City made $223M accounting mistake in financial statements

The city government mistakenly overvalued $223 million in assets like roads, bridges and other property in financial statements last year, officials acknowledged Friday.

Baltimore finance director Edward J. Gallagher said the city's accountants did not classify about 5 percent of Baltimore's $4.3 billion of fixed assets in the correct accounting category, causing the assets — which include resurfaced roads, renovated buildings and improved parks — to be overvalued in financial statements. City accountants never factored in the depreciation of the assets, officials said.

"None of these accounting issues affect the city's cash flows; they have no impact on the day-to-day operation of the city, and Baltimore's budget remains in balance," Gallagher said.

He noted that the mistake was the city's alone and that the assets have been moved to the correct accounting category in which the properties will depreciate in value at the proper rate. He said he's instituting tighter controls to make sure it doesn't happen again.

"Our financials were misstated. The finance department will take responsibility," he said.

Gallagher said the city called ratings agencies in New York on Friday to inform them of the mistake but had not yet reached anyone. He said he did not believe the mistake would affect the city's credit rating.

A spokesman for Standard & Poor's did not immediately return a phone call seeking comment.

Baltimore City Council President Bernard "Jack" Young said Gallagher briefed him on the mistake.

"If we were a corporation, it would be something to frown on," he said. "But since we're not selling anything, I'm not too concerned about it. These things happen with a big city like Baltimore. In light of all our budget issues, some of these things just get dropped. I feel comfortable they have policies and procedures in place to make sure nothing like this happens again."

"He's not hiding anything," Young added about Gallagher.

The city auditor and Ernst & Young LLP are starting the process of auditing the restated 2010 financial statements and are expected to complete their work later this year, officials said.

Steve H. Hanke, professor of applied economics at the Johns Hopkins University, a frequent critic of the city's finances, said that the mistake was relatively small, but still a cause for concern.

"In the context of a general lack of transparency and clarity in the city's accounts, any mistake becomes material and of concern," he said. "It's always gratifying to see the city is correcting its accounts and making its accounts transparent."

Gallagher said the city learned of the mistake last week but did not receive more detailed numbers until Friday.

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