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TOWN OF SAUGUS REPORT ON REVIEW OF OPERATIONS – PART 2 FISCAL YEAR 2012
May 25, 2012
Town of Saugus To the Honorable Board of Selectmen: This is the second of a three-part report intended to report our findings relevant to the scope of services outlined in our engagement letter and initial report. This particular section of our report focuses on potential financial irregularities and noncompliance with laws and regulations as they relate to wage, benefits and other compensation paid to Town employees. The issues identified in this report were obtained from information we received in our initial interview with the Temporary Town Manager, Town Accountant, Treasurer Collector and Purchasing Assistant. The conversation with the previous Town Manager provided insight as well. In addition to initial interviews, we met with the Human Resource Supervisor and the Payroll Coordinator in order to gather additional information relevant to the current employee wages, benefits and other employee allowances, which we felt would be an exception to normal practices within the Town, outside of collective bargaining agreements, or in some way out of the norm for other employees in similar positions and departments. The Town Charter authorizes the Town Manager to set the salaries of most Town employees, which normally would be accomplished through the collective bargaining process and employment contracts. We noted many employee salaries are not formally set by either of these methods but are set informally by the Town Manager. Even though the Town Manager has wide discretion on setting employee compensation, the compensation needs to conform to budget restraints, accounting norms, collective bargaining agreements, employment contracts and payroll laws and regulations. The Town has an internal practice to record and track changes in an employee status by using a document referred to as a “Payroll Master File Form”. This document is used to authorize status changes for a new employee or existing employees relating to base pay within the Town. According to the Human Resources Supervisor, this document is not used for other compensation such as, stipends, special assignments, temporary upgrades, etc. This information is critical for the Town since one of the objectives going forward is to properly budget the wages, benefits and employee allowances in the proper account and/or fund. The Town will be required to adjust the actual payroll related expenditures for the FY 2102 budget and make reliable FY13 budget projections based on our findings. The final report will follow and pertain, as previously reported, to procurement issues. This report is intended solely for the information and use of management of the Town of Saugus, Massachusetts.
Summary of Current Findings As previously reported, we first requested and obtained ledgers and documents that provided the detail and support for the Town’s payroll activity from July 1, 2011 through February 29, 2012 for selected employees. We conducted interviews with numerous Town officials and employees, along with the former Town Manager. What we have discovered is that there is clear evidence to support the fact that there were and are significant violations of municipal finance laws, rules and regulations. Our findings lead us to believe that there was a systematic, knowledgeable and intentional violation of finance laws that led to misleading and fraudulent accounting of the actual nature of the financial transactions for the year under review. As in our previous report, we were informed that after the former Town Manager’s term expired, the Town Accountant and several other employees approached the Temporary Town Manager with evidence and concerns of specific violations of finance laws that had been occurring over the past several years. We were informed numerous times by these employees, that they knew processing these transactions were clear violations of law but stated they only did so under the specific instruction of the former Town Manager. Although there may have been pressure to process the transactions, it does not relieve them of their legal responsibility to comply with the same laws and regulations. Liabilities were incurred were no valid appropriation was made. Those relating to payroll were incurred and charged to an expense appropriation or in a number of instances revenue line items, which clearly there was no appropriation made. The following are examples: • • • • • • • Changes were attempted to be made to the sick leave buyback contractual provision for two current employees and a benefit change for another employee Regular payroll was charged to overtime line items Payroll expenditures were charged to expense line items Payroll expenditures were made to several different revenue line items Contractual and collective bargained payroll employees were paid above their contractual step rate Stipends were given to employees where there was no appropriation Cell Phone and Auto Allowances were given to employees inconsistently and in an arbitrary manner and not in compliance with the Town of Saugus’ Travel Policy The Town’s Date of Hire practice, for calculating years of service, was not adhered to and employees were given related years of service benefits outside of the restrictions of the current practice
Educational allowances were administered inconsistently and were continued for some nonunion employees and discontinued for others Town employees were paid as 1099 vendors and in a few instances the Town Accountant told us that the previous Town Manager instructed her not to issue the required 1099 for calendar year 2010 and prior General fund payroll and employee upgrade wages were charged to the enterprise fund and overtime line items Journal entries were made at the end of the fiscal year to cover the payroll appropriation deficits, which occurred as a result of the practices noted above
