SPECIAL PROJECT: SUMMARY OF FINDINGS AND CONCLUSIONS City OF GLENDALE, ARIZONA ‘August 20, 2013 HARALSON, MILLER, PITT, FELDMAN & McANALLY, PLC 2800 North Central Avenue, Suite 840 Phoenix, Arizona 85004-1069 José de Jestis Rivera Lindsay Brew Nathan Fidel FIDELITY FORENSICS GROUP, LLC 10455 N. Central Expy, Suite 109-120 Dallas, TX 75231. Mark Jenkins Chris B. Meadors LAW OFFICES OF A. BATES BUTLER 250 N. Meyer Avenue Tucson, Arizona 85701 A. Bates Butler EVIDENCE SOLUTIONS, INC. PO Box 42047 Tucson, Arizona 85733 Scott GreeneCONTENTS EXECUTIVE SUMMARY .. SCOPE WORK PERFORMED... HISTORY... ISSUES |, Early Retirement Program... ll, Trust Fund Transfers. Ill, Premium Holidays Iv. City Management and Staff's Communications .. V. Art Lynch -Retirement/SRJ Consultit VI. Alma Carmicle...... Vil. Other Issues. RECOMMENDATIONS. 1.x...EXECUTIVE SUMMARY There was not an adequate analysis of the repercussions of offering an early retirement program, City Management became aware of the existence of the ASRS penalty and associated retirement costs. These amounted to millions of dollars that were not included in the FY 2010 budget. City Management and staff did not inform the City Council regarding the ASRS penalty and associated costs. City Management and staff misled the City Council regarding the costs of the ERP program by providing it only savings estimates. The City inappropriately used cash from the internal service "trust funds” to pay for the ERP expenses and the ASRS penalty. The City made numerous transfers to deal with the underfunded trust funds. City Management declined to request proper City Council approval for such transfers. City Management and staff discussions with City Council were either inadequate or misleading as it related to these funds. City Management and staff reduced the EBTF by approximately $1 million per year from 2008 to 2012 to reduce the City’s expenses. This EBTF premium holiday effectively increased the relative percentage contribution of all non-employer payers (e.g. medical plan participants such as City ‘employees, retirees, and former employee participants under COBRA). ‘Art Lynch’s retirement and post-retirement contract were not in the best interests of the City. Ed Beasley allowed Alma Carmicle to collect benefits associated with a full-time position from her home in Mississippi where her duties as Executive Director of Human Resources were limited to MOU negotiations. ‘Some of these actions may have violated state law.SCOPE In February 2013, the Glendale City Council retained the law firm of Haralson, Miller, Pitt, Feldman & McAnally (“HMPFM”) to conduct a special project looking into the facts and the potential legal issues arising from specific City activities (“special project”). HMPFM retained the following individuals/companie + A.Butler Bates, Attorney at Law, former United States Attorney for Arizona; + Fidelity Forensics Group LLC ("FFG"), a consulting firm specializing in forensic accounting and financial investigations; + Evidence Solutions, Inc, a computer and digital forensics firm responsible for securing, collecting, and hosting electronic data HMPEM was asked to look into the following matters: * Potential improper expenditures involving the Early Retirement Program; + Evaluate transfers between and out of the City of Glendale trust funds; + Evaluate City Management's disclosure to the City Council; + Determine the propriety of certain cash transfers into the General Fund from other City funds; + Assess potential civil or criminal liability based on the above matters. Subsequently, the following additional matters were adde + Understand and evaluate reductions in City contributions to trust funds (“premium holidays”, benefit allocation, or “BENALLOC” transactions) identified as far back as fiscal 2008; ‘+ Retirement terms and post-retirement consulting arrangements for Art Lynch; * Distance work arrangement for Alma Carmicle; + The City’s application of funds under the Federal Early Retirement Reimbursement Program.WORK PERFORMED ‘The special project occurred in phases, they were "Identify, secure, and collect potential sources of relevant evidence (including computer and electronic data); = Detailed review of files related to the issues under the special project; = Conduct interviews with City employees, City Council, Board Members, former employees, and third parties with knowledge of the facts (e.g. consultants, accounting firm). In the process of the project, HMPFM: = Secured 19 workstations, computers and devices; = Secured email archives and performed search terms on several email boxes; = Reviewed relevant electronic information from 27,621,595 search term hits of 556,980 files; = Reviewed over 74,200 pages of documents; = Located and interviewed witnesses in 3 different states = Conducted 37 interviews." During the course of this special project, City employees were consistently very cooperative and helpful. Employee-interviewees were asked to describe events and/or to locate and provide documents from the last several years. Some of these individuals were interviewed multiple times. Their participation and cooperation was critical and is appreciated, In addition to employee interviews, HMPFM contacted certain former City employees with knowledge of the transactions under review. These individuals, who were in decision making positions for each of the transactions reviewed, were asked to participate in interviews. After repeated requests, the following Individuals either failed to respond or declined to participate: * + Ed Beasley + Pam Kavanaugh + ArtLynch + Alma Carmicle + Jim Loeb bxhibit 12 deal tof interviewees. ® nother former Clty employes, Ray Shuey, was present for many of the subject ransactons, bu passed away prior tthe investigation.HISTORY In late 2008, the City of Glendale (“City” or “Glendale”) faced a challenge. After years of growth, the City was now dealing with a projected budget shortfall in excess of $14.4 million. The decisions made by City Management in response to the shortfall, including subsequent efforts to manage the consequences of those decisions, are the subject of this special project. City staff, under the direction City Manager Ed Beasley, looked for ways to fill the budget gap. City Management began exploring a retirement incentive program ("Early Retirement Program" or “ERP”) that offered a financial incentive to eligible City employees to retire before the upcoming fiscal year. City Management promoted this plan to the City Council claiming it would result in significant cost savings to the City's 2010 budget. In choosing to implement this, City Management did not conduct a cost-benefit analysis. Additionally, City Management failed to consider the charge imposed by Arizona State Retirement System (“ASRS”) to cover unfunded retirement ies associated with early retirements ("ASRS penalty”). Even when it became clear that the costs of the ERP would exceed initial estimates by millions of dollars, City Management continued to push the program. In March 2009, the City Management implemented the ERP for 55° City employees that volunteered for early retirement with most of the participants retiring near the end of the fiscal year 2009 or early in 2010.* While City Management promoted and implemented the ERP, they looked for additional funds to cover the costs and ASRS penalty. These ultimately amounted to: + $1.34 million in retirement incentive costs; + $1.36 in vacation and sick day payouts; and + $2.75 million for the ASRS penalty.® City Management identified the City’s internal service funds as potential sources of cash some time prior to February 2009. These funds (referred to internally as “trust funds”) are used to track and account for internal revenues and costs associated with employee benefits ("EBTF”), workers’ compensation (“WCTF"), and risk management (“RMTF") activities. Cash collected by these trust funds was intended to cover potential future losses and/or costs of third-party insurance coverage. City Management decided to divert premiums from these funds (“premium holidays") to cover the ASRS penalty and other ERP related costs. No evidence suggests they submitted the plans to the City Attorney, City Council or the Risk Management and Workers’ Compensation Trust Fund Board ("Board") prior to authorizing these transfers. City staff began making the ERP related transfers from the trust funds on May 31, 2009. By 2011, these ERP related transfers totaled approximately $6.1 million. Ultimately, the individual trust funds were reduced by ERP transfers as follow: The number of participants fluctuated slighty as two employees later withdew from the program and another employee, Art Lynch, was aed afer the program deadine, “hibit 2: Bates GLEN 55355, > Tis figureincudes 2 $2.63 milion ASRS penalty dated Jon 20, 2010, pus $121 thousand inciced for Mr. Lynch in Nov 2010. Adsitona costs scsciated with Wr. Lynn's payout are not nluded inthe retirement inventive costs a the vacation sick payout.