Ombudsman’s report calls for tighter controls on credit cards, travel advances at MODG

Additional recommendations target Municipal Government Act

By Helen Murphy    
April 26 2017

GUYSBOROUGH – The report of the provincial Ombudsman on finances at the Municipality of the District of Guysborough, released last Friday, makes five recommendations for MODG, including ensuring that hospitality spending is clearly defined and preauthorized, and that policy on travel advances be reviewed and strengthened.

It also has recommendations for the N.S. Dept. of Municipal Affairs, including that “the current initiative to update the Municipal Government Act seek to identify certain municipal spending activities, such travel and other discretionary spending, that may benefit from universal, province-wide policies across the municipal government system.”

MODG had urged the Ombudsman’s office to make the report public, and said in a statement issued the same day, April 21, that it already abides by most of the recommendations because of changes it has put in place over the past year.

“I am very pleased that the Ombudsman’s Office has released the final Ombudsman’s report on expenses of Municipal officials (former Warden, current Warden, Council & CAO) as requested by the Municipality as the Report confirms allegations received from a resident by the Ombudsman’s office were unfounded and there was no misappropriation of Municipal funds,” said Warden Vernon Pitts in the statement.

The investigation was prompted by a complaint from MODG resident Susanne Roy. In an interview April 23, Roy told The Journal she is pleased with the level of detail in the 35-page report, but is disappointed that it didn’t go back farther in time. The investigations looked at activities over fiscal years April 1, 2012 to March 31, 2014.

“There needs to be more investigation by somebody back in those (earlier) years,” she said. “I’m really disappointed that there wasn’t a forensic audit. There was a massive amount of information to investigate.”

Among areas of concern highlighted by the Ombudsman, Roy said most troubling for her are practices around credit cards. The investigation found that a corporate credit card had been used by former Warden Lloyd Hines for personal expenses and cash advances. It found in both cases the funds were repaid in a reasonable amount of time. “It must be underscored that in every case of identified personal corporate credit card purchases by the former Warden, there is documentary evidence of recovery within the same month or in the following month,” the report stated.

Roy said she finds it particular egregious that “they signed agreements of understanding on use of municipal credit cards and then turned around and ignored them.” Municipal policy prohibits the use of corporate credit cards for cash advances. “During the period under review, only the former warden appeared to have obtained cash advances on a corporate credit card,” said the report. During the review period, those advances amounted to $715.75.

With regards to use of corporate credits cards for personal purchases, only in one case -- that of former Warden Hines -- were these “purchases common, frequent, and routine.” The report said most charges were relatively small and “It must be underscored that in every case of identified personal corporate credit card purchases by the former Warden, there is documentary evidence of recovery within the same month or in the following month.”

The Ombudsman also looked at the former warden’s use of travel advances. These, “coupled with significant use of the corporate credit card for personal purchases...meant that from time to time the former warden had access to the full spending scope of the corporate credit card, on which personal expenses and cash advances were commonly incurred, augmented by cash advances from the municipality. In effect, the former warden benefited from a form of short-term loans from the municipality to cover expenses that certainly would have included business expenses, but often included personal expenses as well.”

The report also looks at instances where meal expenses went above the allowed per diem rates for travel.

“During the period under review, travelling members of Council and the Chief Administrative Officer sporadically spent amounts on meals that exceeded authorized per diem rates. Those costs were mainly charged to corporate credit cards. All such costs observed were paid by the Finance Department, always with at least one, and usually with two, approval signatures from officials. The practice was common, well understood, and routine,” the report said.

In many instances where costs exceeded per diems, the report found that alcohol was included in the final bill. “The Municipality had no policy at the time regarding reimbursements for alcohol. A policy to justify spending under headings such as promotion or hospitality might be grounded in a perceived obligation to extend hospitality in the form of a meal or a drink to clients or individuals. It might even be extended in return for hospitality experienced in the opposite direction. In this instance, spending beyond levels prescribed by policy often was rationalized that way by those interviewed.

A written statement on the matter to the Office of the Ombudsman from MODG’s current director of finance said: “As you are aware the Municipality of the District of Guysborough is involved in numerous economic development activities, therefore, from time to time resulting in expense and costs not contemplated in Municipal policies. A recent effort has been made to update expense related policies to better reflect the activities of the Municipality.”

