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Comingled funds and the symbiotic relationship between the city of Mission and its economic arm are what led to nearly $3 million in missing sales tax revenue deposits, according to Mission City Manager Randy Perez.
Perez explained the conundrum during a lengthy “cash flow analysis” presentation before the Mission City Council on Monday after members of the Mission Economic Development Corporation board raised concerns that the city was using the EDC’s share of sales tax revenues to instead bankroll city operations.
But Perez disputed that allegation, saying that the money had been left sitting in a bank account pooled with other city funds and that the lack of transfer had had “no detrimental effect to the MEDC.”
“The EDC is currently … part of a cash pool that we have in our city. We are the custodial (sic) of funds in our cash and also the EDC is part of the custodial (sic). They contribute to that cash pool,” Perez explained to the council.
The city manager further explained that though the MEDC is an independent corporation — answerable to its own board of directors and responsible for setting its own budget — it nonetheless relies on the city for some of its financial transactions, including operational expenses.
“Keep in mind also that our finance department handles any, most of all expenditures, payroll because the MEDC employees are city employees. And so, we handle some of their transactions through our cash pool,” Perez said.
Still, the multi-million dollar accounting error went undetected by city staffers for months until it was brought to the attention by the due diligence of the EDC itself, which recently hired its own independent finance officer, according to EDC CEO Teclo Garcia.
“I don’t have intimate knowledge of the city’s finances. But what we did as the EDC is, you know, we were going through our regular auditing of where our monies are and we had noticed that our sales tax funds were not being delivered to our bank account,” Garcia told The Monitor this week.
Garcia explained that both the city and the EDC receive a portion of monies collected via the 8.25% sales tax rate.
Of that, 6.25 cents out of every dollar remains with the state of Texas, while 1.5 cents return to Mission, and another half-cent goes back to the EDC.
With Mission recently averaging approximately $2 million per month in sales tax revenues, that means the EDC should have been receiving between $450,000-$500,000 in fresh injections of cash each month, Garcia explained.
But that hasn’t been happening.
“The city, for several months, did not send that on to us. Those funds were put in a pool of money comingled with city funds. So, they just kept it all, right?” Garcia said.
“The city continued to pay our payroll … They were still covering all our costs, but we noticed in our own account that those funds were not being deposited directly,” he said.
Currently, the city owes its EDC more than $2.8 million in sales tax revenues, the city manager explained on Monday. That’s about six months’ worth of contributions.
Mission has already begun to correct its failure to transfer the EDC its fair share, starting with depositing the EDC’s portion of December’s disbursement from the state, which reflects sales taxes collected in October.
“We received approximately about $2.1 million — $536,000 was transferred over to the EDC bank, as it should,” Perez said.
But what Perez failed to explain during the lengthy presentation and subsequent discussion, which took nearly three-quarters of an hour, was what prompted the transfer error in the first place, nor why it persisted undetected for so long.
And though the city manager repeatedly assured the city council that both the EDC and the city had remained up-to-date on their financial obligations despite the accounting issue, his presentation failed to affirm that the EDC’s funds had not been used for other purposes.
Instead, Perez spoke of the “corrective actions” that the city’s finance department will take to ensure the comingling of funds does not happen again.
“The corrective action is to pay the MEDC portion of the sales tax every month moving forward, as it’s in the ‘general claims’ account,” Perez said.
And he has created a new protocol for transferring funds — one that involves creating a paper trail of approvals from the finance department, assistant city manager and himself.
“We’re creating a fund transfer form that is, again, internal, that requires a data transfer of the source of funds, destination (of) funds, type of transfer, the amount of transfer, the reason … for the transfer, and then of course, it has to be approved …” Perez explained.
But as for the $2.8 million the city should have transferred to the EDC begin with, Perez explained the city will have to repay that via other funds — “other non-General Claims funding sources,” according to a slide Perez presented to the council.
That includes potentially reallocating $1.9 million in American Rescue Plan Act, or ARPA, funding that the council had previously earmarked for infrastructure projects.
Those projects include the repair of a water tower, upgrades to a sewer lift station and others.
The city could also commit all or part of some $747,000 in cash it’s expecting to receive early next year, when an operating investment comes to maturity, Perez said.
Mission is also expecting to receive $1.2 million from the city of McAllen next year — a reimbursement on a road project the two cities undertook jointly.
In presenting the list of potential solutions, Perez never explained why the city would have to dip into other funds to repay the EDC its share of sales tax revenues.
Meanwhile, longtime Councilman Ruben Plata disdained the idea of deobligating funds from projects the council has long since approved.
“Those funds from ARPA funds, we took a lot of time to review them and to allocating the funds for projects that I feel are very important,” Plata said after Perez’s presentation.
Plata said he had analyzed Perez’s report prior to Monday’s meeting and had been left with questions for which he wanted more time to find answers.
“There’s errors on dates on some of this information. I really would like more time to review it,” Plata said.
Ultimately, the rest of the council agreed with Plata. When it came time to vote on the city manager’s proposal to repay the EDC using other monies, they instead chose to table the matter pending the results of an investigation by a newly formed ad hoc finance committee.
The council appointed Plata and newly elected Councilwoman Marissa Ortega Gerlach to the committee, which will meet with Mission’s finance department staff and return with a plan by Jan. 8, 2024.