Again, as previously reported our findings demonstrate that the Town violated municipal finance laws and DOR Regulations. The Commonwealth’s Department of Revenue provides the rules and regulations a Town must follow to comply with Massachusetts General Laws (MGL) regarding municipal finance. MGL Chapter 44 – Municipal Finance is one of many chapters of the law that dictates how liabilities for expenses and wages can be incurred. The scope of work for Part 2, of our report focuses strictly on FY 2012. We believe that based on the known violations we have found we feel that similar findings for previous years are likely. We did not examine all transactions and therefore there is a possibility that not all violations have been identified. The vast majority of this information was obtained in cooperation with the Accounting and Human Resource Departments. Over $206,000 of questionable General and Enterprise Fund related payroll expenditures and fringe benefits were reviewed for FY 2012. Of that amount $161,853, was determined to have been paid with some degree of violation in law or regulation. Policy Related Items Identified We identified 24 instances, totaling $65,087 in FY 2012, where no policy exists to administer employee related allowances and other employee benefits. We found wages were increased for employees that were not budgeted. We found that some employees were hired and budgeted as part-time employees but are working full-time. We found instances where cell phone and auto allowances are being paid to employees inconsistently and in contradiction to the Town’s policy. In prior years when a deficit occurred in a Salary Line Item(s) at year end, due to arbitrary salary increases not budgeted for, the former Town Manager would direct the Town Accountant to make journal entries to move the overage to another line item. This is in violation of law and regulations as the intent of these journal entries would be to hide the true nature of the transactions and to cover up the deficit. We anticipated that a similar entry would be made at the end of FY2012 as a number of Salary line items where under budgeted.
In addition to the amounts reported above, our initial report found that the Plumbing Inspector was given a stipend for conducting the Inflow & Infiltration (I & I) Inspection Program after the I & I Inspection Program had been discontinued. The stipend for FY2012 was $116.54 per week or $6,060 annually. We have listed below other payments that we believe are questionable that were made under the direction of the former Town Manager: o During our review, we identified fifteen instances where employees received phone and auto allowances from the Town. Eight out of the fifteen allowances were for cell phones, totally $3,360 annually. Currently there is no policy in place, which identifies what positions are to receive a cell phone allowance and the amount of the allowance. We found allowance amounts ranging from $25 per month to $75 per month for the Plumbing Inspector, Cemetery Superintendent, Recycling Coordinator, Deputy Assessor, Electrical Inspector, Water Foreman, Health Director and the Building Inspector. Also, there exists no procedure or policy in place for the reimbursement for this expense. The remaining seven instances were for allowances paid to some employees for the use of their personal vehicle for work related travel. We found that in only one instance did an employee adhere to the Travel Policy outlined in the Town’s Policy manual, page 48. All other employees were paid varying amounts. The positions receiving this benefit include the Code Enforcement Officer, Plumbing Inspector, Electrical Inspector, Health Director, Recycling Coordinator and the two Part Time Recycling Enforcement Officers. The total annual auto allowance for these employees is approximately $15,080. The monthly auto allowance for these individuals ranges from between $25 to $280 per position. There was $46,647 paid out in additional wages and benefits in various wage and benefit categories. Prior to year-end the Town Accountant, under the direction of the former Town Manager would make a reclassification entry and charge the over expended amount to any line item where there was an appropriation surplus. • The Town Accountant received a $200 wage increase for a period of 10 weeks that totaled of $2,000 without an appropriation. Since the Town Accountant was responsible for preventing these types of unsubstantiated wage increases, the likelihood of her stopping these payments may have been compromised since she benefited from this questionable practice. An employee in the Town Manager’s Office received a wage increase without appropriation in the amount of $2,000. The Youth and Recreation Department Director was given an $8,000 increase, which included an education stipend for approximately $1,500 annually, which was rolled into the positions base pay. In the Fire Department, the Administrative Assistant to the Fire Chief is receiving benefits that would be typically received by a firefighter, in addition to those benefits received as a member of the AFSCME Union. These benefits to date total $3,645 annually. The benefits are made up of Uniform Allowance, Holiday Pay (13 days paid) and a Fire Prevention Stipend. We also identified that the part-time (20 hour per week) Parking Control Officer, is working 40 hours per week, this equates to $28,747 annually. 4
• • •
The wages are currently being charged to the Police Department’s Holiday Line Item. The former Library Director wages were increased by $1,407 without an appropriation and instead of being charged to a payroll appropriation the amounts were charged to a Library expense appropriation. The DPW General Foreman received an $848 wage increase without appropriation.
