Conroe, April 24 – With little fanfare and under the cloak of the secrecy with which Montgomery County Judge Craig Doyal, Precinct 2 County Commissioner Charlie Riley, and Precinct 1 County Commissioner Mike Meador have shrouded the County government, on March 28, 2017, County Auditor Phyllis Martin presented Montgomery County’s Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2016 (“CAFR”). Although Martin covered the problems with euphemistic phrases such as “County growth,” “AAA bond rating,” or “Generally Accepted Accounting Principles,” in actuality a review of the CAFR reveals a County government experiencing out-of-control growth in County spending, failed toll road projects, little, if any, financial or operational management, and burgeoning debt.
CAFR’s two fundamental problems
The first page of Martin’s March 28 CAFR highlights its two fundamental problems. First, despite stating otherwise, the CAFR doesn’t follow Generally Accepted Accounting Principles (GAAP) with the possible exception of the pernicious Standard No. 34. Standard No. 34 allows local governments to report capital expenditures in a capitalized fashion, i.e., over a period of years rather than reported all at once. In other words, the County government is actually spending more money than it reports to the public, because, since 1999, local governments may fool the public with “modified accrual accounting” rather than reporting the full amounts of cash spent each year.
Martin’s and Doyal’s procedures violate dozens of the GAAP rules in the United States Government Accountability Office’s Yellow Book. Two Yellow Book Sections immediately come to mind:
- Section 3.31. Internal Auditor Independence – GAAP requires the internal auditor to be located organizationally outside the staff or line-management function of the unit under audit. Furthermore an audit must be sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively without fear of political reprisal. In this instance, however, the County Auditor works closely with the Commissioners Court on a regular basis for budgeting purposes. She sits with the Commissioners Court at their regular meetings. The Commissioners Court sets her salary, which is substantially higher than every county auditor in Texas with the exception of Harris County. The County Auditor regularly meets with individual Commissioners Court members (the County Judge and Commissioners) to work with them to establish their department budgets. These meetings occur on an ongoing basis. There clearly is a political relationship with the County Auditor because she not only audits but works on the budget side of the accounting ledger. There is not sufficient independence between the internal auditor and the Commissioners Court under GAAP scrutiny.
- Section 3.35. Nonaudit Work by Auditor. – The Yellow Book makes a major point: “If an auditor were to assume management responsibilities for an audited entity, the management participation threats created would be so significant that no safeguards could reduce them to an acceptable level. Management responsibilities involve leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, physical, and intangible resources.” The County Auditor has assumed significant management responsibilities for Montgomery County. She sits with the Commissioners Court, interrupts meetings regularly, injects her opinions and her department’s policies as policy guidance for the Court, and supervises the individual Court members in budgeting. As Chief Budget Officer of the County, the County Auditor has direct management responsibilities under the Texas Local Government Code. One cannot criticize her for fulfilling these duties but the dichotomy of her role as Chief Budget Officer and as County Auditor has created this major conflict of interest that suggests the necessity of an independent internal audit of the County’s finances.
What’s even more frightening is that with annual County government spending well in excess of $400 million and with assets of approximately $1 billion, the second fundamental problem with Martin’s and Doyal’s CAFR is that there is no independent audit of those financial books. The so-called “outside auditor” (Weaver and Tidwell this year) takes Martin’s financial statements, does a very limited test audit, and then provides a qualified opinion letter. The bottom line is that Martin audits herself. Where the CAFR states “Montgomery County maintains strict budgetary controls to ensure compliance with legal provisions in the annual appropriated budget approved by the governing body,” i.e., the Commissioners Court, it’s lying.
The County government doesn’t follow its own budget. Martin, as Chief Budget Officer, basically allows Doyal, Riley, Meador, and the other Commissioners Court members to do what they want.
Slush Fund Revealed!
One interesting number found hidden deep inside the 222-page CAFR is the amount of the “slush fund.” The “slush fund” refers to the amounts of money inside the County government, that for one reason or another are unbudgeted and unassigned. The best example of these funds are the “7997” accounts which are carryovers of unspent funds from previous years. That’s where the County Judge and County Commissioners spend millions of dollars each year on vital items such as “trucks for Gerald” or tens of thousands of dollars of flowers for the Montgomery County government airport.
The CAFR admits, “Approximately 14.6% of the ending balances, $40,619,824 is unassigned and available for spending at the government’s discretion.”
The Slush Fund: “Approximately 14.6% of the ending balances, $40,619,824 is unassigned and available for spending at the government’s discretion.”
Assets and Expenses: Spending Growth Rate of 16.5%!
The CAFR claims that Montgomery County owns assets worth $1,161,436,652, a number which must include the original cost of roads in order to reach such a high figure.
More frighteningly, Martin revealed that, despite a much lower “budget” number during Fiscal Year 2016, in actuality, Montgomery County’s government spent $427,077,316, up from $366,721,611 the year before. That’s a spending growth rate of 16.5%!
Doyal has repeatedly made clear that he seeks to increase County government spending in the coming Fiscal Year, even though, under his direction, Montgomery County’s government spending has already grown 428% since 2000, while the County’s population has only grown 84%. Montgomery County Republican Primary voters passed a nonbinding resolution by a 94% vote in 2010 calling for County government spending increases never to exceed population growth and the rate of inflation. Since the 2010 vote, Doyal has voted to increase County spending by $54 million in excess of the population growth and rate of inflation.
In order to ascertain inflation, the most commonly accepted source is the United States Consumer Price Index, or CPI, which the United States Bureau of Labor Statistics promulgates monthly and annually. In order to ascertain population growth (“Pop Growth”), the United States Bureau of the Census publishes annual numbers for the population of Montgomery County. The Government Growth Delta (“GGD”) is the CPI plus the Pop Growth:
CPI + Pop Growth = GGD.
GGD should reflect the maximum growth of the Montgomery County government. The CPI during 2016 was 1.3% while the Pop Growth was 3.8%. Under the Doyal’s theory of government spending growth, GGD should have been 5.1% (CPI + Pop Growth).
Instead of a 5.1% growth rate, Doyal and his colleagues grew County government spending at a rate three times of that rate in one year!
It’s important to note where the spending goes:
Public safety 25.88%
Public transportation 18.76% (includes the wasteful County airport)
General administration 13.50% (ridiculously high)
Public facilities 16.87%
Debt service 4.25%
Everything else 12.61%.
Toll roads are hardly an “enterprise”
The Montgomery County Toll Road Authority loses money, a lot of it. During Fiscal Year 2016, this so-called “enterprise fund” lost $87,148 in a period of four months. Despite the rosy projections from the power- and money-hungry Doyal, Riley, and Meador, toll roads lose money. County taxpayers better start digging deep into their wallets as Doyal and Riley blunder forward with the $73 million 3.6 mile Tx-249 Decimation of Hope Highway, which their own lawyer Rich Muller has admitted the voters would reject if provided the opportunity to do so.