Anchorage’s late financial audit leaves key programs ‘hanging in the balance’

An annual audit of the Anchorage municipality’s 2022 financials is late by about 10 months. That’s caused a cascade of problems and put the city at risk of losing millions in grant funding and its certificate of self-insurance from the state, city officials say.

The late audit also means that city officials don’t yet know exactly how much money Anchorage has — even as Mayor Dave Bronson’s administration and the Assembly are due to revise and finalize this year’s budget later this month.

“This makes it very, very, very difficult for the Assembly to do its job,” Assembly Chair Christopher Constant said during a Monday meeting on the issue. “Its job — our job — is to manage the (finances) of this municipality: to approve the budget, to approve amendments to the budget, to authorize expenditures.”

“We are authorizing in the blind because we do not have the financial statements, still, a year later,” he said.

Anchorage municipal code and charter require that a yearly independent audit of all the city’s accounts be completed “within 90 days following the close of the fiscal year.” Having audited financials is also critical for the city to keep some federal and state grants. And it’s possible the tardy audit may impact the city’s bond rating.

The Anchorage Assembly on Monday voted to extend the city’s contract with its auditor, BDO, a national accounting firm, until June.

“Everybody is working as hard as they can on this. I’m not making excuses,” Municipal Manager Kent Kohlhase told Assembly members at the meeting.

The city undertakes a comprehensive review of its finances for the prior year, including of its state and federal grants, and a third-party auditor reviews the report. The audit is normally issued at the end of June, though sometimes it takes a few months longer, said Assembly member Felix Rivera, chair of the Municipal Audit Committee.

But the 2022 audit, still underway, leaves a few of the city’s “key critical components” — grants and insurance — “hanging in the balance,” Rivera said.

About $20 million is at stake in a Medicaid reimbursement program through the state that funds ambulances, Rivera said. This year’s budget uses $2.4 million in those funds to pay for the Anchorage Fire Department’s Mobile Crisis Team, a mental health first responder program.

At the meeting, Rivera said he expects BDO and the city’s Finance Department will finish by the end of April.

Audits have been late before, including under former Mayor Ethan Berkowitz, but not this late. Assembly members had hoped the audit would be completed by the end of March, before annual budget revisions began, because it remains unclear whether the city has overspent or underspent in its budget cycles for the last two years.

“It’s hard to spend money when you don’t know how much money you have,” Assembly Vice Chair Meg Zaletel said.

When setting the next year’s budget, the city usually has to make some assumptions about how it’s doing financially, because the current year isn’t finished. But it usually has audited financials for the previous year. It didn’t have that last fall, when the Bronson administration proposed and the Assembly approved the 2024 budget.

The city must finalize the budget this spring to then set the mill rate, in order to calculate property tax bills by June 1.

“So we’re working on a series of assumptions which may or may not be true,” Zaletel said.

That leaves little or no wiggle room for the city to fix budgeting problems this year, and for the city’s priorities.

“Do we want to add more money to snowplowing for next winter? We can’t answer that because we don’t know if we have more money until we have audited financials,” Zaletel said.

It’s also unclear what impact the long delay will have on the municipality’s bond rating from major credit rating agencies, which Assembly leaders have raised concerns about.

The city sells bonds, taking on debt to pay for voter-approved projects such as infrastructure improvements. When the city’s credit rating is lowered, it means the city would pay back the debt at a slightly higher rate.

“The delayed 2022 ACFR is of course a concern of the rating analysts and investors,” the city’s public finance manager, Ross Risvold, said in a March 27 memo to Chief Fiscal Officer Alden Thern.

The city’s fund balance, or cash reserves, will be more important to rating analysts, which will be “good news,” Risvold said, in part because the city has been reimbursed by the federal government for nearly all of its emergency pandemic spending.

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The city can technically still sell voter-approved bonds without the finished audit, Risvold said, but it won’t until the audit is complete: “... the story for investors and rating analysts becomes more complicated and challenging,” he said in the memo. “Hence, we will wait until we have final audited financials for 2022 prior to selling any bonds.”

In an emailed response to questions from the Daily News, Risvold said questions should be directed to a spokeswoman for Bronson, and that the city would be unable to answer questions about the audit and any impacts until after Tuesday.

Bronson administration officials have attributed much of the delay to problems with staffing and turnover in the Finance Department — including all supervisors with experience in previous audits — along with new reporting requirements and additional workload due to pandemic relief grants and federal reimbursements for the 2018 earthquake and the city’s COVID-19 response.

Last year, about half of the staff positions in Anchorage’s Controller Division were vacant. Also, Thern is Bronson’s third CFO in less than three years.

“Personnel is the biggest hurdle,” City Controller Michael Cipriano said in a February Assembly audit committee meeting.

“When I started May of last year, we only had seven people on staff out of a staff of 17,” he said.

The department has filled most positions, but people new to the municipality and unfamiliar with its system are doing “forensic accounting,” looking at others’ work and trying to reconcile it, he said.

In a February audit committee meeting, contracted independent auditor Joy Merriner of firm BDO described parts of the audit as a “big, huge goose chase” finding book entries posted in “weird spots.”

“You don’t have a director of financial reporting here. You have a huge financial reporting need. You have a huge financial reporting lift, and there’s not somebody who’s holistically responsible for that. And so that’s kind of structurally one of the things that was being done by a conglomeration of people … that have left and now there’s a huge hole,” Merriner said.