Scio Township's bond rating is downgraded; turmoil inside township hall cited
The recent S&P Global Rating Report resulted in the downgrade of Scio Township’s bond rating from “AA+” to “AA.”
Scio Township Supervisor Will Hathaway reached out to the Sun Times News (STN) about this latest development.
Here are some of the highlights from the S&P report:
• S&P Global Ratings lowered its long-term rating and underlying rating (SPUR) to 'AA' from 'AA+' on Scio Township, Mich.'s limited-tax general obligation (GO) debt.
• The outlook is negative.
• The rating action reflects our view that there is heightened risk of credit deterioration given operating challenges associated with governance structure concerns, including political discord; management turnover; risk management, culture, and oversight stemming from internal control findings; and a lapse in certain financial practices such as regular budget monitoring.
• We capture these credit risks associated with governance structure and risk management, culture, and oversight under environmental, social, and governance.
• Following the downgrade, our long-term rating on the township's series 2008 downtown development bonds now reflects a bond insurance rating of AA/Stable.
Hathaway shared with STN a memorandum he authored and gave to the township’s board of trustees on Sept. 7, in response to the annual S&P Global Ratings report.
The following is his memo in whole:
“The S&P Global review resulted in a downgrade of Scio Township’s bond rating from “AA+” to “AA.” This will have a relatively small impact on the interest rate for future borrowing. It has no effect on the Township’s current debt. However, the S&P communication contains the implicit warning that continued instability and internal conflict will lead to further downgrading of Scio’s bond rating. This is a moment for everyone in Scio Township to take note of the precarious situation of our local government.
The S&P report cited four categories of “recent events” in reaching its determination. The cited events are better understood when placed in context. Responses to each of the events listed in the S&P report provide the context.
From the S&P Global report:
Scio Township's underlying credit fundamentals--including participation in the Ann Arbor economy, above-average wealth and income, extremely strong reserves, and a relatively low debt burden--remain strong. However, recent events indicate a somewhat unstable operating environment, which we believe could disrupt the track record of stable financial performance. These events include:
1. Ongoing turnover, including prolonged vacancies in the township administrator and finance director positions.
Response: The prior township manager, Bryce Kelley left on medical leave in September 2019 and then retired. The prior Board conducted a search for his replacement, but that process did not result in a hire. The township manager position remained vacant 14 months later when the current Board took office in November 2020. The current Board immediately began working toward hiring a township manager, however, Clerk Flintoft opposed filling the vacant position. Instead, Clerk Flintoft argued in favor of permanently redistributing the township manager’s authority and duties to herself as clerk, and to the supervisor.
The Board of Trustees has the power to delegate administrative authority. After considering the clerk’s alternative, shared governance proposal, the Board chose to return to a centralized administrative structure and voted to begin a search for a township administrator in May 2021. The search culminated with the hiring of David Rowley in November 2021. Township Administrator Rowley resigned abruptly after serving only five months. We immediately hired an interim township administrator, former Scio assessor James Merte. Mr. Merte continues to serve as interim township administrator.
When Jessica Flintoft was appointed clerk by the prior Board in June 2019, she had a 16-month, term-limited position. At the time of her appointment, Clerk Flintoft requested reporting authority over the Township’s finance staff. Although the Board never approved this change, the finance director and finance manager began reporting to Clerk Flintoft in 2019. Clerk Flintoft then hired the Woodhill Group to consult on Township finances. The formulation of the budget and the audit preparation moved under the clerk’s control. Since the clerk assumed authority over finances in 2019, the Township has experienced a series of budget and audit problems. There has also been tension among finance staff and conflict between the clerk and the finance director.
In November 2021 the Township’s finance director Sandy Egeler was appointed deputy treasurer thus vacating her prior position. Though she no longer has the title of finance director, Deputy Treasurer Egeler has continued to perform finance functions such as formulating the FYE 2023 budget and preparing for the FYE 2022 audit. The Township Board approved the FYE 2023 budget on schedule in March 2022 due in large part to Ms. Egeler’s expertise and hard work. In May 2022, Ms. Egeler was also appointed as deputy supervisor.
Township Administrator Rowley announced that he was postponing any long-term hiring processes, including the finance director search, until after the budget was approved at the end of March 2022. At that time, instead of launching a search for a finance director, Mr. Rowley proposed hiring an outside consulting firm. The Board of Trustees questioned the wisdom of hiring outside consultants rather than reassigning work to existing staff, such as the deputy treasurer. When the Board did not immediately approve his plan to outsource finance functions, Mr. Rowley resigned in April, giving 30 days’ notice.
