Lapse in oversight, mismanagement led to Atwater's fiscal crisis

mnorth@mercedsunstar.comOctober 5, 2012 

ATWATER -- A severe lack of financial oversight as well as unwillingness to act by the City Council has led the municipality to the brink of bankruptcy.

While the situation can partially be blamed on the poor economy, city officials have been made aware in recent weeks that depleted funds have eaten away at restricted monies and drained the city's cash reserves.

An August 2012 treasurer's report shows the general fund has a deficit of $5.2 million, a water enterprise fund deficit of $9.3 million and sanitation enterprise fund deficit of $1.3 million.

The public pays fees into enterprise funds, which would ideally allow the services they provide to be self-sufficient. But water rates haven't been raised in 20 years and sanitation rates have been raised in a decade.

As noted in a report by Fitch Ratings, which recently downgraded Atwater's financial status, the City Council's lack of leadership in addressing budgetary issues has resulted in near financial catastrophe, including the possibility of dozens of layoffs and bankruptcy.

Council members have tried to address the water and sanitation deficits in recent years.

In 2009, Mayor Joan Faul made a motion for a vote on rate hikes in both funds, but no other council members supported her action, despite staff warning the council that the rate increases were "a necessity."

Similarly in April, Faul made another motion to begin laying groundwork for rate increases. "We're headed for bankruptcy if we don't do something," she said.

That time, she got a second from Councilman Craig Mooneyham, but the move was struck down with "no" votes from Mayor Pro Tem Joe Rivero, Councilman Jeff Rivero and Councilman Gary Frago.

City officials have conceded that they knew something had to be done to correct deficits in two of the utility funds, but didn't realize just how toxic the situation was. As blocs of council members shot down opportunities to bring more money into city coffers, such as the rate increases, funds were bleeding out faster than they may have realized.

It wasn't until the fiscal crisis started coming into view that the council got enough votes to begin studies on possible rate increases.

Council members have confirmed that they were being told by the staff that there was a $7 million budget surplus. Then six weeks ago they were informed that instead of having a $7 million surplus, all those funds were for restricted uses and not available for general purposes.

Councilman Craig Mooneyham said staff failed to adequately highlight the dire situation the city was facing. The result was a council that didn't see an immediate need to make changes and raise utility rates.

"I think they (the council) didn't do it honestly because we had a huge budget surplus and they didn't want to hit the citizens with a higher bill if they could get away with it," Mooneyham said.

During an all-hands, closed-door meeting with city employees in early September, interim City Manager and Police Chief Frank Pietro joined then-City Attorney Jose Sanchez and Finance Director Glen Carrington to explain how bad the crisis had gotten.

"Last month, basically, has been a hurricane," Sanchez said in the meeting. "At the end of the month, which was actually July 31, I got a call and I was told basically the way our finances work, it seems as though restricted funds that should not be used for paying general fund obligations are being used."

City officials and staffers haven't been able to pinpoint exactly how the funds have been used and haven't been able to determine where the money has gone.

The city's fiscal mess has been exasperated by the "Great Recession" and the housing market collapse, which began in 2006 and continue to spiral down. The economic fallout was a major hit to Central Valley cities' pocketbooks.

With property taxes falling to $3.8 million in fiscal year 2011-12 from $5.2 million in fiscal year 2007-08, Atwater is no different. A drop off in building permits and a spike pension costs added to the predicament.

Though declining revenues have played a major role in the crisis, some of that has been self-inflicted.

The city has failed to collect various fees in recent years, and documents show a steep decline in administrative fees to $1.1 million in fiscal year 2011-12 from $1.8 million in fiscal year 2009-10, despite increased commercial activity during that time.

Pietro confirmed that in 2007, finance officials changed computer software and only entered about half of the city's businesses in the new system.

Since then, only about half of businesses have been charged for updated business licenses. The issue is in the process of being corrected, he said.

Furthermore, a project heralded as the largest and most expensive endeavor the city's undertaken has contributed to the problem.

The new wastewater treatment plant, which officials say was necessary to comply with stricter environmental regulations from the state, was financed with bond money.

City records show that when that bond money ran out, $5 million was used from general fund reserves to complete the work. The city is still paying off three bonds from the project that total $20 million, $54.1 million and $10 million.

Faul said there is money set aside to pay off those bond amounts.

Despite deficits in the water and sanitation funds, Atwater residents have seen significant spikes on their utility bills from wastewater rate hikes and the wastewater enterprise fund has a positive cash flow.

This week, management said 14 city employees have gotten pink slips and another 24 got letters telling them they may also be laid off.

The City Council will meet Oct. 22 to consider declaring a fiscal emergency under Assembly Bill 506, which would be a precursor to bankruptcy.

The council already declared a common-law fiscal emergency Wednesday, giving the city more flexibility to negotiate with contracted employees.

Reporter Mike North can be reached at (209) 385-2453 or mnorth@mercedsunstar.com.

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