Contractual Non-compliance Issues We found items totally $96,767 where employees were paid above the contractual step specified within the AFSCME collective bargaining agreement, payment of wages for Town employees were processed through the Accountants Payable System (as 1099 Vendors), Part Time Custodians were paid where no position or budget existed for them, the wages paid for a Pay Upgrade for the temporary assignment to a Superiors position were made after the budgeted line item for the upgrade benefit had been exhausted. In two instances compensation has been paid to employees, the Police Chief and the Fire Captain, which does not exist in the agreement governing their employment with the Town. In these instances, the Department Head would approve and submit payroll for upgrade wages charging various overtime accounts. We were informed that the former Town Manager attempted to modify the Police Chief’s Contract, page 1 paragraph 5: from “in no event shall the Police Chief be paid less than 100 accrued sick days in a lump sum no later than 30 days from retirement” to “in no event shall the Police Chief be paid less than 200 accrued sick days in a lump sum no later than 30 days from retirement”. We also were informed that the former Town Manager attempted to modify the Fire Chief’s Contract, page 1 paragraph 5 from “in no event shall the Fire Chief be paid less than 100 accrued sick days” to the “Fire Chief shall be paid for 200 sick leave days”. We were informed that page 1 of the original agreement, was replaced, by the former Town Manager but was date stamped by Accounting Department. The signature page for this agreement was not updated. We were informed that the former Town Manager approved a modification to the DPW Director’s sick leave buyback benefit providing an increase from the maximum allowable 100 days of accrued sick days established in 1994, by the Town Manager in place at that time. In 2007, the DPW Director requested from the Town Manager that a modification to his benefit be made in order to be in concert with a select group of DPW Union employee’s sick leave buy back benefit in effect in 1994, when he was the DPW Director. Under the provision in place for DPW employees at that time, he would have been eligible for up to 50% of all accrued sick days at time of retirement with no maximum number of sick leave buyback days and no less than a minimum of 100 sick leave buyback days. We found that eleven employees, in various positions were paid above the AFSCME Local 262 (DPW/Clerical Union) Step 5 contractual amount. This above grade pay is estimated at $21,775 annually. This Salary Schedule for the AFSCME agreement has been in place since July 1, 2003. We found no document, which amended the step schedule.
Four employees in the Highway, Sewer and Water Enterprise Funds are being paid wages for upgrades that were not budgeted for. These expenditures totaled $5,579 and were charged to the General Fund, Sewer and Water Enterprise Fund overtime accounts. In most instances, the upgrade wages were charged to the incorrect fund, as they actually did not work on enterprise operations while in the upgrade role. The upgrade line item is budgeted in the General Fund and is inadequate to cover the required upgrade benefit paid to the employees. There is one DPW employee being paid benefits, which apply to the AFSCME agreement, which he is not a member. We have been informed during our interview process that all educational benefits have been suspended excluding police and fire personnel. These benefits totaled $7,062 annually. We found that two Town Hall Employees have been paid as 1099 vendors totaling, $18,278 as of the date of this report. These individuals, as well as others identified in the report, will require special employee status in order to hold multiple positions within the Town. The payment to an employee as a 1099 vendor is an unacceptable employment practice, and in violation of Federal and State Employment Laws. We determined that two full-time Town employees are receiving additional wages in the form of stipends from the animal inspection salary line. One employee is a Fire Captain and the other is a Patrolman both are receiving $833, annually. It appears that they are on call for weekends and/or night coverage. They are required to respond to animal related complaints and remove dead animals from the roadways in Saugus. The practice of holding multiple positions within a Town is unlawful without receiving, “Special Employee Status”. The Board of Selectmen can only grant this status. The Police Chief has been paid $15,178 in fiscal 2012 for compensatory time, which is not in his current employment agreement with the Town. The Fire Captain has been paid $2,500 as an Executive Officers stipend, in this instance the position of Executive Officer does not exist in the Fire Fighters collective bargaining agreement. Also there is no specific line item for this amount. We determined that there are three employees whose date of hire was modified in contradiction to current local practices. In these instances the employee’s vacation, longevity and potentially their retirement benefit date have been incorrectly stated. This has long and short-term financial impact as the determination of an employee’s vacation benefit (number of eligible weeks), longevity benefit (annual stipend) and years of service for retirement purposes based on the date of hire. Other Matters We reviewed a letter dated March 4, 2005 from the Town’s labor counsel Norman Holtz of Gilman/Holtz, P.C. to the former Town Manager related to stipends and permanent salary increases similar to the ones discussed in this report. The first paragraph of this letter reads as follows: “I am at a complete loss of how you accomplish a permanent adjustment for Cerbone without it (1) have a “spill over” effect on other employees (and budget process); and (2) making the pay level consistent or reasonable compared to existing pay grades.”