‘+ Employee Benefits Trust Fund (“EBTF") $1,708,384: + Risk Management Trust Fund (“RMTF") $3,367,072; ‘+ Workers’ Compensation Trust Fund ("WCTE") $ 985,926. While the City Management developed the ERP and transferred cash from the trust funds, they engaged in a combination of “premium holidays” and other transfers not directly related to the ERP. This began with systematic monthly rebates of $83 thousand per month ($1 million per year) from the City’s contribution to employee medical coverage. These “employee benefit premium holidays” were commingled with the ERP transfers in 2010, but otherwise continued until 2012. In 2010 workers’ compensation premiums slated for deposit in the WCTF were instead placed into the employee benefits trust fund under the auspice of a “premium holiday.” As with the ERP related transfers, City Management did not seek prior approval of the City Council, City Attorney, or Board for these transfers. During the 2009 - 2012 fiscal years, City Management entered into other financial arrangements. Art Lynch, a former Assistant City Manager, had not initially participated in the ERP but was allowed to enter after the program deadline. The day after he retired in October 2009 the City rehired him as a “consultant” and he took over his previous duties in which he was paid in excess of $900 thousand. Another arrangement involved Alma Carmicle, the former Director of Hurnan Resources. Throughout 2011, City Management permitted Ms. Carmicle to manage her department full-time from her home in Mississippi while retaining her position, salary, a “car allowance,” benefits and an increase to her retirement benefits. She retired in 2012. The City hired HMPFM after the release of the City Auditor's 2012 report on the Risk Management Trust Fund,ISSUES |, EARLY RETIREMENT PROGRAM (On March 6, 2009, the City rolled out its Early Retirement Program, titled Voluntary Retirement Incentive on the announcement documents, to eligible city employees.° Eligible employees were those qualified for “normal retirement” in the ASRS. These employees were either: + 65 years ol ‘+ 62 years old with 10 years of credited service; or ‘+ Those who had 80 “points” by adding their age and their credited years of service. These employees were already entitled ASRS retirement benefits earned, as well as vacation and sick days paid out to City employees upon separation. Under the ERP, each participant also received lump ‘sum payout as an incentive. The incentive included one of the following: + 2months base salary for those with less than 15 years of Glendale service; ‘+ 3 months base salary for those with between 15 years and 20 years of Glendale service; or ‘+ 4 months base salary for those with more than 20 years of Glendale service. This announcement was the culmination of months of crafting by the City staff. ORIGIN OF THE ERP The origin and the circumstances surrounding the creation of the ERP are vague and unconfirmed as no documentary evidence of its genesis was available.’ The earliest documents available discussing the ERP are sporadic and were created after the idea was first proposed.’ The minimal information pinpointing how or when the ERP idea originated comes exclusively from witness interviews. According to witnesses, Ms. Carmicle intially proposed the idea of the ERP in the fall of 2008. The idea was offered and discussed in meetings or individual interaction. ‘The ERP was popular with City Management as it allowed the City to make cash pay-outs to the intended plan participants. This would also allow City Management to claim “savings” in terms of reducing budgeted payroll and benefits while the vacated positions remained unfilled. Witnesses noted that the ERP was also popular with the City Manager in that the City avoided the need to impose layoffs or to reduce the existing number of full-time employees. EVOLUTION OF THE ERP While City Management promoted the ERP as a solution to the City's financial problems, it appears they performed limited cost/benefit analysis of the program. The decision to implement the ERP was "cent 3: Bates GLEN 001848 ~ 001850. ° Gther governmental entities were considering ERPs at the same time. For example, the ly of Scottsdale offered their ERP in January 2009. ‘The eariest known document ceaing with the ER? Is the anaysls prepared by Don Bolton in October 2008. The next known document does not appear unt December 2008apparently made with minimal effort to quantify the potential benefits or costs of the program. There are no documents discussing or quantifying the expected savings or estimated costs associated with the ERP program prior to October 2008. Various methods of financial analysis are commonly used by organizations to evaluate proposed projects. These methods all share a basic premise: comparing total expected costs to total expected benefits. Organizations then evaluate their program based on the net benefit or cost (e.g. whether there are overall savings), or comparing it to a benchmark (e.g. cost of capital, internal rate of return, etc. Where there is a range of possibilities, organizations may estimate a range of outcomes - such as calculating a high and low outcome - or otherwise analyze different scenarios.” For the ERP, the financial analysis would have required an estimate of the number of participants. Based on that figure, the City should have estimated: Program Savings: ‘+ Salaries for participating employees (both one year or ongoing); ‘+ Benefits for participating employees (both one year or ongoing). Less Program Costs:"" + Cost to replace or “backfill” those employees’ positions (or costs associated with assigning those duties to other city employees) either temporarily or permanently; + Incentive cost; + ASRS “Penalty” or Unfunded Liability In the case of the ERP, the number of participants is the most significant factor in this analysis. Other factors such as salary level and expected time to retirement also play into this analysis. Of the employees interviewed, including those in the Finance and Budgeting functions, none recalled seeing, researching, preparing or discussing any financial analysis of the ERP prior to October 2008. When City staff did begin to quantify the various elements of the program, these estimates were incomplete and lacked analytical depth First ERP DOCUMENTS - OcToseR 2008 (On October 27, 2008, Craig Sullivan, Sr. Hurnan Resources Analyst, provided an analysis of 86 eligible ERP participants based on the initial ERP criteria.” This list represents the earliest identified ° Most organizations also Include factors such as interest rates and time value of money (TVM) for example, by evaluating the present value of ‘expected flows ofthe project versus the present value of estimated costs. TVM ia Basle and essential tol for assessing projects ecuring ‘era period of time (eg. greater than one year) "From “cash law” or budgeting perspective, this analysis would aso need to consider the vacation and sick day's payouts ° Exhibit: Bates GLEN 055804 ~OSS8D6.documentation of the ERP. Mr. Sullivan prepared the analysis at the request of Ms. Carmicle and also circulated it to Sherry Schurhammer, then Budget Director, and Don Bolton, Assistant Budget Director. GLENDALE ERP ANALYSIS. On October 29, 2008, Mr. Sullivan's list became the basis of a budget analysis, prepared by Mr. Bolton, that captured average salary information as well as vacation and sick “bank” for the 86 eligible employees. Mr. Bolton estimated the cost for accrued sick and vacation days at up to $3,071,779. While his analysis captured basic payroll information, it does not explicitly estimate the potential costs savings, likely number of participants, retirement incentives or other program costs. Mr. Bolton created another analysis in @ subsequent email discussion, most of which occurs on December 15, 2008."