City may miss deadline for key annual audits

By Johnny Brannon
Advertiser Staff Writer

Honolulu's excellent bond ratings and ability to obtain some federal grants may be in jeopardy this week as city officials and private accountants scramble to complete annual audits required by the U.S. Securities and Exchange Commission.

The city is supposed to file the reports by Friday, but auditors have said they won't make that deadline "due to various problems we are encountering with the information provided by the administration" of Mayor Jeremy Harris, according to a Feb. 14 memo from an accounting firm.

In the memo, PricewaterhouseCoopers partner Dennis Tsuhako said delays had been caused by "errors in the financial statements and audit schedules we have been provided by the administration."

Another memo, from a city auditor, states that city finance officials warned in a recent meeting that a missed deadline "reportedly will have serious consequences for the city's bond issuances."

Neither Tsuhako nor city budget and finance director Ivan Lui-Kwan returned calls. An assistant to Tsuhako said the company does not comment on matters related to clients.

City spokeswoman Carol Costa said in a written statement that Lui-Kwan assured her yesterday that the filings would be made on time. Costa did not respond to further inquiries about the matter.

City Council chairman Gary Okino said he had hoped the deadline would be met but did not believe that was likely.

"This past week, they weren't able to supply the information the auditors needed, so I don't see how we're going to make it," he said.

Okino said he had been informed that a late filing could make the city ineligible for various federal grants, as well as hurt the bond ratings, which determine interest rates the city pays on borrowed money.

The audits are professional reviews of the city's Comprehensive Annual Financial Report and sewer fund financial statements, to determine if they accurately reflect the city's fiscal health.

A Securities and Exchange Commission spokesman said such reports are required by all cities that issue bonds and other securities. He could not immediately say what sanctions a city could face for failing to comply.

Amy Doppelt, an analyst with Fitch Ratings Ltd., said that timely and accurate financial reporting is an important factor in credit rating, but that a delay in the city's annual report would not immediately trigger a bond rating downgrade.

"However, an extensive delay, which I don't anticipate the city doing, would raise some questions," she said.

Costa said the city's problems stem from new requirements by the Government Accounting Standards Board. One of the main changes is that, for the first time, the city must assess and disclose the value of all infrastructure — such as bridges, sewer lines and roads — as well as revenue and debt.

The changes were enacted in 1999, but they go into effect for medium-sized cities this year, and are meant to make government finances more transparent and accountable, according to the accounting board.

"Under the new standard, anyone with an interest in public finance — citizens, the media, bond raters, creditors, legislators, and others — will have more and easier-to-understand information about their governments," the board said in a written statement.

Okino said the city's audits are normally completed by December, and that he believed the additional work triggered by the changes had proved to be a monumental task.

"I think there's a tendency to put this off because there are so many other things to do," he said. "It's a huge obligation put on the city. But we knew three years ago that we had to do this."

Okino said he was told that the problem has been further complicated because the auditors are now swamped with work since income tax statements are due in April, Okino said.

"They had people set aside to do this work, and now they have to find people at a time when they're really pressed," he said. "We're running smack-dab into the busiest time of the year."

Okino said the city will have to pay extra for the audit because of the delays.

Officials are also hustling to prepare the city's proposed annual budget, which must be presented to the council by Sunday. The city is anticipating an income gap of more than $100 million, and must trim costs or raise taxes and fees to strike a balance.

Harris has said he will propose a property tax hike, but it remains unclear whether it would apply to both residential and commercial properties. A hiring freeze and budget cuts for all city departments are also likely, Lui-Kwan has said.

Reach Johnny Brannon at jbrannon@honoluluadvertiser.com or 525-8070.