The letter further describes over ten questionable stipends and then discusses the appropriate way to make salary adjustments consistent with actual duties rather than treating employees on an individual basis. The letter stated the appropriate way may be a massive undertaking. Over the next two months after receiving that letter, we saw further correspondence between the former Town Manager, Cerbone, a union representative, the Town Accountant and Payroll Supervisor that directed a $5,000 permanent stipend be paid to settle a union grievance. The other 10 stipends we believe also continued. The continuation of these practices appears to conflict with the advice received from labor counsel. This practice of increasing salary on an individual basis and not collectively continued through FY2012. We only reviewed the payroll transactions related to Town employees and did not review the payroll transactions of the School. We are aware of other payroll related irregularities that occurred in past years that are similar to the issues discussed above. We were informed that the daughter of the Town Accountant was hired by the former Town Manager. We are not questioning the qualifications of the employee but are questioning whether an evaluation was made to determine if any potential conflicts existed. We are not aware of a Town Policy regarding transactions with related parties as internal controls can be compromised depending on the responsibilities of the positions. The Town should consider establishing policies and implementing controls that would require an evaluation be completed to identify potential situations that could influence or compromise an employee’s ability to fulfill their responsibilities. The policy should require disclosure of any related party transactions for both vendor and payroll. Conclusion With the assistance of current Town employees, we have reviewed many instances where the former Town Manager authorized employment, wage and benefit adjustments and employment practices that were questionable or not in compliance with laws and regulations. It is important to reiterate that the Town Manager is the CFO, CEO, Chief Procurement Officer and Chief Personnel Officer for the Town of Saugus. The internal protocols relevant to these functions were approved or established by him. It is important to note that the practice of requesting personnel changes should be done so solely through the use of the “Payroll Master File Form” and through no other means. This would properly document the purpose and the authorization of any changes that could be verified with the collective bargaining agreements, employment contracts and other Town policies related to payroll. The recently appointed Town Manager now requires that this form be completed for any payroll/employment change. We were informed that the former Town Manager, would use various means of communicating a request for a payroll change and he would vary to whom he communicated the changes. He communicated these requests for changes verbally, via memo, or through the use of the “Payroll Master File Form”. The change could be made
to the Town Accountant, Human Resource Supervisor and / or the Payroll Coordinator. We saw written evidence and were informed that he used language stating that he was authorizing a wage adjustment for a particular reason, such as working overtime for a salaried employee, while others would have no reason. The extra wages could be a one-time payment, a series of several payments or a permanent adjustment. Again and as previously reported, in our discussion with the former Town Manager, he said he authorized these wage or benefit adjustments and payments to make up for some employees not receiving pay raises for years or for extra time worked. It is apparent, based on the evidence we reviewed, that these significant financial violations of laws and regulations was an effort to intentionally cover up the actual nature of the transactions with full knowledge that they were actual violations. Although the former Town Manager may have authorized these transactions, it does not relieve other employees from their responsibilities not to process transactions that they know are not in compliance with laws and regulations. We have concluded that there is sufficient evidence to support the fact that a series of financial irregularities, as detailed above, occurred during fiscal year 2012, as well as over the past several years, that misstates the financial activity in the General and Enterprise Funds. This report is submitted to the Board of Selectmen on May 18, 2012.
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