Philly's missing $26M shows its priorities: Potholes outrank IT

If you or I mislaid  $26 million — the sum that city Finance Director Rob Dubow and Treasurer Rasheia Johnson say they’re still trying to find after comparing bank, tax and spending records last year — there would be consequences.

But bankers and analysts who track America’s trillions in state and local government spending are surprisingly chill, for the most part, about Philadelphia’s having to turn over the couch cushions (with help from auditors at Horsey, Buckner & Heffler LLP)  to settle the books. (It’s not just Philly: The U.S. military said two years ago that it wasn’t exactly sure what happened to $7 trillion. Their auditors are working on it.)

The bankers can see why citizens might be unhappy. “Taxpayers say, ‘My kid’s school needs this, my park needs that, and you can’t find $26 million?'” said Joseph Krist, partner at Court Street Group Research in New York.

It makes our City Hall look backward, Krist says, echoing City Councilman Allan Domb, who said he’s “flabbergasted” that the city doesn’t reconcile accounts quickly, as taxpaying businesses and private borrowers are forced to do.

“In an era where young people pay for everything by swiping your cellphones, the idea governments are still processing a lot of paper receipts sounds cumbersome,” Krist told me. “And it sounds like you’ve had some lax practices.”

Which isn’t shocking, or even surprising, to people who follow rivers of money through state and local governments, Krist added. “Cities have historically been behind the times in terms of how they process and keep track of payments,” he told me. “I’d be surprised if you took the 10 largest cities in America and you didn’t see something like this somewhere in each.”

“This type of thing does happen from time to time,” said Patricia M. Healy, investment portfolio manager at Cumberland Advisors in Vineland, N.J. She cited a New York State auditing report finding that towns and agencies failed to balance accounts “due to lack of proper supervision, inexperienced employees and lack of internal controls” — or the failure to use them. “In a city the size of Philadelphia, the amount is relatively small,” and it’s being fixed, she told me.

It is more worrisome, Healy added, that Philly tends to operate without large cash reserves to deal with sudden expenses or a tax-killing recession. And the city has legacy expenses that its rich suburbs don’t: Pensions for retired police and other city workers, who now outnumber active city employees, eat up one-sixth of the yearly budget — more than is spent on working police.

Pension funding pressure, plus Mayor Kenney’s commitment to find hundreds of millions more for schools, are why Philly bonds are rated just A, compared with AAA for Chester or Montgomery Counties. That’s also why Philadelphia taxpayers pay investors millions more in bond interest, over time.

Won’t the bond rating agencies cut Philadelphia again because its weak financial controls have been so publicly exposed?

“I do not think this alone would precipitate a downgrade. However, it should be noted that management [counts for] about 20 percent” of the grade, when agencies rate which cities will likely pay their bills, said Eric Kazatsky, analyst for Bloomberg Intelligence. The underfunded pensions and school needs are a bigger deal, he affirmed.

“If it were part of a larger, longer pattern of lack of financial controls, it would be a larger negative,” said Matt Fabian, publisher of the Connecticut-based MMA Advisor newsletter. But “it happens. I don’t think it’s a big deal.”

It’s fortunate that the state and the independently elected city controller look over the city’s books — but those watchdogs ought to have been “more forceful,” not just flagging the problem, but demanding the city fix it sooner by bringing in accountants who know what they’re doing, said Cumberland’s Healy.

Are city contractors also to blame?  Philadelphia has banked with Wells Fargo and its predecessors back to the old PNB days before computers. But last year, the city moved cash accounts to Citizens Bank (Wells Fargo still provides other services).

Did the change cause, or uncover, a multimillion-dollar disconnect? Nope, says city spokesman Mike Dunn: “The reconciliation issue predated the change in payroll provider, so it did not play a role.” Both Wells and Citizens “performed at or above expectations,” Dunn said.

There’s no evidence of theft so far, DuBow told me. “We’ve been keeping current” for the last year, said treasurer Johnson. She blames staff turnover and the loss of “institutional knowledge” as accountants leave for better-paying posts.

Which underlines how cash management has been a low priority for City Hall. But that’s true for governments generally, says Court Street’s Krist: “Modern IT costs money,” he told me. “I don’t know of anyone who’s ever been elected by saying, ‘Guys, there’s potholes in the streets, our schools are crumbling, but we’ve got an IT system that kicks it every day.’

“You will never hear that speech.”