° This email to Ms. Schurhammer, and copying Ms. Carmicle, was in response to Pam Kavanaugh’s, Assistant City Manager, request for “more concrete information.” In the updates, Mr. Bolton estimated: + 24 participants; + Savings per employee of $91,807; + Cost per employee of $56,068;"° + Total savings of $2.2 million in fiscal 2010; and + Total costs of $1.3 million. ‘The most striking point about this analysis is what it fails to include. The crucial flaw is the absence of justification for the 24 participants. It is unclear how Mr. Bolton came up with the figure or which 24 individuals were Included. The analysis does include a cost of 24 people retiring but continues to omit other significant costs while failing to describe both the fiscal period in which these costs are expected to fall and the source of the funds. This shows that City staff was aware of but chose not to perform the requisite type of analysis. Even so, Mr. Bolton’s December 15 analysis is the first known attempt to quantify the expected participants, savings and costs of the ERP. ‘The $2.2 million “savings” Is the first step towards providing City Council with misinformation because they failed to disclose that the savings were valid if only 24 people retired and did not include the costs. ‘As early as December 2008, Budgeting and Human Resources were aware of the costs and potential savings, assuming only 24 out of 86 participated, would likely result in a net savings of approximately $858 thousand for one year ~ significantly less than the $2.2 million told to the City Council © exhibits: Bates GLEN 055610 ~ 055819. Exit 6: Bates GLEN 055797 ~ 055798, ae ° average Salary of eligible employees of $73,770 pls Socal Security, Medicare, and retirement benefits cleulated at 24.45% of base pay. Based on the notes, this figure inludes the rarementincentve cot, vacation & scx payouts, and “Stability Pay where applicable”‘THe ASRS PENALTY In 2004, state statutes were amended to allow ASRS to begin imposing a penalty for municipalities that provided incentives for their employees to retire early. No one in the City Management or City staff considered this fact in developing the ERP. ‘There are conflicting accounts of when the City first became aware of the ASRS penalty. + Ms. Schurhammer first became aware of the penalty sometime in December 2008 — January 2009 when she learned it from a colleague in another municipality. She raised the issue with Horatio Skeete, Deputy City Manager. According to her, no one at the City was previously aware of this penalty nor was she aware that anyone had contacted ASRS about any possible implications of the program. Mr. Skeete stated that at the onset he directed staff to assess the ASRS penalty to ensure that all costs were understood. ‘+ Former Mayor Scruggs first learned of the penalty from a colleague in the Peoria Unified School District and passed the information on to Ed Beasley, City Manager. The City first contacted ASRS about the penalty issue in a conference call on January 8, 2009. This call ‘was attended by Mr. Skeete, Ms. Schurhammer, Diane Goke, Chief Financial Officer, and Mr. Shuey from the City, and Michelle Briggs and Mark Muraoka from ASRS. The attendees discussed the nature and calculation of the penalty. According to Ms. Schurhammer’s notes from that call, Mr. Skeete and Ms. Carmicle agreed to put together a list of potential participants to send to ASRS."” On January 16, 2009, the City provided a list of 11 specific employees to ASRS."* The rational for submitting 11 names instead of 24 or how particular participants were chosen is not clear. ‘= Ms, Lupe Sierra, then a Human Resources employee and individual who transmitted the list, indicated that she did not know why those 11 employees were chosen. She stated Ms. Carmicle had directed her to give the list to ASRS. Ms. Sierra noted that the list appeared to her to be “top or manager heavy.” ‘+ Mr. Skeete opined that this list was selected as a “sample” (i.e. composed of individuals from various levels in the City) that City staff could use to estimate the overall penalty. (On January 21, 2009, Mr. Muraoka sends a letter to Mr. Shuey providing a preliminary estimate of the potential ASRS penalty.”” According to the letter, ASRS prepared their estimate based on a list of 11 specific employees provided by the City on January 16, 2009. Based on this list, the estimated ASRS penalty for those 11 employees was $1,047,592.44. Considering only 11 employees, the ASRS penalty already exceeded the net $858 thousand benefit estimated by Don Bolton for 24 employees on December 15, 2008. ® eb 7 Bates GLEN 05567-05569. "Eat 8 Bates GLEN 002026 002033 eb 9 Bates GLEN 002261 - 002362.THE ERP 1s ANNOUNCED On January 20, 2009, the day before the ASRS letter, Mr. Beasley sent a memorandum to former Mayor Scruggs and the City Council discussing the City's cost reduction strategies.” This memo is the first known mention of the ERP to the City Council. ‘The memo states “Human Resources has also put together an incentive package that will be offered to ‘employees currently eligible to retire. Should they choose the package, their positions would not be refilled resulting in a reduction in ongoing expenses in future years.” ** No discussion of the terms of the plan, nor the expected costs or savings associated with the plan is mentioned. ‘The ERP is rolled out to eligible employees on March 6, 2009. In its final form, the program differs from earlier drafts, most notably in that it reduces the retirement incentive amounts. The ERP participants needed to notify the City and submit the required forms no later than March 20, 2009. Even with the reduced incentive under the final plan, the number of employees electing to participate exceeded the earlier estimates. On March 24, 2009, Ms. Kavanaugh told City Council at the first FY 2010 Budget Workshop that over 120 letters were sent to eligible employees with 55 employees accepting the offer.” The total number of participants was more than twice the number used in the December 15, 2008 email (24), and five times the number submitted to ASRS (11). IMPLEMENTATION OF THE ERP The City updated calculations to reflect the 55 employees on March 23, 2009.” The City calculated $2,694,269 as the total cost of the incentive, vacation and sick payouts ("front-end costs"). The list of participants was then submitted to ASRS on March 26, 2009. Prior to the first FY 2010 Budget Workshop, Mr. Beasley provided City Council his “FY20 City Manager's Recommended Operating Budget” on March 13, 2009.”* This recommended budget was the basis for the initial Budget Workshop meeting on March 24, 2009. The Budget Workshop was attended by Ms. Kavanaugh, Mr. Skeete, Mr. Beasley, and Ms. Schurhammer who discussed the ERP in general. During that workshop, former Mayor Elaine Scruggs made a number of statements: + Asking for clarification about the letters sent to employees regarding the voluntary retirement program; + Asking if there were additional funds provided to these employees that were taking retirement in the form of buy-outs; + Responding that it would be very hard for Council to look into which programs could be cut because it receives only lump sums to review.”* exhibit 10; Bates GLEN 060364 ~ 060365, au 2 gxhibit 14: Minutes ofthe Glendale City Counc WarkshopSesson, March 26,2009, 4 exhibit 12: Gates GLEN 002371 Calcalations distingush government and proprietary fund employees » exhib a2 p.2 > pei a8: p. 9 0In partial response to her statements, Mr. Skeete explained that the budget balancing strategy was based on the most current information available.” City staff had calculated gross savings and expenses in the program on a one-time basis for fiscal year 2010 but commented that these savings would continue to be realized as long as the positions remained unfilled. Even at this point, City Council was not being provided with complete information. City Management present at that Budget Workshop failed to notify City Council of the existence of an ASRS penalty or preliminary estimates of the costs despite this information being available as early as January 2009. On April 10, 2009 ASRS sent the City a letter detailing its preliminary estimate of the penalty based on the 55 actual ERP participants. ASRS estimated the penalty at $2,493,852.25."" On April 13, 2009, Mr. Bolton emailed Ms. Schurhammer and Mr. Skeete with an attachment detailing ERP savings of $4.2 million as well as a discussion of the estimated $1.8 million “backfill” (ie. costs associated with filling vacated positions).”* Based on these figures, Mr. Bolton calculated $2.4 million savings from the ERP, According to his email, this is consistent with the $2.2 milion in total savings told to the City Council as part of the proposed FY 2010 budget. Mr. Bolton did not include the costs associated with the incentives and the ASRS penalty, an amount already estimated near $2.5 million. PAYING FOR THE ERP City staff, faced with funding the initial costs of the ERP and ASRS penalty, immediately turned to the trusts as a source of funds. In an April 30, 2009 email, Mr. Bolton asked Ms. Schurhammer, Diane Goke, Chief Financial Officer, and Jim Brown, Assistant Director of Human Resources, if the ASRS penalty could be paid directly from trust funds.2° He also asked City Management which trust funds should be used to pay retirement costs. On May 6, 2009, Mr. Bolton sent another email recommending that the EBTF be used to pay all of the fiscal 2009 ERP costs of $2.7 million.