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What happened to $1.1 million? Borough audit finds reports of shredded documents, missing meeting minutes

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 7/3/18

Where did the money go?

That’s what Middletown Borough Council now wants to know, regarding $1.1 million of $1.3 million that council transferred Dec. 30, 2015, to a borough authority that …

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What happened to $1.1 million? Borough audit finds reports of shredded documents, missing meeting minutes

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Where did the money go?

That’s what Middletown Borough Council now wants to know, regarding $1.1 million of $1.3 million that council transferred Dec. 30, 2015, to a borough authority that no longer exists.

The payment is the subject of a forensic audit that council had completed by RKL, a Lancaster-based accounting firm, with the final report dated May 24.

The audit also found reports of documents being shredded in the borough office in December 2015.

“The nature and contents of the shredded documents are unknown,” RKL says in the conclusion to its report.

RKL could not find meeting minutes for when the Middletown Borough Authority did exist, making it harder to determine what happened to the money.

The audit also raised questions about the procedure council used during its Dec. 30, 2015, meeting to transfer the $1.3 million to the authority. No one who served on the council then remains in office.

An overview of the audit was presented to council June 19 by Emily A. Bomberger, a certified public accountant with the Business Consulting Services Group of RKL.

“We struggled a little bit because the records related to the authority were not intact,” Bomberger told council June 19. “It had been dissolved for awhile by the time that we came on board and started looking at these transactions.”

Bomberger, pressed by current councilors for details about the document shredding that allegedly occurred, had little to add.

“We don’t know what that material was, unfortunately. We don’t have any records,” she said. “It’s just hard for us to make a conclusion” about what may have been shredded, and why.

Except for one check dated Jan. 4, 2016, for $241,062.67 that the former authority made out to its legal counsel at the time, RKL could not find documentation regarding what the authority did with the money.

That leaves over $1.1 million unaccounted for.

The borough paid RKL $23,998 for the audit, Finance Director Kevin Hartman told the Press & Journal.

A forensic audit to examine borough finances under former Council President Chris McNamara was proposed in December 2015 by Robert Reid, the borough’s former longtime mayor who had just been elected to council.

In January 2016, a new council majority following McNamara’s loss in the 2015 election voted 7-1 for a “special audit” to be done of borough financial activities from Dec. 30, 2014 through Dec. 31, 2015.

Check information

The authority owned and operated the borough water and sewer systems until Jan. 1 2015, when responsibility for the systems was turned over to Suez water under terms of a 50-year lease that council and the former authority approved in September 2014.

The lease deal with Suez called for the authority to go out of existence, but that didn’t happen until May 2016 when council and the borough finally succeeded in dissolving the authority.

RKL as part of its investigation “pulled an initial sample” of checks that were cut after the Dec. 30, 2015, council meeting, Bomberger said.

According to the final RKL report, provided by the borough to the Press & Journal, the majority of these checks pulled were dated before Dec. 30, 2015 — except for the $241,062.67 check the authority paid to the law firm of Stevens & Lee in Harrisburg.

Bomberger told council the borough might be able to get information on all checks — not just a sampling — that were written by the authority, or by the borough, during the time period by contacting the bank.

“They most likely would have to provide all the checks,” Bomberger said. The bank would likely charge a fee “but I don’t think it would be too significant.”

Mayor James H. Curry III and Councilor Mike Woodworth urged the borough go back to the bank.

“We should pull all those checks and find out where that money went. That’s our money,” Woodworth said.

How was check processed?

The forensic audit raises questions about the procedure used in transferring the $1.3 million from the borough to the former authority.

According to the RKL report, the check was “not processed routinely” in that the borough employees whose job it was to process checks were bypassed.

Instead, the check was processed by someone who logged in in place of another person who was among those authorized by the borough to process checks, according to the report.

The person whose log-in credentials were used is believed to have been on medical leave at the time, although Bomberger told council RKL could not confirm this.

Bomberger told council that both the person with the credentials and the person logging in were believed to be with Susquehanna Group Advisors, the consulting firm hired by the borough that was acting as the borough’s finance director at the time.

