operating units, programs, activities, functions, and classes of transactions within the scope of audit. Matters noted on audit relating to noncompliance with various guidelines and/or significant deficiencies in the design or operation of the internal control for those operations audited are presented in the Summary of Audit Findings below.

Summary of Audit Findings

Management Controls

The City of DeFuniak Springs’ (City) stewardship responsibilities carry with them a responsibility to assure that management controls provide for the effective and efficient use of the resources in accordance with applicable laws, ordinances, and other guidelines. City management’s ability to implement adequate controls is affected by the City’s limited staffing and financial resources, and we considered these limitations in evaluating the adequacy of the City’s management controls as discussed under appropriate subheadings below.

Policies and Procedures

The City did not have written policies or procedures for many of its accounting and other business-related functions. Such policies and procedures are essential in providing both management and employees with guidelines regarding the proper conduct of City business and the effective safeguarding of assets and ensuring that City records provide reliable information necessary for management oversight. (See paragraphs 22 through 25.)

Budgetary Controls

Section 166.241(3), Florida Statutes, provides that the governing body of each municipality shall adopt a budget each fiscal year by ordinance unless otherwise specified in the respective municipality’s charter. The amount available from taxation and other sources, including amounts carried over from prior fiscal years, must equal the total appropriations for expenditures and reserves. The budget must regulate expenditures of the municipality, and it is unlawful for any officer of a municipal government to expend or contract for expenditures in any fiscal year except in pursuance of budgeted appropriations. The City’s budgeted appropriations for expenditures (excludes interfund transfers) totaled $6,526,799 and $7,414,149 for the 1996-97 and 1997-98 fiscal years, respectively. Our review disclosed several deficiencies and/or noncompliance with applicable law in the preparation, adoption, amendment, and implementation of the budget that could result in over- or undertaxing and inadequate information being provided to taxpayers.

• Budget Preparation. Although required by Section 166.241(3), Florida Statutes, the City did not consider all beginning fund equities available from prior fiscal years when preparing the 1996-97 and 1997-98 fiscal years budgets. The amounts of such balances brought forward have a direct impact on the amount of additional funds to be raised to finance City operations. In addition, the 1996-97 and 1997-98 fiscal years budgets did not include appropriations for one special revenue fund. (See paragraphs 28 through 31.)

• Budget Adoption and Amendment. The City Council did not adopt by ordinance the original budget and budget amendments for the 1996-97 or 1997-98 fiscal years, which is not consistent with the provisions of Section 166.241(3), Florida Statutes. (See paragraphs 32 through 36.)

• Budget Overexpenditures. City records did not clearly identify the legal level of budgetary control (i.e., the level at which expenditures may not legally exceed amounts budgeted) established by the City Council. Also, for the 1996-97 fiscal year, the City overexpended its total budget by $243,907, contrary to Section 166.241(3), Florida Statutes. (See paragraphs 37 through 41.)

Investments

According to the City’s audited financial statements, the City had cash and investments totaling $4,466,233 and $4,912,426 at September 30, 1997, and 1998, respectively. These amounts consisted almost entirely of interest-bearing accounts and certificates of deposit at local banking institutions ($1,000 was invested in a United States Treasury Bond). During the period October 1, 1996, through June 30, 1998, the City maintained significant balances of surplus City moneys in low interest money market or checking accounts and reported interest earnings net of service charges of approximately $61,000. However, additional interest earnings of $47,680 could have been earned had the excess funds been invested through the Florida State Board of Administration. (See paragraphs 44 through 49.)

General Fixed Assets

According to the City’s audited financial statements, the City had net fixed assets totaling $15,174,578 and $16,707,506 as of September 30, 1997, and September 30, 1998, respectively. Of these amounts, $12,406,978 and $13,603,456 were related to the proprietary fund types as of September 30, 1997, and September 30, 1998, respectively. The results of our examination of the City’s records and internal controls for fixed assets are described below:

• General Ledger Control Accounts. The City had not established general ledger control accounts to account for fixed assets reported in the general fixed assets account group (i.e., fixed assets not associated with proprietary fund types). Additionally, we noted differences between general ledger control accounts and the fixed asset inventory (subsidiary) records for proprietary fund types. (See paragraphs 51 through 54.)

• Tangible Personal Property Records. The City’s fixed asset subsidiary records did not include all of the information necessary to properly identify, and evidence the establishment of accountability for, tangible personal property items. Specifically, the City had not established a uniform property numbering system to account for tangible personal property. Although some property numbers were assigned to tangible personal property, the numbers were not recorded in the fixed asset subsidiary records. Additionally, we noted several instances where the fixed asset subsidiary records had not been promptly adjusted for deletions of tangible personal property. (See paragraphs 55 through 58.)

