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Sarno set to review report from State Auditor DeNucci

By G. Michael Dobbs

Managing Editor



SPRINGFIELD Mayor Domenic Sarno said his financial team will now review the report issued Tuesday by State Auditor A. Joseph DeNucci on the city's compliance on municipal finance laws pertaining to the city's investments.

DeNucci's reports called for the city to "update its cash management and investment policies and procedures."

Among the recommendations is for the city to use an outside investment advisor to guide city officials about investment decisions; write a job description for the city treasurer as none currently exists; and create an independent internal audit function that would report to "an appropriate level of city government."

Sarno's request for the state audit came in the wake of an investment contract with Merrill Lynch last year that put city money into the sub-prime mortgage field. That move resulted in a $12 million loss for the city. The funds have since been returned to the city after an investigation and Sarno made the decision earlier this year to put the city's investment funds into a state-operated program.

Sarno said that he has wanted to "create the proper checks and balances" to insure all city investments are sound and legal.

DeNucci wrote in the report, "Our audit was not conducted for the purpose of expressing an opinion on the City's investment practices. Our audit was made in accordance with generally accepted government auditing standards for performance audits. Our review identified and evaluated the fiscal policies, procedures and investment practices employed by the City for investing funds as well as the procedures and responses by the Finance Control Board (FCB) and City officials in monitoring, providing oversight and instituting remedial procedures to protect its investments."

The audit covered city investments and financial practices up until Feb. 29. State officials interviewed a number of city employees, reviewed state law regarding municipal investments and examined city records.

"Our review found that, prior to the takeover and tenure of the Finance Control Board (FCB,) the City had inadequate, fragmented, piecemeal written procedures or informal policies and procedures in place for its overall cash management and investment functions. Clearly defined comprehensive policies and procedures are necessary to provide guidance, structure and direction to establishing and enacting a process as to how the City should enter into its cash management and investment decisions and selections, as well as monitoring activities," DeNucci wrote.

He noted that the FCB put into place a uniform fiscal policy in February 2006.

DeNucci's full recommendations are for a city investment policy:

The scope of the policy, including what funds are or are not covered by this policy. For example, some municipalities exclude debt service funds and trustee funds from the traditional cash management policies.

Delegation of authority to specifically delineate who is responsible for management of the City's investment portfolio, role of a selection committee if adopted, defining who is authorized to make periodic selections, conduct investment transactions and who is responsible for establishing and maintaining the written procedures for cash and investment management.

Performance standards addressing not only safety, liquidity and yield as they currently do, but expanded to include performance targets. Performance targets would probably not be written as an absolute percentage, but rather as a percentage of a recognized performance indicator for the types of investments applicable to that category of investment.

Internal controls, including a summary of the important controls applicable to the investment area.

Legal authority and limitations of investments that include the types of investments that may be made and any maximum time frames of investments.

Investment limitation per institution to help protect the City in the event of a financial institution failure. The City might consider limiting how much funds are invested with a particular institution. Additionally, policies in this area might consider limiting how much of the City's funds compose the institution's financial resources.

Reporting requirements to help ensure that the necessary reports are generated and reconciled to the appropriate records and made available to the appropriate parties.

Institute ongoing formal monitoring activities of the City's investments, including periodic performance evaluations, so that informed decisions can be made on a timely basis. This shall include timely reporting to upper-level management.

Establish ethics and conflict of interest policies, and provide awareness training to ensure that officials and employees are aware of conflict of interest laws and City policies and to help ensure that investment decisions are made impartially.

While reviewing current City cash management policies, the City should determine whether it desires to keep its current restriction of limiting investments to the so-called 'legal investment list' items or whether they desire to allow more flexibility in investment vehicles.

If the City is going to make investments through brokerage firms, we suggest that an evaluation of the firm be conducted to provide such services, which would include, at a minimum: the qualifications and expertise of the proposed firm; the experience the firm has in managing portfolios similar to the City's; the structure of the firm; the firm's ethical and professional standards; and costs of providing such services. Any such selection process should have clear documentation requirements outlined in the City's fiscal policies and procedures.

The City may want to consider the use of an investment advisor, independent of servicing brokerage firms, to guide the City in assisting its finance officials in investment selection decisions. This may assist the City in ensuring safety, liquidity and financial return on principal, accordingly to meet its strategy, goals and objectives for maximizing revenue from its investments.

The City should formulate a job description for the position of the City Treasurer, as no description currently exists for this position.

In the event of any restructuring within the City's Finance Departments, consideration should be given to dividing the Collection responsibility to another high level Collector's position. This break would segregate the Treasurer's responsibilities more exclusively towards cash management, investment strategy, monitoring improvements and related cash-control activities, including ensuring rapid reconciliations to ensure cash flow measurements and expectations are reported in a timely manner and documented for cash management improvements.

The City should consider creating an independent Internal Audit function that would report to an appropriate level of city government. Although the City has a City Auditor, the responsibilities of this position are aimed more at determining whether departments are within spending limits, whether new programs or positions are funded, compliance with applicable accounting standards and assisting the assembly data as part of the annual independent City audit. The Springfield City Auditor's responsibilities are similar in nature to what other municipality, city or town auditor positions require throughout the Commonwealth, but the general public often misunderstands these responsibilities."