** (On May 6, 2009, City Management authorized $2.7 million of trust fund transfers to pay ERP costs in FY 2008. See Transfers Section Infra. On May 31, 2003, City staff began making a series of journal entries, budget appropriation transfers, and reclassifications in order to provide the necessary funds. II. Trust FUND TRANSFERS Governments utilize internal service funds as an accounting device to accumulate and allocate costs, ‘among the entities various functions. In Glendale, the City utilizes three such internal service funds, referred to as trust funds. Two of these, the RMTF and the WCTF, are self-insurance trust funds 2 exhibit 11:3 » exhibit 13; Bates GLEN 002179 - 002180, gah 26, Bates GLEN 002181 - 002184 © exidit 15; Api 30,2009 eral, "exhib 16; Bates GLEN 002186,authorized and governed by Arizona statutes. The third trust fund is the EBTF.”” The funds are described in more detail in the City’s annually released budget books as follows: Risk Management (Fund 2540) and Workers’ Compensation (Fund 2560): The Risk Management and Workers’ Compensation Trust Funds support the provision of liability insurance and workers’ compensation coverage for the city. Income to the funds comes from premiums charged to each city department..The funds are used to pay claims against the city and to cover premiums for certain types of outside insurance coverage. Benefits Trust (Fund 2580): During the course of the year, employer and employee contributions for medical, dental and vision insurance are deposited into this fund. Income to the fund comes from premiums charged to each city department based upon employee coverage elections made each year during open enrollment (employer portion). The fund also receives contributions from employees, both current and retired. Premium payments to insurance carriers and related claims expenses are made directly from the fund. The ending fund balance serves as a reserve to cover incurred but not reported claims, as well as a buffer against rising health care costs. ERP TRANSFERS. Starting in FY 2008 the City began posting regular transfers from the EBTF to the General Fund. See Premium Holidays section infra. Subsequently in 2009, the City used this same concept to regularly transfer money between all trust funds for the ERP. Due to City Management's authorization on May 6, 2009, City staff began making large transfers to cover the costs of the ERP.” On May 12, 2009 Mr. Bolton asked Ms. Goke if she was ok with funding the retirement incentive and payout costs through the EBTF as well as the corresponding journal entries that needed to be made. She responded, “Yes, we are ok with the process, Robert will be doing the entries by Friday of the first week of June Thanks, Diane.” [sic}* ‘The table below summarizes subsequent transfer activity. ‘Sino oF ERP Trust Fun TRAN sca Yeat Taust FUNDS are Funo _~3008 2010 zor FORERP Comers 5/31/2009 EBTF —$(2,694 265) TRANSFER TO COVERINTIN ERP COST 10/5/2009 EBTF $985,926 $2,708,343 To move costs oRGINALLY CHARGED TO eat 10/5/2009 WCTF (985,926) $985,926 2/apo10 MTF (2,041,839) $1,041,839 | “cannvoven” oF ERP FROM 2009 4/5010 MTF (2,203,897) $2,203,887 aAspoit AMT $(121,336) § 121,336 ASRS Penaty: Anr Lan Tora, $12,696,269] $13,245,736) $1424336) $6,061.241 in practic, al thre trust funds are sometimes referred to as seinsurance trust funds, regards of whether they technicaly meet the definition, canon i. ™ exhibit 17: May 12,2009 ema(On May 31, 2009, a journal entry was approved and posted charging a total of $2,694,269 to the EBTF to. reduce the fund balance and "medical contribution” expense for each participating department.™ It’s formal purpose was described as: “[t]o reverse a portion of each fund-depts medical premium payments to the Benefits Trust fund for the initial retirement incentive payouts (per SAC 5-12-09 meeting).”2* Emails indicate that Ms. Carmicle only authorized a reduction of $1.6 million from the EBTF, accordance with the estimates from an independent actuary, Buck Consultants.” To accomplish this, on October 5, 2009, City staff transferred $985,926 in funds from the WCTF to the EBTF. The previous entry for $2.7 million in FY 2009 was adjusted to spread the ERP costs over both the EBTF and the WCTF. On. February 2 and April 8, 2010, City staff transferred a total of $3.2 million from the RMTF in FY 2010. City staff described $1,041,841 as a FY 2009 carryover. The remaining $2,203,897 came from the RMTF to pay the General Fund's portion of the ASRS penalty.** The total amount of the costs and penalties for these ERP transfers was charged to FY 2009, It raises the question why a significant portion of this amount was being charged as a carryover when the costs were already accounted for in FY 2009.” On November 27, 2010, the City authorized payment to ASRS for $121,336. This amount represents the ‘ASRS penalty for Mr. Lynch who had been permitted by City Management to participate in the ERP after the program deadline. Unlike other ERP related costs that were first transferred out of the trust funds, this fee was paid for directly out of the RMTF. When asked why this transfer was done in this manner, Andy Jennings, Risk Manager from 2010-2012, responded, “they had already taken $2 million from the ‘trust fund — what is another $121,000.""° OTHER TRANSFERS As a result of reductions in assets from the ERP transfers, the trust funds experienced shortages in funds. City staff found themselves having to request inter-fund transfers to meet minimum funding levels. These included: + On November 11, 2010, the City transferred $450,000 from the RMTF;, + On June 30, 2011, the City transferred $1,000,000 from the RMTF to the WCTF; + On February 24, 2012, another $1,000,000 was transferred from the RMTF to the WCTF; + On May 11, 2012, Ms. Goke authorized a transfer of $200,000 from the RMTF to the WCTF. This transfer was requested by Mr. Jennings “to ensure there is adequate balance above the ‘minimum level required by the Industrial Commission for the rest of this FY.""* This practice, as well as various inter-fund transfers to maintain minimum required funds levels, continued until the Fall of 2012 when the transfers were identified in the Internal Auditors’ Report. © exhib 8: Bates GLEN 060733 - 060743, Ha exhibit 29: Bates GLEN 061219 - 061221. > Total amount imvoiced by ASRS was $2,632,527. Of that amount, $2,203,897 was charge tothe General Fund and the remaining $428,640, was paid bythe enterprise funds. > Eiht 20: Bates GLEN 002059 002071. * andy lennings interview. on.IIL. PREMIUM HoLipays During the investigation, the term "premium holiday" often appeared as a justification for fund transfers. A recently passed Arizona law states: [flor the purpose of instituting a one-time insurance premium holiday, the department of administration shall not collect premiums for the self-insured state employee health insurance program for sufficient pay periods during fiscal year 2012-2013 to generate $25,000,000 of state general fund savings. The department may determine which pay periods will not have a premium charged. This premium holiday applies to all premiums, including employer, employee and retiree contributions. For entities that pay premiums on a basis other than biweekly, the department shall calculate an equivalent decrease in premiums and reduce their premium collection by that amount. On or before September 1, 2012, the department shall report to the joint legislative budget committee on its plans for implementing the premium holiday. During the investigation, depending on the individual or source document, the term “premium holiday” describes more than one group of transactions. In one instance, premium holiday was used to describe a fund reduction of $1.6 million to the EBTF. In a second instance, the term was used from 2007 to 2012 to describe taking amounts of approximately $83,000/month ($1 million/year) from the EBTF. And in a third instance the term premium holiday was used in 2010 to refer to the one year moratorium on City workers’ compensation self-insurance premium payments to the WCTF. In stil other instances, the term premium holiday appears to be a generic description for any diversion or reduction of trust fund premiums from any of the internal service funds. In every case, premium holidays were a method of reducing fund assets to make the funds available for other uses by the City. Each variation was considered and implemented separately. PREMIUM HOLIDAYS — IN GENERAL As part of its efforts to fill the budget gap, City staff and Management identified the internal service funds as potential sources of cash with each being characterized as overfunded during the 2008 ~ 2009 time frame. Documents available indicate that as of February 2009 the City staff concluded, with the help of the third-party actuaries and consultants, that the assets available in each of the internal service funds exceeded the expected liabilities. Ms, Sierra stated that Ms. Carmicle told her she had been directed by Ms. Kavanaugh to check with Buck Consultants, the City’s benefits consultants, to see if the funding levels in the EBTF would support a reduction in contributions." In a letter dated February 24, 2009, Buck Consultants, who had calculated the Incurred but not Reported (IBNR)** claims and the fund assets, concluded that the Unrestricted Reserve for the EBTF as of September 30, 2008 was $3.7 million on a GAAP basis and $6.5 million on a © pon Sess. ws 294 $8 1523 Section 135, State employee health insurance premium holiday 2013 report. © Lupe sire interview. “~ [BNR san estimate ofthe amount of covered claims under an insurance poy that have not yt bee reparted aBudget Basis."* They also concluded, “a one month premium holiday which would reduce unrestricted reserves by about $1.67 million would not be considered imprudent at this time under either accounting basis.”** This letter is the first documented use of the term “premium holiday."