• Annual Tangible Personal Property Inventory. The results of the City’s annual physical inventory of tangible personal property was not, in some instances, reconciled to the fixed asset subsidiary records. Our test of 19 property items that we physically observed and attempted to trace back to the fixed asset subsidiary records disclosed 4 items that, although they had been inventoried as indicated on the inventory sheets, were not recorded in the fixed asset subsidiary records. (See paragraphs 59 and 60.)

Restricted Funds

The City did not maintain separate accountability for the use of certain transportation-related restricted revenues through the use of special revenue funds. Although, according to the City’s accounting records, the City’s transportation-related expenditures in the General Fund exceeded the amount of these restricted revenues received for the period October 1996 through September 1998, the use of special revenue funds, as required by the Florida Department of Banking and Finance’s Uniform Accounting System Manual, would enhance the City’s ability to control the use of restricted moneys. (See paragraphs 61 through 66.)

Personnel and Payroll Administration

The City had 75 full-time employees and elected officials as of September 30, 1997, and salary expenditures/expenses of approximately $1.3 million for the 1996-97 fiscal year. Personnel policies of the City are addressed by the City’s Personnel Policy (Policy), which the City Council adopted by Resolution No. 87-12 on November 23, 1987.

• Salaries in Excess of Maximum Range. In some instances, employees’ salaries for the 1996-97 fiscal year were above the maximum range established in the City’s Job Classification & Description plan (Plan). Also, the City Council had not, of record, approved the Plan. (See paragraphs 68 and 69.)

• Employee Benefits. Two employees on extended leaves of absences without pay during the period June 1994 through June 1996 received holiday and/or incentive pay and their health insurance premiums were paid by the City. These benefits do not appear to be clearly allowable in the Personnel Policy. (See paragraphs 70 through 74.)

• Compensatory Time. To appropriately demonstrate compliance with Federal laws governing compensatory time, the City should review its Personnel Policy for consistency with its actual compensatory time payment practices. (See paragraphs 75 through 78.)

Procurement of Goods and Services

Expenditures of public funds must, to qualify as authorized expenditures, be shown to be authorized by applicable law or ordinance; reasonable in the circumstances and necessary to the accomplishment of authorized purposes of the governmental unit; and in pursuit of a public, rather than a private, purpose. The nature of our audit required that we form judgments as to the propriety of City expenditures. Our audit disclosed a number of expenditures for which the City had not adequately documented: (1) the propriety of the expenditures (i.e., that they served a public purpose and were in compliance with applicable laws, ordinances, and other guidelines); (2) the amounts expended were reasonably determined in relation to the goods or services acquired; and/or (3) the goods or services were acquired using good business practices (i.e., a competitive selection process and/or written agreements). These expenditures totaled $1,225,665, including $136,359 that were unauthorized and/or inadequately supported as to their propriety.

General Disbursements

• Disbursement Processing. Our test of expenditure vouchers disclosed deficiencies in the City’s disbursement processing procedures that may limit the City’s ability to ensure that goods and services are received in the quantity and quality contemplated by management’s authorization. (See paragraphs 83 through 86.)

• Contributions to Nongovernmental Organizations. The City made cash contributions totaling $45,638 and $52,550 to a total of 14 different nongovernmental organizations during the 1996-97 and 1997-98 fiscal years, respectively, for which the City had not implemented adequate procedures to obtain an appropriate level of assurance that the public funds were used for a specified public purpose. (See paragraphs 87 through 91.)

• Contributions to Governmental Entities. The City made cash contributions totaling $14,000 to, or on behalf of, two governmental organizations during the period October 1994 through September 1998. The City Council had not, of record, demonstrated why these expenditures were the responsibility of the City rather than the other governmental entities. (See paragraphs 92 through 96.)

• Inadequately Documented/Unauthorized Expenditures. Our audit disclosed expenditures totaling $4,619.43 for which the City’s records did not clearly document the public purpose served. (See paragraphs 97 through 100.)

Purchasing Practices

As a matter of good business practice, procurement of goods or services should be done using a competitive selection process to provide an effective means of equitably procuring the best quality of goods or services at the lowest possible cost. The City’s purchasing and contracting practices are primarily addressed in Section 2-1 of the Municipal Code, which establishes, in part, the dollar thresholds for obtaining quotes and bids for purchases and contracts, specifies the methodology for advertising for bids, and establishes procedures for sole source and emergency purchases. As discussed below, our audit disclosed deficiencies in the City’s procurement practices.

• Awarding of Contracts for Services. Contracts for linen services were signed without obtaining City Council approval, which does not appear to be consistent with the Municipal Code. Additionally, contracts for engineering and linen services were signed by an official and an employee, respectively, who were not authorized as a contract signer by the Municipal Code. (See paragraphs 102 through 104.)

