Despite $5.2 MM From Casino, Bethlehem Finishes '09 in $8.5MM of Red Ink

Although the festive sounds of Musikfest wafted into Bethlehem Mayor John Callahan's conference room from time to time on August 11, the mood inside was somber. Four City Council members, Business Administrator Dennis Reichard and Controller Meg Holland were among the twenty-seven people who listened as independent auditor Tracey Rash, of accounting firm MaherDuessel, sang a funeral dirge about the City's dire finances in 2009.

According to her audit, the City finished last year with a negative cash balance of $8,548,661. She explained this negative difference between assets and liabilities as the result of a $5 million deficit last year. Although the Christmas City received $5.2 million in casino revenue, it still finished the year in the red. "Nobody could have predicted the economy would have been this bad," said Business Administrator Reichard. Council member J. William Reynolds, who chairs the City's Finance Committee, tried to make lemonade out of lemons, explaining that other cities are going through similar crises. "We have a City to run," he asserted.

But Ms. Rash raised question about whether it's in the right direction, detailing "significant deficiencies" and "noncompliances" peculiar to Bethlehem, extending beyond its $8.5 million negative fund balance or $5 million deficit.

City Misses Pension Contribution. - Last year, the City missed its annual pension payment, which had been set at $2,047,975. It caught up in February ($510,945) and April ($1,676,228) installments, spending $139,198 more. The City denies this is any form of late fee or interest penalty. "Cash flow issues" were blamed for this missed payment, and City administrators assured Council President Bob Donchez there would be a timely payment this year time.

City Spending Without Prior Council Approval. - Rash lists three instances in which City Administrators transferred money last year in violation of Ordinances requiring advance Council approval: $335,643 in casino funds went for operating expenses; $2.4 million was "borrowed" from the Treasurer's Escrow Account; and another $500,000 from the sewer fund. "There were transfers made without Council approval," deadpanned Rash. Reichard indicated it is likely that he will ask Council to approve transfers from the Treasurer's Escrow Account this year

City "Borrows" EIT Money Collected For Other Municipalities. - Bethlehem collects Earned Income Taxes (EIT) for other municipalities. But instead of sending the money on its way, Bethlehem made two advances to itself last year from this fund. This has been a City practice since 1974, when cash flow is tight. Reichard told Council Prez Donchez that "at this point," the City has not dipped into that account this year.

Commingling Restricted and Unrestricted Funds. - Bethlehem commingles restricted and unrestricted funds in one bank account. "If there are restricted funds within that bank account, they could be used for unrestricted purposes," explained Rash. "There was a deficit in certain funds and we were concerned that restricted funds may have been used. We're asking the Administration to look and make sure no restricted funds were used for unrestricted purposes." According to a City response on the draft audit report, that practice has been going on since the 90's to prevent shortfalls in the General Fund.

Commingling Wireless and Land line Funds For 911. - The City gets $1 per land line from phone companies for administration of its 911 services. It gets .75 for each cell phone. That money is supposed to go to the state, which then distributes grants, based on need. But Bethlehem has been keeping the money from wireless accounts, and now owes the state $2,598.461.

Internal Service Fund Running at Deficit. - In response to questioning by Council member David Gigiacinto, Rash told Council that the City maintains an "internal service fund" for medical insurance. That fund is in the red, and "those expenses will have to be caught up."

"Unusual Investments" in Pension Fund. - Rash noted that the pension fund has two "unusual investments." "Is this a very high risk?" asked Council Prez Donchez. "I can't address the risks associated with the investments," replied Rash. "What I can say is that it caught my eye because it isn't a typical investment." Donchez asked Reichard to supply a more detailed explanation at the next Council meeting.

911 Personnel Costs. - For three years, the City has exceeded the seventy per cent threshold it can use from the 911 fund for personnel costs, by $381,000 per year. The City is going to have to reimburse that fund.

911 Unallowable Costs. - $288,000 in unallowable costs were diverted from the 911 fund, and need to be reimbursed. No one explained where exactly this money was spent.

Treasurer's Escrow Account Irregularities. - "There were grant revenues and expenses run through the Treasurer's Escrow Account, which should have been accounted for in a different type of fund," explained Rash. The audit elaborates that some national grants were recorded inaccurately. But she conceded, in response to questioning from Donchez, that the "grants situation" has improved over the past three years.

Council members Reynolds, Evans, DiGiacinto and Donchez all stressed that next year's budget has to be lower. And Council Prez Donchez cautioned that revenue estimated must be more realistic. "You can't high ball them. They're going to have to be on the low-ball side. If you get extra, that's icing on the cake."

After giving these marching orders, Council discussed plans to borrow $5.8 million on top of the $73.5 million owed by the City at the end of 2009 for basic capital projects, like repairs to a boiler pipe in the police department that is leaking 180 degree water over the heads of police officers.

Council member David DiGiacinto suggested holding off on this borrowing plan, but the other two members of the Finance Committee - Eric Evans and J. William Reynolds -overruled him. Council President Bob Donchez and member William Mowrer,as nonmembers of the Finance Committee meeting as nonvoting members.

One Council member, David DiGiacinto, was clearly upset by what he considers fiscal mismanagement. In an unusually stormy (and lengthy) meeting for Bethlehem, he traded barbs with Business Administrator Dennis Reichard, questioned why Mayor John Callahan was absent, and challenged Controller Meg Holland's oversight.

But that's another story.