ANALYSIS: Town of Pelham Forensic audits and the questions that remain unanswered
BY VOICE STAFF
Following the KPMG and Town presentations on November 29, the Voice sent a series of follow-up questions to the Town, to the accounting firms KPMG and Deloitte, and to Daniel & Partners LLP, the Town’s legal firm. KPMG and Daniel have not responded to or acknowledged the Voice’s inquiries.
On official stationary, Deloitte sent a letter saying that it would not discuss confidential information without “proper cause and specific authority.”
When asked whether the Town would grant Deloitte this authority, Mayor Augustyn said, “Given the response from Deloitte, only Council would have the authority” to approve the request. (In a meeting on November 6, Augustyn suggested that the Voice direct questions about Pelham’s financial statements to Deloitte.)
This leaves the Town. Questions sent to Treasurer Teresa Quinlin and CAO Darren Ottaway were ignored, and a resubmission (and reminder) to the Town’s Public Relations and Marketing Specialist Marc MacDonald elicited only, “I anticipate the KPMG report will yield the answers you’re looking for.”
As of Wednesday, December 13, two weeks after KPMG’s presentation of what were said to be the results of its audits, the audits themselves had still not been released.
What follows are important open questions that need to be answered.
Where did the Town acquire the $3 million used to buy out development credits from Fonthill Gardens in 2016?
Why did the Town not choose to buy all 8.9 acres of the land in 2015, for just $1.7 million, only to buy just 3.3 acres of that land a year later for over $3 million? Councillor Peter Papp has said that this transaction was not ideal. After the presentations on November 29, a resident approached Papp and said, “They negotiated like you’re idiots. You could have bought that whole property, kept that little bit, and then sold it.”
“That one was not well-handled,” replied Papp.
“You’re not kidding,” the resident said.
“No, I’m not kidding,” said Papp. “I can’t comment—it’s part of another situation…Could it have been done better? Yes. Absolutely. So, we move on."
Accounting entry: Was the accounting journal entry recording a revenue amount for "Contributed Assets of a Developer" and a related Accounts Receivable an appropriate journal entry given that the Town paid Fair Market Value consideration for the land?
After the agreement with Fonthill Gardens, the Town added the cost of the land to fixed assets, and its payment of the cash and credits were recorded as offsetting figures. But the Town also recorded a second entry that shows that Fonthill Gardens provided the land without compensation.
An accounting expert consulted by the Voice said, “They are really recording the Parkland Cash In Lieu fees they hope to collect from a large number of new houses to be built throughout the Town. These are not payable until the builders apply for a building permit. This will take a number of years.”
The amount that builders will be required to pay could not have been calculated, since it is a percentage of the lot value when the building permits are issued.
“I think it is inappropriate to book such an entry,” the source said. “If the real estate market stays hot it could still take four or five years or more to collect these amounts. If the market tanks, it could take ten years or more to collect them—that’s why they should only record them when the building permit has been issued and they are collected.”
The expert told the Voice that “this entry likely improved a number of their ratios that the Ministry of Municipal Affairs is looking at for 2016 and later years. It also made it look like they had a big surplus for 2016, when they really likely did not. It increased the assets and revenue by one lump sum amount instead of what likely should be done—record them as an increase in cash and booking of revenue over a large number of future years.”
Replenishment risk: A full analysis of the risk involved in the Town’s current plan to replenish the reserves raided and spent on capital projects is required.
During her presentation, Town Treasurer Teresa Quinlin was asked by a resident if property taxes were going to increase. Quinlin gave a little laugh, said “Okay,” and ignored the question.
Much of the financial plan presented by Quinlin involved the Town acquiring funds through development charges and property taxes from new homes.
After the meeting, Councillor Papp said, “We hope that the construction out there is rapid. And, I hate to say it from my old healthcare days, if we can fill the beds, fill the homes, get the taxes.”
Papp acknowledged that the cooling of the real estate market could adversely affect this plan.
“It could happen. If people don’t come here, and they can’t afford the housing—sure the developer’s buying, but it sits vacant. I went through that in 1983 when I moved here.”
Papp said that other municipalities have made investments on future developments charges, “but sometimes you can never catch up. Always the risk is that if the development never came, you’re stuck.”
During discussion over the Community Centre plan in 2016, Papp voted against the immediate construction of a twin-pad arena, a position he continued to stand by on November 29.
“We should have staged it. I said to them specifically, hold off, because other communities like Ancaster had waited until everything had been filled in.”
Operating costs: During the same November 29 interview, Papp also raised concerns about the operating costs of the community centre.
“If there was no debt on the Community Centre right now, if they gave you a cheque and paid for it, my biggest concern is the operating cost,” he said.
Independent analysis of projected operating costs done for the Voice by an accountant indicate that the $200,000 yearly estimate is likely understated.
Papp’s comments indicated that he too thought that operating the facility could prove to be a financial burden. When asked about the implications of the emptied reserves, he said, “One is, you hate the cliche, but tighten up the belt….if you can’t operate two arenas, then you operate one. And other communities have done that. They’ve come to a point where they say, you know, we can’t run a five or six hundred thousand debt every year.”