The RKL report identifies both individuals as working for SGA and being listed among those who had the ability to process checks.

Susquehanna Group Advisors no longer works for the borough, after council in 2016 hired a finance director and brought borough finance operations in house.

According to the RKL report, the assistant finance director  — who was employed by the borough, not SGA — was out of the office for medical reasons on Dec. 29 and Dec. 30, 2015.

“So somebody used (the person’s) log-in because he was out on medical leave, to create a check for over $1 million?” Curry asked Bomberger at one point.

“It would appear that way,” she responded.

In its conclusion in the report regarding the $1.3 million transaction — which Curry requested Bomberger read word for word into the public record — RKL says that a borough employee told the firm that “a significant amount of document shredding occurred in the borough office” at the time of the transaction.

Regarding the $1.3 million check from the borough to the authority, “no documentation of the check’s purpose or explicit approval was maintained or provided” upon return of the borough assistant finance director, identified in the report as the person “primarily responsible” for processing checks.

By the time the assistant finance director returned on Dec. 31, the $1.3 million check from the borough to the authority had been processed, and signed by then-Council President Chris McNamara and Suzanne Sullivan, another councilor who was authorized to sign off on checks.

Council during a Dec. 23, 2015, public meeting had voted to accept the resignations of then-borough Manager Tim Konek, Public Works Superintendent Lester Lanman, and borough Secretary Amy Friday. All three were hired during McNamara’s tenure as president. McNamara lost his re-election bid in November 2015.

More questions

Compounding the unanswered questions is the procedure council used during the Dec. 30, 2015, meeting to transfer the $1.3 million to the authority.

The transfer was covered in a vote council took to ratify all borough expenditures for all of 2015.

According to minutes from the Dec. 30, 2015, meeting that are included in the RKL report, resident and former councilor Rachelle Reid requested a list of the expenditures to be ratified, and asked council to allow more public comment.

Reid’s request was denied by a 4-3 vote of council, which had nine members at the time, two of whom were absent.

Council later the same meeting approved the 2015 expenditures by 5-2 vote. No mention was made of the $1.3 million to the authority, which RKL in its conclusion found “unusual” given the amount, and that council just two weeks before had voted to raise the electric rate by a penny per kilowatt hour to close a deficit in the 2016 budget.

That electric rate increase would bring in about $660,000 of new revenue — roughly half the $1.3 million that council had approved paying the authority without public discussion, according to the RKL report.

The RKL report also notes that council paid the $1.3 million to an entity — the authority — that was supposed to be dissolved under terms of the 50-year lease of Middletown’s water and sewer systems approved in September 2014 by council and the authority.

The authority ended up fighting to stay alive — in the process hiring Stevens & Lee to thwart council plans to dissolve the authority.

That led RKL in its conclusion to allege a “conflict of interest” regarding council’s vote to transfer the $1.3 million to the authority.

“The decision had been made by borough council to dissolve the authority due to the concession lease agreement,” RKL said in its conclusion. “Several members of borough council also sat on the authority. In authorizing this payment to the authority, which funded a legal retainer for the authority, the borough was essentially funding the legal defense against its own motion. It is difficult to ascertain if these council members were acting in the best interest of the borough when authorizing this payment.”

None of the seven councilors participating in the 5-2 vote approving the transaction are still in office. The RKL report notes that “the majority” voting to ratify the 2015 expenditures, including the $1.3 million to the authority, “lost their seat on council the following day” due to not being re-elected or not running again.

Represented by Stevens & Lee, the authority on March 7, 2016, sued the borough in Dauphin County Court to block council from dissolving the authority. The authority was dissolved as of May 19, 2016, according to court documents.

Curry requested that the entire RKL report be made public as part of minutes from the June 19 council meeting.

Council President Damon Suglia supported Curry’s request. Council is expected to act on approving the minutes during its next meeting July 9.

Suglia did not respond to requests via phone or email seeking comment regarding what council plans to do with the RKL report.