At the time, there were political implications made by several pro-Roberts council members and administration officials that CFO Michael Lenz, who supported a ticket in opposition to the mayor, was purposely making the city's books look worse than they really were. By doing this, they said, Lenz was giving credence to the opposition's position that administration was not in control of its spending habits. But was the firing justified for that reason?
A new audit calls the city's position into serious question. The audit shows that Lenz did not overstate how much extra funding was needed, but actually understated the figure.
The new audit, which is public record and can be view at the City Clerk's office, shows that the city, even after allocating $1.9 million in emergency appropriations last year, overspent its 2003 fiscal year budget by an additional $757,000. The $1.9 million in emergency appropriations had to be made up in this fiscal year's 2004 budget, and the $757,000 in overspending will have to be made up in next year's budget, which will cover July 1, 2004 through June 30, 2005.
In total the city spent $2.6 million more than what had been originally approved by the City Council in January of 2003. What was advertised as a $62.6 million budget really ended-up being closer to $65.2 million, according to the audit.
While $2.6 million may not seem to be huge portion of a $62.6 million budget; when one considers that the entire municipal tax levy for 2003 was only around $18 million, a $2.6 million increase in spending represents around 14 percent the total municipal tax levy.
A brief history
To understand the issue, a brief explanation of what happened last year is needed.
Every year the City Council, the local governing body, is in charge of creating a budget for the city. The fiscal year runs from July 1 through June 30.
In January of 2003, City Council approved a $62.6 million budget to cover city services, supplies, and salaries from July 1, 2002 to June 30, 2003.
In theory it should not be a common practice to spend above and beyond the set budget, because by doing so the administration could usurp the council's responsibilities, which could lead to a breakdown of governmental checks and balances.
But occasionally there are unforeseen circumstances that might cause the city to have to overspend its budget. When this happens, the City Council is supposed to approve an emergency appropriation for what is needed. Emergency appropriations are permitted under the New Jersey Local Budget Law after the budget has been adopted to provide for emergencies that were not foreseen at the time of the budget adoption.
In the first half of 2003, the City Council approved $1.9 million in emergency appropriations for items such as group health insurance, workers' compensation insurance, the costs of council runoff elections, and the cost of repairing a leaking roof at the public library. The largest portion of the emergency appropriation was $587,847 for pay for anticipated overages in group health insurance. This happened because the rates were rising higher than expected.
These emergency appropriations were fiercely debated by the council. Several council members who were aligned with Roberts were highly critical of Lenz during the process.
Lenz said that the situation was bad, and if not remedied via an emergency appropriation, layoffs could be a possibility.
But the pro-Roberts faction said that Lenz was overstating the city's financial problems in an orchestrated effort to make the administration look bad just days before a critical election.
Nevertheless, the council voted to approve the appropriations.
Investigation begins
Almost immediately following the approval of the emergency appropriations, Roberts ordered the city's attorney and auditors to launch an investigation into the budget and the emergency appropriations.
Roberts at the time stated that he was concerned that that there was a need for emergency appropriations too soon after the budget passed. He added that this alone was justification for launching an investigation. In April 2003 he added that there was a "deliberate attempt to undermine the fiscal integrity of the city."
After all, if the city passed its budget only in January, shouldn't Lenz have known then that they'd need more money soon? Lenz didn't know how high the insurance increase would be at that time.
But Roberts thought Lenz might have been setting the city up to underbudget.
Roberts said that there were "substantial differences" between the "actual" budget numbers and those presented to the City Council in April.
Around six weeks after the investigation by Louis Roberts (no relation to David Roberts) of the firm Ernst and Young began, Lenz was terminated on election day in May.
At the time, Lenz was still studying and taking classes to become a licensed CFO. His official title was acting CFO, and his position was a provisional one, meaning that the city had the authority to terminate him without reason.