• Written Agreements. The City incurred legal and water and sewer testing services expenditures totaling $106,026.11 during the period October 1996 through September 1998 without benefit of formal written agreements. Written agreements are a good business practice that facilitates a determination that payments for services are reasonable and in accordance with the City Council’s intent. (See paragraphs 105 through 107.)

• Auditing Services. The City acquired auditing services for its general purpose financial statements for the fiscal years ended September 30, 1997, and September 30, 1998, without using a competitive selection process, contrary to Section 11.45(3)(a)5., Florida Statutes. (See paragraphs 108 through 112.)

• Sole Source Purchases. The City expended $12,679 for street repair material purchased from one vendor without documenting that other vendors were contacted to evidence that the item could only be obtained from a sole source. Documentation of such vendor contacts is required by Section 2-1(i) of the Municipal Code. (See paragraphs 113 through 115.)

• Lease Purchases. The City entered into two lease-purchase agreements to acquire a fire truck and 13 police cars at a total cost of $415,741; however, the City granted the banks a security interest in the equipment being acquired. The Attorney General has opined that governmental agencies, including municipalities, may not legally agree to the creation of a security interest in publicly-owned assets. Also, the agreements contained provisions that appeared to limit the City Council’s discretion in determining whether they should be renewed beyond the current fiscal year. (See paragraphs 116 through 120.)

Travel Expenses

City travel expenses are subject to Section 112.061, Florida Statutes, which governs per diem and travel expenses of public agencies. During the 1996-97 and 1997-98 fiscal years, the City incurred expenditures of $13,574 and $10,846, respectively, for travel-related expenses of City officials and employees (including $5,425 for travel allowances paid to the City Manager). Our examination of travel-related expenditures disclosed several instances in which travel expenditures were inadequately supported and/or not in accordance with Section 112.061, Florida Statutes, as discussed below.

• Travel Allowance. The City Manager received a monthly travel allowance during the period October 1, 1994, through January 15, 1998. However, this monthly travel allowance was not supported by a signed statement showing a typical month’s travel, contrary to Section 112.061(7)(f), Florida Statutes. As a result, the City had not demonstrated, of record, the propriety of the travel allowance. In addition, such travel allowances were not subjected to withholding for payment of Federal income tax and other employment taxes. (See paragraphs 123 through 128.)

• Travel Reimbursements. Our test of 41 travel expenditures totaling $5,544.05 for the period October 1, 1996, through July 14, 1998, disclosed that these expenditures were not always adequately supported and/or in accordance with Section 112.061, Florida Statutes, or City procedures. (See paragraphs 129 through 132.)

• Taxable Meal Allowances. Contrary to Federal regulations, payments for nondeductible travel expenses (Class C meal allowances) were not reported as wages or other compensation and were not subjected to withholding for payment of Federal income tax and other employment taxes. (See paragraphs 133 through 136.)

Communications Expenses

During the period October 1, 1996, through September 30, 1998, the City paid $464.96 of Federal, State, and local telecommunication taxes from which it is exempt. (See paragraphs 137 through 139.)

Vehicle Usage

The City Council had not, of record, designated which City vehicles were to be driven home overnight (i.e., to be assigned to employees on a 24-hour basis), contrary to the City’s Personnel Policy. Also, adequate vehicle usage logs were not maintained for City vehicles assigned on a 24-hour basis. In addition, the City, for employees assigned vehicles on a 24-hour basis prior to January 1998, did not report the value of the personal use of the vehicles to the Internal Revenue Service, contrary to United States Treasury Regulations. (See paragraphs 140 through 142.)

Other Matters

• Sunshine Law. In one instance, two former Council members and the City Manager met with a local business owner to discuss the purchasing of parts and service. Contrary to Section 286.011, Florida Statutes, the meeting was not advertised and held open to the public and minutes for the meeting were not recorded. (See paragraphs 143 through 147.)

• Sprayfield Acquisition. The City, in purchasing 400 acres of land, acquired a site necessary to the completion of its sprayfield irrigation system project and avoided potential future costs related to noncompliance with the Consent Order requiring full compliance with the Florida Department of Environmental Protection standards. However, the City did not fully comply with the provisions of Section 166.045(1)(a), Florida Statutes, regarding the documentation of offers and counter offers. As a result, the City did not adequately document, of record, why the City acquired 100 acres of property (at $800 per acre) in excess of that needed to construct the sprayfield, paid approximately $40,000 in excess of the appraised value of the property, and allowed the property owner to cut timber from the property and retain the proceeds from the sale of the timber. (See paragraphs 148 through 156.)

• Year 2000 Compliance. The City has initiated several actions intended to assure that the City’s information technology systems and resources are Year 2000 compliant. Because of the unprecedented nature of the Year 2000 issue, its operational effects will not be fully determinable until the Year 2000 and thereafter. (See paragraphs 157 through 160.)

The City's written response to the audit findings and recommendations included in audit report No. 13529 is presented as Exhibit B.