“” On the same date, Ms. Sierra sent an email to Ms. Carmicle with a copy to Mr. Skeete,** reporting Buck Consultants findings: "Per Mr. Summers’ [Buck Consultants] review, the trust fund has an adequate balance to permit a $1.67 million draw by the city for premium holiday purposes...""* The City performed a similar analysis for the WCTF and RMTF just one day earlier. On February 23, 2009, Jim Loeb, Risk Manager, prepared the following memorandum summarizing the results of this analysis.” Human Resources & Risk Management “2a Memorandum GLENDZLE to: Horatio Skeete, Deputy City Manager Administrative Services Via: ‘Aims Carmicle, Diggeigr of Human Resources and Risk Management From: Jim Loeb, Risk so Date: February 23, 2009 Topic: Risk and Workers" Compensation Trusts Reserves and Not Assets Given the current faced constraints, we have heen requested to provide further information regarding Gvedability of funds im the Riek and Workers’ Compensntion Trusts ‘The cociosed chart and graph portrays the assets in the two Trusts compared to reserves for expected Tosses. Actuation tne a $39% confidence level when sstumating expected losses, There is @ 50% ‘itauce iosnes will be below or above the forecast at « 55% condidence level, “rhe City of Glendale Comprehensive Annus! Financial Report (CAFR) approximates the actuarial Toa wt the 3596 Confidence level to book reserves for claims besed at the present valuc of losses y Some cities uve higher confidence levels for the purpose While the Guy use 9 55% confidence of regisionng reserves on tis CAFR “The faUlouting table seflacts net aseets above actuarial determined reserves discounted to present Vainaat hath the £58; and.S0Se confidence levels at of June 20. 2008 [ie si000% Tsk Management —_| Warken" Compensation Assets 36.614 Faaer [ Ressrer at 5550 2530 1276 ma0% [e386 2503 (Retance at 3506 es 176 S os) and 0 254 provides direction regarding Trust Fund operations and ABS Title 11 981 nd Ondinanes No 1256 ee SAhS thy cousel of tasices. oth regulations nestact the city on the use of assets in ae Seo ie tes eae the Trust Foncls The ett may, however, © exhibit 23: Bates GLEN 002166 002168, “i ae Bates GLEN 002168, «fs Sierra also indicated tat it wos Buck Consultant that rst use the term “premium holiday’ to deserbe such premium reductions. sehibit 22: Bates GLEN 002155. ae ~ exhib 23: Bates GLEN 002163 - 002364.| Schurammer, Shery; Carmicie, Ama; Siera, Lupe Trust Funds High on, ‘Alma, Lupe and | met this morning. Asa preface, ARS precludes taking monies out of trusts for other purposes. However, public entities can circumvent tis by diverting funding on the frontend and nar placing the funds into the trust ae Sida nthe salen Oyo may dr $1 milion of Risk Tut unin tothe Genes Tat cecoves the $3 millon faker above the $16 milion. Te Buck actuarial review ndlsted the most that shouldbe taken from the Benefits Trust, ‘was 51.6 millon inorder toyergin funded, — red ‘Gonding for use in payment of the ASRS penalty oe en es eee ‘Based on fiscal year-end 08-09 actuarial studies the Risk and Workers’ Compensation Trusts wil stil be funded soundly with $3 milion less in assets. 4m Loe, Risk Manager ‘ity of Giendale 623-030-2855, 623-847-5321 (tax) inebi@alondaieaz com Neither of these two documents were provided to the City Attorney's office for their analysis. Mr. Loeb's ‘thought process as to why this was legal is also absent, It is clear from these two memos that at a minimum the City Management and staff recognized direct spending out of the funds for non-approved purposes was a violation of state law. The intent is clear from their own words describing this as an attempt to “circumvent” Arizona statutory law and City ordinances. Ultimately even this attempt failed as the City did the very thing that Mr. Loeb made clear that the law prohibited: transferring funds directly from various trusts in order to cover costs. Another added benefit to having the City Attorney's office review this proposal would have brought up other possible flaws such as the danger of declaring a premium holiday for only the employer. See Legal Conclusion section infra. It also prevented the City from challenging the ASRS penalty clause, which the City of Scottsdale legally challenged and received a 40% discount to the penalty.”* 5 jar. oeb's original analysis contains an arthmstic ear by incorrectly eng the “Reserves amounts under the $5% confidence scenario, ® Hand writen comments onthe memorandum are fom Ms. Sehurharnmer. © ibit 34: Scottsdale Compan, Power point Presentatlon, and Setlemert. 16PREMIUM HOLIDAY ~ EMPLOYEE BENEFITS ‘The EBTE tracks employee benefit related costs such as medical, dental, and vision coverage. The typical internal entry includes the City’s and employee's payment of employee medical costs. This contribution is withheld from each employee's paycheck. For example, a typical accounting journal entry for EBTF is summarized as follows: Example Journal Entry—EBTF ‘Journal Entry No. 165650 Date: 9/30/2008, City Departments/Funds (various) Employee Benefits Trust Fund Expenses: Revenue: Medical Premiums ~Employer $ 1,106,559 Employer Contribution $ 1,145,903 Medical Premiums ~Retirees * Employee Contribution $311,231 cash: ashi Dept. (various) Cash Equity $ (1,457,134) EBTF Cash Equity $1,457,134 Journal Entry to record the employee benefit expense to the funds/departments and book the corresponding revenue to the trust fund. The entry also moves the cash from the departments to the trust fund. * Note: the remaining expense of $311,231 needed to balance the entry is the amount withheld from the employee's paychecks. This amount is an expense of the individual employees and not the City While the documents available indicate the discussion about the EBTF premium holiday occurred around the 2008 ~ 2009 time frame, the actual reduction in the EBTF began as early as August 2007. Accounting records reflect an approximately $83,000/month ($1 million/year) reduction in the employer portion of the medical contribution to the EBTF for each of the fiscal years 2008 ~ 2009 and 2011 - 2012. According to various City staff, including Ms. Schurhammer, this was approved by the City Council Starting on August 1, 2007, the City staff began reversing a portion of the payments made to the EBTF for employer medical contributions. These typically occurred on a monthly basis with entries approximating $83 thousand per month or $1 million over the course of the year. These reductions are described in the accounting records as benefit allocation or "BENALLOC” transactions, usually with a reference to the fiscal year (e.g. BENALLOC10 for journal entries related to FY 2010). BENALLOC transactions reverse employer contributions to employee medical costs. This resulted in a reduction in the EBTF revenue and the corresponding expense to the departments. These funds were initially returned to the various City departments and funds paying into the EBTF. Often times funds were later moved to cover City expenses. While both employees and employers paid into the EBTF for a portion of employee medical costs, the premium holidays and their resulting cost reductions benefited only the City. No portion of this cost reduction was ever passed on to the employees. Each EBTF premium holiday effectively also increasedthe relative contribution of all non-City payers (e.g. medical plan participants such as City employees, retirees, and former employee participants under COBRA). This approach was not entirely consistent. Instances of skipped months or several months’ worth of premium holidays being taken at once were noted.™ The difference in timing and amounts was @ function of how “busy” the accounting staff was at any given time.” if they were too busy with other ‘matters, they might allow several months’ worth of BENALLOC transactions to accumulate. These EBTF premium holidays continued until 2012 when they were formally ended per instructions from the City Attorney and the City Council. The Table below summarizes the regular employee and ‘employer medical contribution for the 2008 ~ 2012 fiscal years. ‘Summary of Selected Employee Benefit Transactions ‘in millions of dollars Fiscal Year Employee Benefits- 2008 2008 2010 2011 2012 Medical Premium: Employer contribution $42,099,083 $13,820,727 $14,205,312 $12,629,538 $13,363,991 Employee contribution 3,231,787 3,746,110 3,628,521 3,471,151 3,712,454 Medical Premium Reduction _$ (915,836) _$ (994,540) _$ (999,995) _$ (999,950) _$ (999,996) During his interview, Mr. Skeete acknowledged that these were significant decisions that should have been discussed with the governing body. "These monies were there for the City employees.” Mr. Skeete also acknowledged that due to the direction of his superiors the City Council was not adequately informed. Mr. Skeete recognized that due to this policy, incomplete information was provided to the City Council. (See City Staff's Communications to City Council/Trust Fund Boards/Press section infra). PREMIUM HOLIDAY ~ WORKERS’ COMPENSATION The WCTF tracks costs associated with workers’ compensation claims for City employees. These costs are charged to the department based on a formula that accounts for its number of employees and the relative risk of claims (e.g. higher rate of claims for police, etc.). City Management elected to have a one-time holiday from paying workers’ compensation premiums for FY 2010. These saved premiums were used to pay the additional costs associated with the ERP. Summary of Workers Compensation Self Insurance Premiums and Premium Holidays Fiscal Year 2008 2008 2010 201 2012 Self-Insurance $991,514 § 992,638 $ 246,482 $ 984,458 $ 902,422 Premiums Reversal of Premiums (64,321) Net premiumstoWCTF $ 994514 $997,698 § 82161 S9BL458 $ 902422 See Senedule A * Diane Goke interview. Horatio Skeete interview.Ms. Carmicle pointed out that the $2.7 million drawdown in May 2009 exceeded the $1.6 million she had authorized. This was referred to in emails as “the $1M problem."