But the city did give a reason. According to an official statement from the administration, the termination came as the direct result of an "internal city investigation" into the city's budgetary process. "It was discovered by the Purchasing Department that the Group Health Insurance account was erroneously encumbered for approximately $600,000," read the report. "This overencumbrance negates the need for additional funding."
Was there a mistake?
Both side of this argument acknowledge that there was a mistake made.
While Ernst and Young's report last year said there had been an error, it had not placed blame on a specific person.
The city contends that Lenz made the mistake and appropriated more than what was needed. This was the main reason given for his firing in the investigation.
City Business Administrator Robert Drasheff said Thursday that Lenz' termination was completely justified. "Michael Lenz was an unmitigated disaster as this city's CFO," said Drasheff. "He continually put his political aspirations above the needs of this city. The fact of the situation is that he was a provisional employee and his performance was not satisfactory so his employment was terminated."
Lenz had been hired in late 2002. He did not have previous experience working for the city, but had served as Roberts' campaign manager for the 2001 mayoral campaign and then had a falling out with him later. Lenz was a CPA who worked for a real estate firm in Central Jersey, and was a former president of Hoboken's Board of Education.
Drasheff added that in addition to the overencumbrance, Lenz failed to keep a general ledger and failed to reconcile the city's bank accounts.
It's important to note that an appropriation is not the same as spending. When a government appropriates funds, it is merely setting money aside for an expected future expense. If that expense never materializes, then money set aside as an appropriation becomes a surplus in the next year's budget. Spending is when a government entity actually cuts a check and pays for a service.
So what Drasheff criticized was Lenz asking for the extra funds in April. But later, it turned out that they were needed.
Lenz said that he knew there were several big questions in the budget and that it is acceptable accounting procedure to leave a buffer when making appropriations.
Lenz added that he was made a scapegoat for the city's overspending. "This is nothing more then a case of shooting the messenger," said Lenz shortly after being fired.
He contended, and continues to believe, that the error was made in the Purchasing Department, which he did not supervise. It falls under Drasheff's department.
But even with the mistake, Lenz said he was being on the safe side in making sure the city had enough money to pay its bills.
New audit
The audit for the 2003 fiscal year has been presented to the council, and there are figures supporting Lenz's caution. According to the audit, which was also completed by Ernst and Young, not only was all $587,847 of the emergency appropriation eventually needed to pay group health insurance bills, the city actually overspent the line item by an additional $40,816 by year's end.
According to the audit, Lenz did not overestimate how much was needed for the group health line item; in fact, he underestimated it. Its implication was that the city's fiscal shape at the time was even worse than his "conservative" estimate.
Not only does the audit state that the emergency appropriation in group health was needed, but it also said that even with the $1.9 million in emergency appropriations, the city overspent its 2002-2003 budget by an additional $757,000.
In reality, according to the audit, the city really overspent the council-approved budget of the 2003 fiscal year of $62.6 million by $2.6 million. This included the $1.9 in emergency appropriations and the $757,000 in overspending.
Taking from Mary to pay Paul
What makes things even more complicated is how the Police Superiors' contract factors into the controversy surrounding the emergency appropriations.
In March of 2003, the city agreed to a new contract with the police superiors. At the time it was signed, it was known that there would be a substantial increase in the cost of running the police department for the 2003 fiscal year, but there was debate over exactly how much extra it would cost.
At a City Council meeting in March, shortly after the deal was brokered, Drasheff said that the overages would run around $200,000 but expressed uncertainty if that was exactly the correct number, due to the complicated nature of the contract. Then, as the year went on, those estimates grew from $200,000 to $500,000 and eventually ended up costing the city around $1 million more than was budgeted.
The extra spending for the police contracts was not included in the emergency appropriations. According to Drasheff, the plan was to use budget transfers from accounts that have money left over to accounts that needed money to finish the year. State law allows budget transfers only in the last two months of the fiscal year. The biggest transfer in the police salaries and wages came from group health care in the amount of $458,570, according to Drasheff in June 2003. This was the money from the emergency appropriations that Lenz allegedly overestimated.
