Firm cites “significant drop in the financial health of the Town”
BY VOICE STAFF
When former Pelham Town Councillor Marvin Junkin resigned on November 6, asserting that Council had learned on September 5 that the Town was $17 million dollars deeper in debt than previously disclosed, he did not have physical confirmation of his claims. At the September 5 meeting, Junkin said that Councillors were not permitted to take notes, nor leave the meeting with any materials presented to them.
On December 19, KPMG released a version of that same report presented to Council on September 5, with the names of identifiable individuals removed and certain financial elements updated. KPMG’s report confirms Junkin's account of what Council learned on September 5. Here are Junkin's statements, as made to the Voice in early November, compared to KPMG's report, released December 19.
Reason for review
Junkin: Former Councillor Junkin asserted that Treasurer Teresa Quinlin said she became concerned about the Town’s financial state after being on the job for just two or three weeks, and that it was this concern that prompted KPMG’s summer review.
KPMG: The firm’s report states, "In July 2017, KPMG was engaged to investigate certain concerns over the financial health of the Town." KPMG's involvement was requested by the Town's lawyers, says the report, "in contemplation of litigation with an identifiable individual." Quinlin was hired as interim Treasurer during the third week of May. She was named to the position permanently in September.
Unreported debt
Junkin: Former Councillor Junkin asserted that Council was told the Town was $17 million deeper in debt than disclosed in its financial statements, calling this unreported debt.
KPMG: The auditing firm confirms that the September 5 report to Council showed $17.2 million in approved debentures that had not yet been acquired. By KPMG’s November 29 presentation at E. L. Crossley high school, this $17.2 figure had been reduced to $9.9 million.
This reduction is partially a result of the Town's paying for infrastructure projects through development charges (loss of future revenue), rather than taking on debt.
The single biggest reduction came from the Town's internal funding of a $3 million dollar, 3.3 acre parkland purchase from Fonthill Gardens in 2016 (the subject of another audit).
The Town has repeatedly refused to explain how this purchase was funded internally, given that the Town had just $554,000 in cash at the start of 2016.
As this remaining $9.9 million is to be funded with debentures in 2019, it is considered "unreported debt," since it is debt that the Town has approved and which it intends to acquire.
The main difference between "unreported debt" and "approved debentures (but not issued)" is that the approved debentures (loans) may not be taken out in the entirety of their original amount. Accordingly, it is technically true that they are not debt that is unreported on financial statements. But they are unreported long-term liabilities. And, since at least some of these loans inevitably will be taken, some—if not all—of the $9.9 million is, for all intents and purposes, “debt.”
This functional debt was not reported on the Town’s 2016 financial statements.
In her remarks at E. L. Crossley on November 29, Treasurer Quinlin suggested that the Town may not need to acquire a loan for the entire $9.9 million in 2019, suggesting that the amount might be as low as $5 million. But unless the Town finds $9.9 million in cash without taking on additional debt, then practically speaking there is unreported debt, even if the precise amount remains presently unknown or undisclosed.
Depleted reserves
Junkin: Former Councillor Junkin asserted that Quinlin was concerned about the Town's reserve balances, saying, “She realized that what the Town should have had in reserves and what they really had in reserves were two different figures...There were some accounts that should have had hundreds of thousands of dollars in them that had virtually zero.”
Junkin said further that this news came as a surprise to Council, a sentiment similarly expressed by Councillor Peter Papp.
A few hours before Junkin resigned, however, Mayor Dave Augustyn, when asked directly whether he had received any information in the interim that would lead him to question the accuracy of these audited reserve amounts, replied, “I have no reason to believe that number is not correct.”
KPMG: The firm’s report says, "barring any other Town assets that are easily convertible to cash, the Town did not appear to have cash available to cover its deposits, deferred revenue, nor its reserves in 2015 or 2016."
The report notes that while there is no formal legal requirement to maintain cash balances in reserve accounts, "without maintaining balances of cash and liquid assets equal to reserves, the intended mechanism of the reserves may be impaired."
KPMG says that reserve balances were presented to Council by the Treasurer (then Cari Pupo) in 2014, 2015, and 2016.
"In each report to Council, it was stated that ‘year end reserve balances remain healthy and capable of supporting the Town's ongoing commitments.’ This statement appears misleading as the Town does not appear to have the cash balances on hand to support the year end reserve balances."
KPMG also notes, "representatives of the Town are concerned about the Town's cash balance and believe it should be at least equal the balance of deposits, deferred revenue and reserves."
Generally poor financial health
Junkin: Former Councillor Junkin asserted that KPMG painted a bleak picture of the Town's finances to Council at the September 5 closed-door meeting. The message, he said, was, "You're ****ed."
KPMG: The firm’s report concludes that "the Town went from a net financial assets position of approximately $4.1 million in 2008 to a net debt of approximately $13.7 million in 2016. This represents a significant drop in the financial health of the Town."
KPMG notes that $9.1 million of Town's cash balance at the close of 2016 came from loan funds issued for the Community Centre, and "were not available to support ongoing operating cash requirements of the Town."
"We do not know what the [provincially assessed financial risk] ratios for 2016 would indicate if this cash had been excluded from the Ministry [of Municipal Affairs]'s calculations."
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UPDATE: Corrected typographical error in which $4.1 million was presented as $44.1 million.