*” In an email dated August 17, 2009, Mr. Bolton proposed a “remedy” to this problem "before the accountants got too far along.”** He suggested reversing monthly entries for workers’ compensation premiums already booked for FY 2010 and to cease the regular entries for the rest of the year. The City could then move the entire year’s budget appropriation of $985 thousand (approximating the $1 million) in one entry to the EBTF. "Don's proposal" was approved by Ms. Goke and Mr. Loeb, with copies sent to Ms. Carmicle, Ms. Schurhammer and Robert Steele, Accounting Manager.” IV. City MANAGEMENT AND STAFF’S COMMUNICATIONS. From the onset of the ERP, City Management and staf failed to keep the City Council appropriately informed, at times misled them and/or provided incorrect information. Under the previous administration, City staff was hindered and/or prohibited from providing valuable information to the City Council, Until recently City staff was hesitant to make independent decisions or communicate directly with the City Council due to a mandate by City Management that all Council communications be run through the City Manager's office. The few times City staff was allowed to present to the Cit Council, they were required to do a dry run for City Management and only present that which was approved at that rehearsal. These acts could be most readily observed in official communications by City Management and staff with the City Coun BuoceT WorksHoPS FY2010 During the budget workshops for FY 2010 the ERP was represented as a $2.2 million one-time cost savings to the City. From the time the ERP was conceived until the March 24, 2009 Budget Workshop, the City Management failed to inform the City Council of: + The actual costs of the retirement incentives; ‘+The failure of City Management to recognize, account for, or include the ASRS penalty; ‘+ The net short-term loss that would result from the penalty; and + Anaccurate depiction of the time and cost of the program to achieve a net saving If the City Council had been briefed on these points before the ERP proposal was offered to the City ‘employees, recognizing the loss and penalty, the City Council would have had the opportunity to decide whether it wanted to continue with this program. City Council was not informed even at the March 24, 2009, Budget Workshop. In her briefing to the City Council, Ms. Kavanaugh introduced the ERP stating that over 50 employees have decided to participate in the ERP. When asked by Mayor Scruggs about the cost of the ERP, Ms. Kavanaugh stated * exhib 19 = ot exhibit,that the details would be covered later in the presentation by Mr. Skeete and Ms. Schurhammer. These details were never presented by Mr. Skeete, Ms. Schurhammer nor any City staff at this meeting nor any Budget Workshops for FY 2010 despite having knowledge of the ERP's expense. After this Budget Workshop, rather than providing further information to City Council, City Management continued to hide important facts. They failed to get approval, prior or subsequent, for the funding of the ERP and ASRS penalty. They intentionally avoided informing the necessary parties as best exemplified by Mr. Loeb requesting the deferment of payments from the RMTF and WCTF until after this upcoming RMTF and WCTF Board meeting: “I didn’t think that would be a problem to accommodate since we have an equally sizable chunk of retirement incentive money to cover during FY10 when the ASRS portion is due.”* The explanation for this request is that City Management wanted to keep the Board and City Council in the dark as to how they were funding the ERP. This deception continued to the May 18, 2010 City Council meeting, May 18, 2010 City COUNCIL MEETING (On May 18, 2010, former Mayor Scruggs questioned City staff regarding the ERP. Rather than inform the City Council at that point of the difficulties with the ERP, the ASRS penalty and the trust funds, Mr. Skeete indicated that staff had built the cost into the current budget. The 100 plus vacancies at the City were offered as the explanation of how it would cover the costs of the ASRS program. [sic] This statement is false. The ERP costs were paid for by the EBTF, RMTF, and the WCTF in FY 2009-11. When asked about this contradiction, Mr. Skeete explained in his interview that all City staff presentations to the City Council were rehearsed in front of executive City Management, including Mr. Beasley and Ms, Kavanaugh. Asked if City staff were told not to discuss the ASRS penalties, Mr. Skeete responded that he was not specifically told to withhold the ASRS penalty costs, but that staff was told what to say. Ms, Schurhammer’s recollection is different. She remembers Mr. Beasley directing City staff not to mention the ASRS penalty in discussions with the City Council.®* FeeRUARY 22, 2011 City CoUNCIL MEETING During the February 22, 2011, City Council meeting, some of the withheld information started to come out. Although some information had lain buried deep within budget amendments that was not volunteered by City staff, the City Council was finally told about the ASRS penalty and how it was funded. Despite this change of tone, City Management still continued to mislead the City Council by not revealing it had been aware of the penalty as early as January 2009. In a discussion about the FY 2010 budget amendments, Ms. Schurhammer talked about a $1,540,610 appropriation to pay for ASRS penalty ‘These kind of costs could not be anticipated when the FY 2010 budget was developed in January 2009, therefore transfers of appropriation authority were required during the * exhib, * exhibit 26 Bates GLEN 000332 * Horatio Steet Interviews. “ Spey Sehurhammer interview.course of FY 2010 so department budgets ended the year with sufficient appropriation authority to cover the actual expenses associated with the higher than usual number of retirements. When asked about why she stated that the costs of the ERP could not be anticipated, Ms. Schurhammer replied that they had an idea of costs when doing the budget but not the exact costs. When shown calculations her department completed prior to this time she said she got confused and made a mistake ‘on what she told the City Council. Novemer 5, 2012 SPECIAL City COUNCIL MEETING After concerns were raised by the City Attorney and other personnel, the City conducted an internal audit. The audit report, while finished in June 2012, was not delivered to City Council until September 2012. After receiving the audit, the City Council recognized a number of issues that needed to be discussed. In the November 5, 2012, City Council meeting to review the audit findings, Mayor Scruggs asked Mr. Skeete if the ASRS penalty was built into the FY 2010 budget. Mr. Skeete said he did not recall if the penalty was known at the time but he did say that the actual amount of the penalty was not included. Mr. Skeete also indicated that the penalty was not presented to the City Council in the budget. He did not take responsibility for the decision to continue with the ERP despite the penalty. He said the decision was made by the City Manager.” This is not the only time Mr. Skeete admitted to misleading council. At the November 5, 2012, meeting he acknowledged that ASRS costs had not been built into the FY 2010 budget due to a decision by the City Manager.