During the 30-day notice period, Township Administrator Rowley did not direct existing Township staff to prepare for the annual audit. Neither did Clerk Flintoft take steps to begin year-end closing. This delay created more pressure on the audit preparation. When he began as interim township administrator on May 12, Mr. Merte immediately directed Ms. Egeler to begin preparing for the audit. However, this effort was obstructed when Clerk Flintoft asserted her authority and forbade the former finance director, now deputy treasurer/deputy supervisor to have access to the general ledger. The clerk’s action further delayed the audit preparation. A compromise was reached when the Board agreed to hire an outside municipal CPA to assist in the audit preparation. Clerk Flintoft then allowed the audit preparation work to continue.
2. Several internal control findings in the township's audit.
Response: The number and extent of internal control findings in the Township’s audit are unprecedented in Scio Township’s history. These deficiencies have occurred during the era of Clerk Flintoft’s oversight of Scio finance functions. In response to the audit findings, Clerk Flintoft wrote a corrective action plan and submitted it to the state. She did this on her own, choosing not to consult with the supervisor and without review and approval by the Board of Trustees. This was a unilateral action by the clerk.
The following descriptions are from Clerk Flintoft’s 11/18/21 Corrective Action Plan. The 2021 audit included the following four deficiencies under the Clerk’s responsibility:
1) ...an employee hired subsequent to the previous March 31, 2019, OPEB actuarial valuation who was not included in the census data for the OPEB actuarial valuation as of March 31,2021. 2) The Township is not yet in compliance with Public Act 202 of 2017 and has not set up a trust to pay retiree insurance premiums for the year, as well as the normal costs for the new employees hired after June 30, 2018.
3) ...actual expenditures did not remain within the amounts authorized in the budget. There were individual expenditures that exceed 10% of total expenditures. There were some over budget by 10% or more.
4) The Township should more fully comply with current guidance issued by the Local Government Financial Services Division (i.e., Uniform Reporting Format, Accounting Manual, Audit Manual, Budget Manual, Numbered Letters, MCGAA Statements).
3. A lapse in regular financial reporting to the board.
Response: Members of the Board have asked for financial reports since taking office in November 2020, but Clerk Flintoft has given excuses for not providing reports. In November 2021, the clerk eventually provided reports in exchange for a Board vote to expand a consulting contract with the Woodhill Group. However, Clerk Flintoft then stopped the financial reports in spring of 2022.
The treasurer’s reports to the Board were hampered by an accounting change eliminating a record upon which the treasurer relied. The accounting change was instituted by the Woodhill Group in 2021 and approved and implemented by Clerk Flintoft. The Woodhill Group is an outside consulting firm that was engaged by and under the direction of Clerk Flintoft. This accounting change was reversed in 2022. As a result, the treasurer has recently resumed investment reports to the Board.
4. Discord between township officials, including a lawsuit that the clerk filed against the board regarding a finance staffing contract.
Response: Clerk Flintoft and the Board majority disagree on several key issues. The “discord” increased after May 2021, when the Board majority voted to proceed with hiring a township administrator over the objections of Clerk Flintoft. The Board subsequently delegated specific authority to the supervisor and to the township administrator. The Board delegated authority over finance staff and software access to the township administrator. The clerk objected to all these actions. In April, the clerk sought to hire outside financial consultants in response to what she claimed was an “emergency.” The Board disagreed about the emergency and the response to it and canceled the contract.
Clerk Flintoft chose to file a lawsuit against the Board of Trustees, challenging the Board’s action to terminate the “emergency” contract and all the Board’s earlier actions to delegate authority over staff and software to the township administrator. The existence of the clerk’s lawsuit has hindered efforts to recruit a finance director. Several prospective applicants have cited the lawsuit as a reason for withdrawing their candidacy. The lawsuit is one of a series of assaults on Scio Township’s elected government.
The Township Board’s May 2021 vote to hire an administrator despite Clerk Flintoft’s opposition triggered a change in the clerk’s approach and that of her supporters. They have since then been working to overturn the results of the 2020 election. The negative impacts include a recall petition drive, two trustee resignations, a special election to fill a trustee vacancy, the withdrawal of multiple applicants to serve as trustee, ongoing litigation against the Township by the clerk and one of her supporters, and now a downgrade in the Township’s bond rating.
Since spring 2021, the quality of public discourse has become caustic, marked by personal attack and incivility. It is increasingly difficult to attract people to serve on Township advisory boards. Recruiting and retaining staff has become more and more challenging. In this combative environment, we lack the collegiality and trust that are the basis for effective Township government.
S&P takes a negative outlook based on the possibility of further deterioration of Scio’s governance and management but offers a potential “upside scenario” in which the Township puts the turmoil behind it and resolves the challenges to financial operations. It is up to all of us, those of us currently serving as Board members and the people of Scio Township. Are we able to work together or will the Township continue to fight against itself?”