Coburg may face more cuts over error.

Byline: Karen McCowan The Register-Guard

COBURG - Facing a $450,000 shortfall in its 2004-05 operating budget after a math error created a false beginning balance, the City Council essentially borrowed from Peter to pay Paul.

Actually, Coburg borrowed from multiple Peters: its dedicated funds for water, street, sewer, parks and other services. Together, they contained enough cash reserves to help the city balance its overall 2004-05 and 2005-06 budgets as required by state law.

But now the Peters need their money back.

Coburg's 2005-06 budget audit, presented to the City Council on Tuesday night, shows that the city's general fund owes its dedicated funds about $825,000.

"It's not a pretty picture," Coburg Finance Director Craig Gibons told a grim City Council. "But it is an ordered, audited, actionable picture."

Gibons, hired six months ago, said the city must decide how and when to repay the funds during its 2007-08 budget-making process. That probably would mean more cuts to the city's 15-employee staff, on top of six positions already eliminated since 2004.

"With a general fund budget of $1.2 million, you cannot make up that kind of money out of incidental expenses," he said.

"How did that happen when we worked so hard to live within our means?" Mayor Judy Volta asked Gibons, who told the council that the city had overspent its revenue in each of the past five years, including two since discovering the original general fund shortfall.

"It's clear to me that you were not given good monthly information on your status," he said. "And by the time you got the numbers showing a year-end loss, you were already two fiscal years down the line."

Gibons said this year's audit, by Pauly, Rogers and Co. of Tigard, marks the first time the city has completed an audit on time since the budget crisis of 2004-05.

"This is the first time we have had audited financial information in time for preparation of our next budget," he said. "For at least the past three years, and probably longer than that, the city had prepared budgets based on incomplete audits."

That caused a snowball effect in which the city continued to spend more than it took in, based on poor projections. Gibons said the gap has been steadily closing since 2005, however, and pledged a zero deficit - even a small surplus - by June 30 of this year.

Nevertheless, the audit found five "reportable conditions" that the city must correct. They include:

Inadequate checks and balances for employee time sheets and payroll history. Gibons said the city staff already has instituted a new system to document and record any salary changes.

Inadequate scrutiny of the Coburg Municipal Court's bank reconciliations and canceled checks to ensure "no unusual or unauthorized checks."

Inadequate segregation of duties, allowing some employees sole access to both physical assets and related accounting records.

Gibons said he will begin opening all court bank statements, and the city's accountant is already reviewing court bank reconciliations monthly. The audit "did not reveal any significant errors or irregularities resulting from this lack of segregation," according to the auditor's report.

An overly complex fund structure for the city's size.

Gibons recommended that the the City Council close 12 of the city's 23 funds, consolidating like funds.

Many transfers and interfund loans made "in error, not done in accordance with budget law, and made out of restricted funds, which is not allowed."