®* But on May 18, 2010, at a different Council meeting, Mr. Skeete stated that ASRS costs had been built into the FY 2010 budget. Mr. Skeete made similar admissions on the drawdowns from the EBTF. At the November 5, 2012, meeting he explained the decision made during the 2010 budget process to take a premium holiday. He said the premium calculations for the funds were made and appropriated by departments throughout the City. The amount of the premium, about $1 million, was not sent to those funds, but rather kept in the General Fund and other funds for purposes of completing a balanced budget. While the amounts were credited to the expense accounts, they were sent to the General Fund as part of the process to balance the budget.” Decemper 4, 2012 City COUNCIL WORKSHOP One month later at the December 4, 2012, City Council workshop, the City Management adopted 2 different tone as it defended the drawdowns.” Ms. Schurhammer and Mr. Brown stated that the © exhibit 25: Bates GLEN 000376. “ sheer Schurhammer Interviews © exhib 26: 115.12 City Counel Meeting Minutes, pp. 3-7 a or exhib 27: Bates GLEN 061329 ~ 061332.drawdowns were included in each year’s budget books, which stated that the $1 million would be used to cover fluctuations in medical and dental claims history. Mr. Skeete backed up the claim by stating that the drawdowns were used to balance the budget; a direct contradiction to statements he made one month earlier. Although City staff claim that this information was in every budget book since 2008, the description of why the $1 million was drawn down appears to be misleading since it was essentially taken to reduce the General Fund deficit and not to anticipate higher medical expenses. RMTF/WCTF OcroseR 4, 2012 MeeTING The City Council was not the only group being misled. At an October 4, 2012, RMTF and WCTF Board ‘meeting, Ms. Goke made several comments regarding the management and use of the trust fund: You know, obviously, this is something that we've been able to wiggle around with for the last few years. Because there have been some rate holidays, for lack of a better word, so there have been years when there weren't--they weren't funded at all, so- because of the budget. And so we're saying, okay, look, we have a budget shortage and we-we're going to go to council. And instead of saying it's nine million, what it really is, we're going to take a holiday and not paying into Workers’ Comp this year, so we're only going to say Ms. Goke confirmed this position in her interview by stating that City staff, instead of telling the real shortfall, “played around” with the premium holidays and trust funds so that only “good news" went to the City Council.”? RESPONSES TO PUBLIC REQUESTS These misrepresentations were not limited to the City Council and RMTF/WCTF Board, City Management also provided inadequate information to public record requests from the Arizona Republic. (On August 19, 2009, the Arizona Republic requested information from the City regarding the ERP, including a list of the employees who participated in the program and the program savings. Ms. Kavanaugh directed Ms. Carmicle and Ms. Schurhammer to put together information and give to Mr. Lynch to review before it went to the City Attorney's office.” The savings calculation of $4,304,441 was based on salaries for 50 employees.” There was no mention of the cost of the ERP which would have included the retirement incentive, vacation and sick leave payouts and the ASRS penalty. On May 21, 2010 the Arizona Republic made a second public records request for information on the ERP including ASRS and incentive costs. After discussions with City staff and consultation with City Management, Julie Frisoni, Marketing Director, responded with a description of ongoing savings of $5.1 million. She also described a $1.3 million incentive program and $2.6 million for the ASRS unfunded formation was lity.* Noticeably absent was the cost of retirees’ vacation and sick payouts. This "eb 28: Bates GLEN 002013 - 002037 " diane Goke interview. ™ eet 29: Bates GLEN OSS659- 055688, id or Bates GLEN OSS6I6,provided by Ms. Carmicle with assistance of Ms. Schurhammer, Mr. Skeete, Ms. Kavanaugh and Mr. Beasley.”° V. ArT LYNCH —RETIREMENT/SRJ CONSULTING Art Lynch, a long-time employee of the City, held several positions during his tenure including Deputy City Manager, Assistant City Manager and CFO. For several years he was involved in special projects and economic development such as persuading sports franchises to move to Glendale. PARTICIPATION IN THE ERP Although Mr. Lynch was listed among the 55 participants in the ERP as of March 23, 2009, he did not retire until October 21, 2009. Even though Mr. Lynch did not meet the ERP deadline, Mr. Beasley approved his participation. Mr. Skeete was aware that Mr. Lynch did not retire until after the deadline. When Mr. Skeete questioned why Mr. Lynch was permitted to retire under the ERP program, he learned that Mr. Beasley provided Mr. Lynch an extension beyond the deadline based on Mr. Lynch's continuing duties. The City incurred an additional $165,069 cost by allowing Mr. Lynch to participate in the ERP after the deadline. ‘SPECIAL PAYMENTS Mr. Lynch was also paid $25,000 in additional compensation upon his retirement. The Personnel Action Form prepared by Ms. Carmicle describes the $25,000 as deferred compensation with “by separate process” indicated on supporting documentation. Mr. Beasley signed the form.”” Mr. Skeete in an email sent to Mr. Muraoka, the ASRS representative, confirmed the $25,000 sum as “additional compensation for services rendered during the year leading up to that payment.””* In reviewing these documents Mr. Brown indicated that additional compensation for services rendered during the year would not be equivalent to deferred compensation. He added that this compensation paid for additional services would not be part of Human Resources Policy.”” ConsuttinG The day after he retired Mr. Lynch returned to his former duties at the City as a consultant under the name "SRI Government Consulting.” This contract, having been never put out to public bid, was signed by Mr. Beasley and approved as to form by Craig Tindall, City Attorney, on October 22, 2009. The City Council ratified the contract in January 2010. * i at Bates GLEN 055666, * exibie30: Bates GLEN 001854 exhib 31: Bates GLEN 001856. im Brown interviews.Mr. Lynch was ultimately paid $930,410 from December 3, 2009 - January 24, 2013. Mr. Skeete approved Mr. Lynch’s bills. When he saw the amounts “he was shocked” at the size of the fees paid to Mr. Lynch” Mr. Lynch reported directly to Mr. Beasley when he was consulting for the City. Asked why Mr. Lynch received such high compensation for consulting, City employees were informed that Mr. Lynch was invaluable to negotiations. A former employee stated when told about the fees paid to Mr. Lynch, "Well, we, you know, we had gone through, | think three years of layoffs, uhm, we had gone without raises since 2008.50, it’s very disturbing for me that while we were scrimping and, and cutting people’s pay, and not increasing pay, uhm, that that amount of money was being paid for services that the City should have been able to get from the employees they already had on board...”*" Had Mr. Lynch remained a City employee, the City would have an estimated savings of $504,681 over the 3.15 years that he provided consulting services to the City. Extimated Cost — Art Lynch “Retirement” (2009-2012) Description Est. Total Benefit (Cost) Estimated Salary Savings $ 663,238" Direct ERP Costs “Retirement Incentive $ (43,733) ASRS Penalty __0121,336) Total ERP Costs $ (165,069) Direct Retirement/Separation Costs = "Deferred compensation” $ (25,000) Stability pay (800) = Sick payout (10,826) = Vacation payout ___ 85,816) Direct ERP Costs $s (72,442) Est Savings-Lynch Retirement $425,729 City payments to SRI Gov't Consulting (020,410) Est. Net (Cost) after Consulting, $_(504.681) City Management and staff, though aware as early as May 2009 of Mr. Lynch's retirement plans to come back as a contractor, did not build his contractual costs nor the retirement costs such as incentives, vacation and sick payout, and the ASRS penalty of $121,336 into the FY2010 or FY2011 budgets.” Horatio Skeete interviews. © Lupe sierra interview © projected salary and benefts for Art kynch from his retirement date until termination of the RU Consuiting contrac, Calculated using {210,522 base salary and benefits for Art yh in 2008. exit 32: eats GLEN 055695 2VI. ALMA CARMICLE Ms, Carmicle began working part-time from her new residence in Mississippi during the summer months of 2010. She permanently moved to Mississippi and worked from home full time beginning in May 2011 until her retirement in February 2012. Ms. Carmicle first began telecommuting when Mr. Skeete assumed the role of Assistant City Manager. When he inquired about the rationale for this employment arrangement, Mr. Beasley informed Mr. Skeete that he approved the telecommute and that he needed Ms. Carmicle to continue working since he was busy with other tasks. ‘The majority of Ms. Carmicle's time during this period of telecommute was spent negotiating union contracts." Mr. Brown assumed day-to-day Human Resources duties. According to Mr. Brown, Ms. Carmicle's interaction with staff decreased from every day when she was living in Arizona, to once @ week or even twice a month when she was telecommuting from Mississippi. Mr. Brown stated, “She just wrapped up, | think, uh, when she left, uh, some of the union negotiations for the MOU's, uh, and then she [retired]. And so, you know, | even had to meet with some of the union reps to find out what the conversations were with the MOU’s so | understood where we were in those negotiations.”