Atwater's road map to near ruin

Warnings unheeded, chances missed led to municipality's fiscal crisis

mnorth@mercedsunstar.comOctober 6, 2012 

— 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.

The situation can partially be blamed on the poor economy, but 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 has a deficit of $9.3 million and a sanitation enterprise fund deficit of $1.3 million.

The public pays fees into enterprise funds, which ideally would allow the services the funds provide to be self-sufficient. But water rates haven't been raised in 20 years and sanitation rates have not 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 a 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 having warned the council that the rate increases were "a necessity."

In April, Faul made a similar motion to begin laying the 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 that they didn't realize just how toxic the situation was. As blocs of council members shot down opportunities such as the rate increases to bring more money into city coffers, funds were bleeding out faster than they may have realized.

It wasn't until the fiscal crisis started coming into clearer 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 that money was for restricted uses and not available for general purposes.

Mooneyham said staff failed to 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 become.

"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 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 continues to linger. 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 dropoff in building permits and a spike in pension costs added to the city's predicament.

Though declining revenues have played a major role in the crisis, some of the city's trouble 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 entered only 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 being corrected, he said.

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

The new waste-water treatment plant, which officials say was needed to comply with stricter environmental regulations from the state, was financed with bond money.

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

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

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

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


Timeline

AUG. 25, 2009: Despite staff warnings, the City Council chooses not to support Mayor Joan Faul's motion to increase utility rates.

NOV. 2, 2010: City Manager Greg Wellman retires from his post after eight years on the job and is replaced by Assistant City Manager Stan Feathers.

MARCH 29, 2011: Council increases water capacity for users, costing the city about $10,000 to $30,000 a year.

APRIL 7, 2011: Council decides to part ways with interim City Manager Stan Feathers.

APRIL 28, 2011: Kathy Kivley hired as Atwater's city manager.

MARCH, 2012: Mayor Joan Faul makes a motion to begin laying groundwork for rate increases, but it's voted down by Mayor Pro Tem Joe Rivero, Councilman Jeff Rivero and Councilman Gary Frago.

JUNE 8, 2012: Council votes 3-2 to update its water rate model. During the same meeting, the council votes 4-0 to search for a consultant to examine possible sanitation rate increases. Councilman Jeff Rivero abstains from the vote.

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

AUG. 22, 2012: Atwater City Manager Kathy Kivley is placed on administrative leave. Police Chief Frank Pietro takes over as acting city manager.

SEPT. 6, 2012: All city employees are called in for a meeting with management for a briefing on the fiscal crisis and its possible ramifications, including staff reductions.

SEPT. 10, 2012: City Manager Kathy Kivley is terminated by the council on a 4-1 vote, with Councilman Jeff Rivero voting "no."

SEPT. 19, 2012: City Attorney Jose Sanchez of Meyers Nave announces that he will resign from his position.

OCT. 3, 2012: Atwater management confirms that 14 employees were laid off and 24 more got letters saying they may be laid off. The council votes to declare a common-law fiscal emergency so the city can negotiate with contracted employees.

OCT. 22, 2012: A hearing is set for the council to consider an Assembly Bill 506 fiscal emergency, a precursor to bankruptcy.

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