At that time, Drasheff told the Reporter that the city would end the year with a surplus, because of the city's ability to take advantage of the transfers. "At the close of the year, we should have a slight surplus," said Drasheff on June 18, 2003. "These budget transfers balance out all of the accounts for this fiscal year."
No surplus, but a deficit
But, according to the new audit, the city didn't end the year with a surplus. In fact, it showed a deficit of $757,000. What happened?
According to Lenz, the city paid the last group health insurance bill for fiscal year 2003 out of the fiscal year 2004 budget.
Even according to Drasheff, there were some bills from 2003 paid in 2004.
"A couple bills came in late," said Drasheff recently. According to Drasheff, late payments were made because the bills for the final months of the fiscal year were not received until after the year had ended.
What this does
Lenz and Councilwoman Carol Mash, a critic of the Roberts administration, said paying these 2003 bills in 2004 did two things for the administration. First, they said, it gave the administration a way to pay off overages on a controversial police contract. Second, it kept the appearance that Lenz did overestimate how much was needed to pay off group health.
"Simply put, they didn't pay the last group health bill in 2003 and slid that bill into 2004," said Lenz. "That gave the appearance that there was too much money appropriated for group health, and gave them the opportunity to fund this police contract which they badly overspent."
Marsh wrote a letter to Jan. 20, 2004, to Joseph P. Monzo, then the director of the state's Division of Local Government Services. "In fact there was no surplus in Group Health Insurance available for transfer," the letter said. "City officials created the illusion of a surplus by holding invoices."
The auditors speak
The audit bears this fact out. Auditor Randy Nelson of Ernst and Young, who was at the last City Council meeting, said it's improper to transfer money from an emergency appropriation to other budgetary line items. "[These transfers were reversed] because they were not permissible by state statute," said Nelson. Those funds were transferred by the auditors back to group health line item.
The auditors moved the group health insurance bills that were paid with 2004 money back into 2003. Because of this, every cent, and then some, of the original emergency appropriation was needed to pay off group health. After all the bills and emergency appropriations were moved back into group health by the auditors, the item was still overspent by $40,816, which means that Lenz did not, according to the audit, overestimate how much was needed.
"I always said we were broke," said Lenz, "and that is what this audit proves."
The domino effect of transferring the $458,570 from police salaries back to group health was that police salaries and wages were now overspent.
According to the updated figures in the audit, the police salaries and wages from fiscal 2003 were overspent by $590,964. That is the bulk of the $757,000 in total additional overspending that is reported in the audit.
The $757,000 will have to come out of the 2004-2005 fiscal year budget.
Roberts recently said the audit, even with the $757,000 in overspending, shows progress from previous years. Over the past decade, Hoboken's audits have averaged between 40 and 55 comments and recommendations, but the 2003 audit only contains 16, of which most were described as minor or technical. He added that he is confident that even with having to make up the money next year, the city will be able to produce a 2004-2005 budget that will maintain a stable tax rate and keep city services at a high level.
A history of overspending
This is far from the first time that Hoboken has overspent is municipal budget. In September of 2002 the city suspended then-CFO George DeStefano, who is the brother-in-law of former Mayor Anthony Russo, for allegedly failing "to adequately monitor the city budget" which led to over-expenditures of $5.4 million in 1999, $1.1 million in 2000, and $2.1 million in 2001, for a total of over $8 million in the three-year period, according to a state report. The accusation by the Roberts administration was that the Russo administration was using under budgeting "as a tool" to maintain a stable tax rate.
Drasheff added that this administration operated differently because it did ask for emergency appropriations when it saw that extra money would be needed. "You would have never have seen an emergency appropriation from that administration," said Drasheff recently. "Instead of sweeping it under the rug, we directly dealt with it and did the responsible thing by pursuing an emergency appropriation."
He added that the $757,000 in additional overspending was a mistake and will be corrected. "It was a mistake that will have to be raised in next year's budget," said Drasheff.
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