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Monday, November 14, 2022

Another case of mis-managed Charlestown tax dollars?

Payroll errors cost taxpayers plenty of money over the years

By Stephen Hoff C.P.A.

Editor’s note: This is a transcript of testimony presented by Stephen Hoff, CPA whose comments on Charlestown’s budget management problems have often been published here. CLICK HERE for an example. This testimony was given to the Charlestown Town Council at its November 14 meeting, the last with the pre-election Council members still seated.

It’s not easy to describe budget issues in short, simple terms and the issue of long-term salary overpayment is no exception. I can give you my own short-and-sweet synopsis: that through no fault of their own, most Charlestown town staff have been paid more than their contracts stipulate for at least the last decade. To understand the how and why, please read on.    – Will Collette

Here's the transcript:

Good evening 

The Town of Charlestown has apparently been paying all of its union employees, as well as its Town Administrator who is not a union employee, at a rate of pay per day in excess of what their negotiated contracts allow.  The amount of the overpayments appears to be at least $200,000 over a period of approximately 9 years, but we will probably never know the exact amount.  This is just one more instance of the Town’s financial management team failing to do its job properly.   

However, let me be clear that I am not suggesting the town attempt to take back cash from the union employees for a mistake they played no role in creating. 

Based on my previous experience as a municipal Finance Director for 15 years and as a CPA, I did not find the Town Administrator’s or Treasurer’s explanation convincing when they requested a significant increase in budgeted salaries in their end of year Budget Amendment Transfer request to the Town Council in August.   Nor did I find it convincing when they both emphatically stated that approval of the requested Transfer would not result in overpayment of Town employees.   

After multiple APRA requests and analysis of literally thousands of pages of documents, it became evident that salary overpayments had been systematically made over at least a decade, going back to FY 2013.     

Specifically, all of these Town employees are salaried at yearly amounts.  However, their salaries must be converted to an amount paid per day so that each paycheck issued every 2 weeks covers 10 days of work.  This only requires a simple calculation, but one that the Town has consistently miscalculated for each employee for the past 10 years.  That miscalculation has cost taxpayers at least several hundreds of thousands of dollars. 

In order to calculate an employee’s bi-weekly paycheck properly one must both know and use the actual number of days per year that the employees will work.  Once this is known one simply divides the annual salary by the number of work days per year and multiplies the amount by 10 which represent the days worked in each 2 week pay period.  This calculation does not require high level math skills.  

Charlestown has 261 workdays each year and has for the past 10 years.  However, the Town has been incorrectly calculating its employee’s daily pay based upon only 260 days.  That means that for every 5 fiscal years one additional week of work is being either paid or accrued to all employees that is not approved in the union contracts.  I ask the Town Council to confirm this with the auditors.  

This means that the employees have been receiving 100% of their full annual salaries over a period less than the total workdays in a fiscal year.    Therefore, they are being paid at a higher rate per day than allowed by union contract and at a higher rate than any budget referendum has ever approved.  This is a serious and expensive problem for taxpayers going back 10 years, and it is continuing as we speak tonight in the current fiscal year. 

So, what happens to the 261st day that employees work since the annual budget appropriation was already expended in only 260 days?  Well, the employee gets paid for it in their next paycheck, but the 261st day is charged to the next FY, and so on and so on and so on effectively kicking the can down the road year after year. 

However, a silent liability accumulates for the Town for these additional days, but that silent liability is never recorded on the Town’s financial statements because of a national accounting rule.  At a tipping point the liability becomes so large that it is exposed to the light of day and cannot be hidden any longer.  That is what happened at the end of FY 2022, the year now being audited.   

An examination of the detailed General Ledger of the Town shows that 270 days of payroll were charged to FY 2022, a full 9 workdays more than the employees actually worked during FY 2022.  This fact screams for an explanation.  And these 9 days extra charged to the General Ledger in the final payroll of the year still did not cover the Town’s liability for FY 2022.  June 29th and June 30th remained unpaid.   

These additional 9 days of salary represent the accumulated overpayments made over approximately the past 9 years.   Once again, this is a serious indictment of the Town’s financial management team starting at the very top. 

