Sterling, Illinois City Manager Scott Shumard told KWQC that research he did on behalf of Sterling in 2010 revealed obvious warning signs that there were problems with Dixon, Illinois’ finances. His research was 15 months before Dixon’s now-former comptroller Rita Crundwell was arrested at city hall by the FBI and accused of stealing $53 million from taxpayers over more than two decades.
Below is Shumard in his own words explaining the financial research he performed in 2010 and why he became concerned about Dixon’s financial condition back then. His “attachment” references refer to the 26-page financial report he presented to Sterling City Council in January 2011 which KWQC has obtained.
Following the financial meltdown, Sterling had a very public and occasionally contentious debate with the fire union in an attempt to freeze wages to avoid a large deficit and a large inequity between employee groups. It was a tough task, but our approach ultimately allowed us to change from negotiated health insurance premiums to percentage shares from employees. It let us set the stage for the use of furlough hours for fire union employees as well as non-represented employees. It temporarily stemmed the tide of increasing labor costs and even set the table for eventual reductions in headcount without a second battle. Dixon, a similar city in demographics, seemingly managed to avoid most of the negative press regarding budget tightening while the City of Sterling was receiving prominent attention locally and regionally.
In seeing news from other locales in regards to budgets, I began to compare our fiscal health and our changes compared to other cities in Northwestern Illinois and comparably sized downstate cities in advance of preparing a tax levy recommendation to the Sterling City Council. The two primary things I wanted to compare were: 1) the reported fund balance and the fund balance percentage of other cities General Funds (reserves/expenditures) and 2) the year to year changes in fund balances to see how other cities were adjusting spending in their General Funds.
In late 2010, I compiled the results of 33 cities 2009 and 2010 Annual Financial Reports (AFR’s), which are publicly available from the Illinois Comptroller’s website. I first shared Dixon’s AFR with other city managers and administrators as the fund balances and year to year changes seemed well out of the norm. On January 31, 2011, the City of Sterling held its first budget meeting for Fiscal Year 2011-12 Budget. There, I presented my findings, primarily to inform the Sterling Council of our superior fiscal health, and to demonstrate that our proactive measures had allowed us to preserve our fiscal health, particularly in relation to most cities. The meeting was also setting the stage to implement a formal fund balance policy to further strengthen our financial policies. At that meeting that I pointed out our health and the obvious comparisons to our neighbors. My research showed that Dixon’s negative General Fund balance was dramatically out of line with all 32 other cities compared. The second worse off city, had a fraction of the nominal problem, and by fund balance percentage, Dixon was 43.6 percentage points worse than the second worst off city in the list. Even including Dixon’s massive negative fund balance, the overall average of the 33 communities surveyed was a +30% fund balance as opposed to Dixon’s -57.9%. (page 4 of the attachment)
A negative fund balance of that proportion does not indicate fraud has or has not occurred. Not having seen the City of Dixon budget, it was possible the City Commissioners were authorizing spending more than they had for emergency capital projects or to bridge financial gaps elsewhere. Drawing down fund balances to negative levels is not typical. The Government Finance Officers Association (GFOA) generally recommends a city have at least 2 months of expenses in General Fund reserves for the purposes of cash flow and emergencies and most cities that formalize a policy seem to target at least 3 months, a fund balance ratio of +25%. That compares well to the overall survey of +30% that I compiled.
My second concern of significance was how quickly Dixon’s negative fund balance was growing. Out of 33 cities in the same survey, Dixon had the 2nd largest nominal decrease in the General Fund’s fund balance and by percentage, Dixon had the 4th largest decrease in their fund balance ratio. (page 19 of the attachment)
If I had had a reason to suspect fraud, I would have ethically been bound to report it as a member of ICMA (International City/County Management Association). With the City of Sterling’s organizational structure under the city manager form of government, our segregation of duties among professional staff, our premier financial software, our auditing practices, and our reporting capabilities, I could not reconcile how millions of dollars could be defrauded from a city, particularly of our size, without someone detecting the fraud. Having assumed Dixon’s Commission had provided for proper internal controls and assuming that the Commissioners were providing direct oversight of budgets and audit reviews under the Commission form of government: 1) one could presume the large scale of the deficits and fast growing negative fund balance had already triggered a review of finances, and 2) subsequently, the Commission was actively approving large deficit spending measures and that the run up of negative fund balances as shown in the audits and AFR’s as part of their chosen fiscal policy.
– Sterling, IL City Manager Scott Shumard, May 08, 2012