The report adds: “It is important to emphasize that in allowing the practice to evolve, councillors and administrators were not in breach of the Municipal Government Act. Under the MGA there is no explicit requirement for policy governing such spending” -- which the Ombudsman calls an “undesirable situation.”

The Office of the Ombudsman also looked at MODG’s use of federal per diem rates for travel, as opposed to lower provincial rates. “Council’s setting of the higher federal reimbursement rates for kilometers and per diems lacked an empirical rationale and a clear principle to underpin the policy,” the report said. “This Office does not support the characterization of certain spending as “reckless and frivolous.” However, we would characterize the federal rates, combined with other practices such as personal use of corporate credit cards, advances, and certain conference costs, as inappropriate or opportunistic. Practices in some areas appear indulgent, such as the choices of restaurants and purchases of alcohol for meals attended only by Municipality officials. The question of whether all such decisions should be made at the municipal level merits attention, as part of an ongoing review of the MGA.”

The report acknowledges the new policies MODG put in place in Nov. 2016, “and it was observed by Municipal officials that certain practices of the past are no longer to be encouraged. The current Warden pointed out that a previous practice of providing alcohol at the Municipality’s expense for annual strategy meetings has been abandoned. A new and more specific “hospitality” policy, while not forbidding spending above per diem rates, clearly demands prior approval for such spending. To the extent that the revised policies provide greater clarity and guidance for the categories of spending under review, the changes are positive and commendable. To the extent that they also provide authorization and general approval for certain practices that in the past were not always appropriate or necessary, the new policies require cautious application.”

Roy said the fact that the Ombudsman office investigated expense practices at MODG shows there was evidence that something was wrong.

“I could not have invented evidence suggesting there was suspicious activity going on and convinced the Office of the Ombudsman of Nova Scotia that there was something going on there, unless there was some evidence.” Roy had presented the Ombudsman’s office with documents she obtained through Freedom of Information requests.

The statement from MODG said the municipality is proud of its accomplishments in recent years, including economic development activity, and the fact that the municipality has the lowest residential tax rate in the province. It also highlighted that 65 per cent of MODG’s revenue comes from sources other than taxes, mostly related to business investments.

Both the Ombudsman’s report and the MODG statement mentioned that Guysborough differs from many other municipalities in its aggressive work on economic development. MODG pointed out that unlike the large regional municipalities and cities, the municipality does not have an economic development agency such as a port corporation, greater regional partnership, or other such organization that it would provide a grant to for this work, thereby moving direct expenses away from municipal financial statements. “All of our economic development and business work is done in house and all associated expenses are accounted for on our books, and our officials are directly accountable for same.”

The Ombudsman’s report notes that councillors and the CAO “were insistent that the review of the Municipality’s travel spending practices acknowledge and reflect the larger context of Municipal Government in Guysborough. All interviewees expressed pride in their achievements and a sense of the ongoing success of the Municipality. This Office acknowledges the Municipality in fact does stand out in its aggressive pursuit of big-scale revenue-generating and investment opportunities.”

A number of MODG’s economic development activities were outlined in the report. “As a strategy, Guysborough has pursued industrial development based on natural resources, including readily available land. It has assembled and in numerous cases profitably leased and taxed large tracts of land for industrial parks and specific types of development such as quarries and wind-farms.”

The report says “the significance of the above contextual data is that it does reflect the Guysborough Municipal management culture, which is entrepreneurial and assertive. In the longer run, this approach is commendable. In the shorter run, it may require more careful reconciliation with the imperatives of municipal governance, municipal culture, and local needs.”

In its statement Friday, MODG referred to its annual audits by Grant Thornton’s Chartered Accountants and noted “as indicated in the Ombudsman’s Report all annual audits have confirmed that all expenditures were accurately accounted for and both reports commended the municipality for the successful economic development activities related to solid waste, wind energy, industrial parks (Melford, Goldboro, Black Point) etc. Additional activity results in additional expenses, but we have been very fortunate to have exceptional success resulting in a very low, stable tax rate and exceptional return on investment for our residents.”

Roy said she is actively pursuing changes to the Municipal Governance Act related to financial procedures and accountability.

“I am on that,” she said. “I’ve been on that for a year.”

A priority change she’d like to see in the act is to have an auditor brought in to audit all municipalities.

Roy said she believes increased attention to municipal finances in Nova Scotia over the past year are bringing about positive change.

“Changes are happening because of this, because of the media coverage and because of the Ombudsman getting involved...It’s a start. It’s not a big enough start, but it’s a start.”