When did this problem begin and why wasn’t it identified earlier?  I do not know if this problem precedes 2013, but I have examined documents that reveal it has been occurring for at least the past 10 years, and it has continued each year, including the last paychecks that were received by Town employees just last week.  These overpayments need to be immediately stopped and the amounts paid to employees going forward returned to contractually agreed upon salaries.     

The Town has had 3 Treasurers since FY 2011, each of which assisted the Town Administrator in formulating his proposed annual budget to the Budget Commission.  However, Charlestown has had only 1 Town Administrator since very early in 2013 who has recommended Town budgets to the Budget Commission and who supervises the Finance Department and its Treasurer.  Similarly, the Town has had only 1 outside audit firm until this year.   

The Town Administrator and Treasurer both acknowledged on August 9, 2022, when questioned at the Town Council meeting that their end of year budget amendment transfer required significant increases in salary areas. However, they both publicly stated that it would not result in an overpayment to employees.  

Either they didn’t understand that overpayments had been made, or they simply chose not to inform the TC that their requested transfer approval would result in overpayments being made.  I would like to think that it was the former, but a lack of understanding of why the Transfer was needed in the 1st place would still very damning.   

Their assurances resulted in these overpayments being approved by the Town Council based on inaccurate information.  We simply do not know how the Town Council would have voted had they been provided accurate information last August. 

Unfortunately, the Town Council and public were both in the dark last August because the total cash required for salaries was obscured by an earlier action by the Treasurer/Town Administrator.  They had amended the budgets of multiple salary lines using Charter authority that had the effect of making their TC proposal for needed salary increases look smaller than it actually was.  And that earlier budget adjustment journal entry was not provided in the August Agenda Packet or referenced when they responded to TC questions regarding possible overpayments. 

Bottom line, the Town’s Unassigned Fund Balance will be approximately $200,000 less than it should be at June 30, 2022. 

How can this be fixed?  First, our new auditors need to be made aware of the assertions that I am making this evening, along with the backup and documents provided tonight supporting my assertions.   They can evaluate my claim of overpayments to all union employees including the Town Administrator.  They can also determine if my assertion of 261 workdays per year is accurate.  

When they present their audit findings for FY 2022 to the Town Council, they can reveal their findings to taxpayers as well and explain any ramifications as well as their recommendations if any.   

My expectation is that our new auditors have already discovered the same thing that I am reporting tonight. This is because the excess number of workdays paid to employees in FY 2022 that were charged in the General Ledger will require a thorough explanation as to what the overpayments represent and why there was no budget approved at referendum to cover it.  

Second, the Town can issue 2 separate payrolls each fiscal year for the payroll that spans 2 fiscal years at the end of June each year.  For instance, if 3 days of it belong in June and 7 days belong in July, then the proper amounts for each FY can be paid to employees and the amount budgeted for salaries in each referendum would equal the exact amount budgeted.   

The Town Administrator has implied that there is an inherent problem in paying employees properly when they are salaried and paid bi-weekly.   As stated above, doing it properly does not require higher math skills, only an extra payroll once a year.  A small cost to taxpayers and infinitely cheaper than overpaying employees several hundred thousand dollars every 9 years. 

Why wasn’t this problem identified and fixed years ago?  Possibilities include inadequate financial management skills, failure of internal financial controls or the non-existence of internal financial controls, failure of oversight at every level of budget preparation and administration, and what appears to be a demonstrated inability to hire and retain adequately qualified staff.   

Quantity of staff does not appear to explain the overpayments. I say this because the fix takes virtually no time to implement.  However, it is likely to be used as an excuse for the overpayments, so we must remain vigilant and keep our eye on the ball.   

This overpayment of employees is only the latest  of many problems to surface in the past year or so.  We must not forget the recent $3 million dollar problem where neither the auditors or Town staff recognized for over a year that the FY 17 and FY 20 audits improperly recorded Unassigned Fund Balance when reviewing the final audit report draft documents.  We must also not forget the prior year’s Management Letter from our auditor that stated town financial staff could not be depended upon to provide them with accurate financial statements to audit.  

We clearly recognized that we had serious problems in our financial management team before this.  Now we know that the problems are both deeper and even more serious than we were previously aware.  That is why we desperately need an independent 3rd party analysis to advise Charlestown on how we should best proceed.  The time is long gone for us to rely on the continued belief that our financial management team has the capacity to both self-diagnose and rebuild what is clearly a broken system.