'We have taken considerable, deliberate steps in which to safeguard against any future fraud from ever happening in Houston again.': Houston Mayor, Treasurer address state of finances

During the regularly scheduled Houston City Council meeting, Mayor Carter Cole addressed some of the budget issues that have angered residents who felt that the previous administration had not been truthful when it came to the budget and where the money was coming and going.

Adding to the frustration and speculation of residents has been the sudden departures of then-Mayor Virgie Thompson, former Deputy Mayor Lance Wilson, and former Treasurer Sally Schug and the embezzlement investigation and indictment of a former city treasurer, Jess George Adams.

“I want to set the record straight,” he told council members and residents, upholding his promise of transparency as the city works to after the previous mayor, deputy mayor and city treasurer abruptly resigned following election results last October.

Last week, Jess George Adams, was arrested and arraigned on 31 counts including embezzlement, tax evasion, and wire fraud following an IRS Criminal investigation. Adams is accused of embezzling over $250,000 from the City of Houston while he was treasurer, from 2015 to 2018.

“At the recommendation of Jess George Adams, the City funds and accounts were not audited during the years of 2015, 2016, 2017, and 2018. Approximately 5 months later, in May 2019, the Alaska State Troopers were notified of alleged criminal activity, tentatively identifying the theft at City Hall as approximately $100,000,” Deputy Mayor Mike Adams (not related to the defendant) read into record during Thursday’s meeting.

He then told council and attendees that the city filed 2 insurance claims following the theft, first in April 2020, and with the assistance of auditors contracted by the city, insurance claims were filed for the loss of $279, 473.25.

In June that same year, the American International Group (AIG) paid $250,001.46, less the required deductible of $25,000 to the City of Houston for the loss.

“Later that same month, June 25, 2020, Alaska Public Entity, the main carrier for the City of Houston insurance, paid a claim of $22,500, minus the City of Houston deductible of $2500.”

Mayor Cole showed copies of the checks the city received, and then the ordinance in which part of the money was brought into the city.

“If you weren’t a bookkeeper, you would not know how to find that (the insurance money). The hours our new staff and I spent finding some of the money holes.

“The books were in shambles,” said Mayor Cole. “They were not reconciled for 2 years. We immediately took action.”

That action came in the form of adding a full-time Financial Administration Aide Tricia Kendall, for Bookkeeping and Data Entry duties, and filling the vacancy of a new City Treasurer, Samantha Jones.

One of the more glaring inconsistencies was how the insurance money from the theft was entered into the budget. Mayor Cole had specifically requested from the auditors a copy of their recommendations a

“They (the auditors) have no knowledge of how they (the city) was bringing those funds in. The city did report it.

The year the insurance proceeds were received, none of the auditors’ proposed entries were made as labeled “Insurance Proceeds” or “Fraud,” but appears that Schug reported them as general funds.

“All cash accounts were in the ‘General Fund’ and putting insurance proceeds in the ‘General Fund’ was the only place to put them since the rest of the funds were grant funds,” Mayor Cole read from the auditors’ statement he requested for the meeting.

Mayor Cole also discussed the budget ordinance that was passed in which the funds were accepted, saying that $250,000 was addressed in the ordinance passed in May 2021, approved as revenue, even though, according to Mayor Cole, the checks did not show up until June. In the ordinance, nearly $200,000 was approved as Capital Improvement Funding, and $50,000 went into the Reserve Fund. Mayor Cole went on to say that currently, his staff has verified the $50,000 did go to the reserve fund but have only been able to find a little over $172,000 transferred to the Capital Improvement Funds, and that everything has been reconciled for that year.

“So, we have not been able to account for $27,760. We are assuming its still in the main account and we’re letting the auditors figure that out,” he said cautiously. “I don’t know how that was done, but I’m only saying this so that you are aware of how hard it was to figure out what went on.”

Mayor Cole also said that the auditors are only concerned that transactions get recorded, and that it isn’t their responsibility to make suggestions on what accounts funds go in or how it should be spent. “That is a city decision.”

Changes in the internal financial processes have already been implemented. One such change is that specific Department Directors now sign for all purchases made within their departments.

“The results of that alone, we’ve already found a $4,200 overpayment for a sand shack, and we did receive a check back just this last week. So there’s a tremendous amount of work the Directors have been doing on this, and I want to thank them for their hard work.”

He told residents that one of the first steps he took on the recommendation of auditors, was to have a more streamlined, 2-party verification process for finances.

An official audit is something that many residents and council members have called for since October, and Mayor Cole says that it should be finished up soon and will be presented to the City Council at a future meeting.

City finances are now all being completed utilizing one software program, including payroll and accrual-based accounting as required by the Houston Municipal Code. Payroll will now be made electronically, along with other features to be implemented in the future.

“The previous software was here, and we tried to make use of it. The problem was no one purchased all the modules and it wasn’t set up properly,” he said before reassuring everyone that the program software being used now is much better and expected to be 100% in the next few months.

Another change is that the city is in the process of changing banking services, based upon service fees and interest rates. Jones said that she hopes to have all funds fully transferred by June of this year.

“This has been a monumental task,” said Jones, when discussing going through past budgets and reports and other paperwork she and Kendall had to sort through and reconcile with records already on file. She pointed out that there were several hundred pages that needed corrections. Her priority has been to ensure that all the money reported as being paid out and coming in match the records within the budgeting software system.

“We completed the reconciliations with 1,667 manhours, and that’s 2 ½ people since December,” she reported, saying that there were payments not entered into the budgeting systems, nor were receipts being entered, meaning reports may not have been correct.

Jones also said that one of her long-term goals is to re-organize and create documents of the processes of operations so she can begin to find ways to make things more efficient.

“When we are more efficient and streamlined, we are more productive, and things are a lot cleaner.”

Mayor Cole applauded the council and staff for their continued patience as the new treasurer and aide worked through getting everything back on track.

“We have taken considerable, deliberate steps in which to safeguard against any future fraud from ever happening in Houston again.”