** Ms. Sierra confirmed Mr. Brown's comments.” Cathie Mcintyre, City Human Resources Administrator, assisted Ms. Carmicle in the MOU negotiations for FY2013-2015. She provided the meeting/conference calls and length of calls of the negotiations. According to Ms. Mcintyre, Ms. Carmicle participated in 26 MOU meetings/calls from October 27, 2011 to February 1, 2012 that lasted a total of 13 hours and 55 minutes. The Table below summarizes these MOU negotiations below based on the HR Administrator calendar: Description Month | No. Meetings | Duration (hrs/mins) Police Union Meeting Oct. 2011 z Pre-MOU Meeting with Police | Nov. 2011 1 Fire and Police Meetings Dec. 2011, is Police Finalization Meetings Jan, 2012 6 Police Union Discussion Feb. 2012 2 TOTAL 26 During her year of telecommute, for which she spend the majority of her time nego Ms, Carmicle collected her full salary, including additional stipends such as a car and telephone allowance. The salary and benefit costs are estimated to be approximately $140,000. While she declined to be interviewed, Ms. Carmicle sent a letter explaining her actions. * Horatio Skeete Interviews Pia © Lape Siva interview. genie 33: sune 28,2013 letter.VII. OTHER ISSUES EMpLovee BeNeriTs TRUST FUND Unlike the RMTF and WCTF, the EBTF was not a typical self-insurance trust fund as authorized by Arizona statutes. Instead, this appears to have been set up in 2001 as an accounting accommodation to allow the City to track these costs. The EBTF does not have a Board of Trustees or a Charter. ivy Auorror’s RePoRT In Glendale, the City Auditor reports to the City Manager. Candace Macleod, the City Auditor, indicated that she attempted for several years to perform an internal audit of the City’s RMTF but was repeatedly buffed by Mr. Beasley.” On or about 2012, Ms. MacLeod successfully initiated and later completed the audit. Her audit findings, along with City management's responses, are summarized in her Risk Management Trust Fund Audit, June 2012. Once completed, the audit identified the following observations relevant to this special project: = Over $3.2 million was transferred out of the RMTF in FY 2010 to pay for ASRS unfunded liability assessments as part of the city’s retirement incentive program without consulting the RMTF ‘Trustees, the City Attorney's Office or City Council; = In FY 2011 and FY 2012, transfers of $1.45 million and $1.2 million were made out of the RMTF respectively to the WCTF, which did not receive budgeted premiums of $985,920 in FY 2010; + Salaries and other administrative expenses were paid out of the RMTF in FY 2011 and FY 2012 despite being prohibited under the Ordinance; «Many important RMTF procedures were undocumented. If the City Auditor had been allowed to perform the RMTF audit when she issues might have been identified earlier. ly requested, these ART FUND TRANSFERS, ‘The Art Fund is a governmental fund intended to collect/reserve funds for the use in purchasing and installing “public art” in the City of Glendale. As of 2010, the slowdown in construction in the City resulted in the funds being largely unused. A significant portion of the Art Fund assets were transferred to the General Fund during this period. Upon further examination, these transfers were appropriately approved by the City Council. AinpoRT LAWSUIT (On August 15, 2011, the City was subject to a bank account garnishment amounting to approximately $2.3 million for a lawsuit dealing with the airport. The City staff had booked an entry recording this, transaction to a suspense account where it remained at the commencement of this special project. This, amount was ultimately reclassified to General Fund expenses. As such, no issues were identified with the treatment of this lawsuit expense. ™ candace MeCleod interview,RECOMMENDATIONS + The City of Glendale should implement an anti-fraud program that would include the following: (© Conduct a fraud risk assessment to ide! abuse and/or employee misconduct; © The City should implement a code of conduct and provide training for that code; © Create an ethics hotline where callers could be allowed to provide information anonymously. The calls should be investigated thoroughly and immediately with reports provided at least quarterly to the City; ‘© Implementation of the ethics/antifraud program should be communicated to all levels of employees. areas that are vulnerable to fraud, waste and Retention policy for emails/server information should be reconsidered. Sixty days for email backup is not adequate for litigation and investigative purposes. The minimum should be one year. ‘+ Decisions on significant programs, such as the ERP, should be supported by sound financial analysis and supporting documentation discussing both the short-term impact, and potential long-term impact of the program. It should also document City Management's consideration and reasoning for recommending or implementing such a program. * Have Risk Management and Workers’ Compensation trust fund boards meet more frequently than once a year. * City should evaluate its current policies and guidance as to required authorization for transfers and revise if necessary. These policies should be assessed by City attorneys for consistence with applicable statutes, regulations and ordinances. ‘+ Revise charter/ordinances to require the notification and/or involvement of the City Attorney over all significant transactions. + To the extent that budget appropriations transfers are a practical necessity during the year, update or revise the policies to clearly set out what is and is not permitted, as well as what transfers and when those transfers must go for City Council approval. ‘= To the extent that the City desires to pay certain administrative costs and salaries related to the appropriate trust fund purposes [as with other cities] — ordinance or amendment to governing documents should be considered and approved by City Council to authorize these expenditures. ‘+ Premium levels charged to City departments are subject to the recommendations and the discretion of the City Management. Premiums should be based on sound long-term evaluations rather than by short-term cash needs. * Significant changes in trust fund premiums (e.g. >20%) paid by City departments should be authorized to the City Council in advance. * City Auditor should report directly to the City Council rather than the City Manager. This recommendation has already been made implemented, + The City’s external auditor should be engaged to perform at least an annual audit of internal controls. WEXHIBIT 1Exhibit 1 City of Glendale Special Project Interview List, Norma Alvarez 1 Don Belton 1 Jim Brown 2 Cathy Mcintyre 1 ‘Ann Buchmeier 1 Nick DiPiazza 1 Julie Frisoni 1 Diane Goke 1 Julianna Lloyd 1 Candace Macleod 1 Darcie McCracken 1 Raquel Montero 1 Christina Parry 1 Sherry Schurhammer 5 Horatio Skeete 2 Elizabeth Smith 1 Craig Sullivan 1 John Stern 1 Joyce Clark 1 Andy Jennings 1 Shelly Kitts 1 Mayor Elaine Scruggs 3 Lupe Sierra 1 Robert Steele 1 Craig Tindall 2 Michael Morrison 1 Jill Shaw 1 Jim Suramers 1 Total interviews 32 Total individuals interviewed 28 Privileged & Confidential Attorney / Client Work ProductEXHIBIT 2$50550-N379EXHIBIT 3eae, a Cuan Special Announcement to Eligible Employees Voluntary Retirement Incentive Marek 6, 2009 In Februay you recelved « budget update memo from the City Meniager disoussing the ‘ongoing finaycial situation of the City of Glendale and some possible steps wvo ruight ‘have to fake i menage our way thtough this global economic csi. ‘The purpose of this letter isto announce thatthe city hes deolded to offer a retirement | incentive which is only available, at this time, to employees eligiblo for a “normal Fetirement” in the Arizona State Retirement System (ASRS). “Normal retirement” in the ASRS refers to employees that have reached any of the followsig three milestones: age 65; age 62 with 10 years of credited service; or et £0 points as detonnined by adding age and years of credited eervico ‘The reilrement incentive being offered will allow eligible employees to receive a lump ‘sua payment from the City of Glendale. This additional cash payment is separate from futuce moulbly peyments with the stato retirement eystem, All retirement incentives aro subject fo appiovel by the city and are baséd oni ofganizatlonal needs. ‘The retitement incentive fncludes two weeks of sepatetion leave plus. hump sum cash payment of one of the followlag: = Lesathan 15 years of Glendale service: 2 months base selmy = 15 to loss than 25 years of Glendale service: 3 months base saluy + 25 ormors yeers of Glondale service: 4 months base salary ‘Because you are eligible for notimal retirement you likely have been evalusting your retirement options and trying to determine which course of'action 4s best for you. Feel freo to contact Lupe Sierza at extension 2859 or Cathy Melntyre at 2465 if you have any questions, Please complete the attached response form and retura it in person to Lupe Sietra, no later than March 20, 2009. If you do not return this response, it will bo assumed that you do not wish to take edvantage of the rotixement incentive. ‘Alma Caunicle ‘Furman Resources Director ly of Biendale ‘Munlepal Complex = $850 Wost Glendale Avarue » Glendale, Aizona 86801-2809 + Phone. (628) 820-2000 ‘Ww glondaleaz.com cores