A taxpayer advocacy group says Modesto is mismanaging city funds and potentially forcing water ratepayers to pay for a computer upgrade at City Hall.
The Stanislaus Taxpayers Association is criticizing a proposal to borrow up to $5 million from the city's water fund to pay for new software that will serve almost every city department.
That's money sitting in a fund intended to pay for the cost of maintaining the city's drinking water system, and expanding it. The council in 2005 started increasing water rates to pay for a $152 million system upgrade that was billed as necessary to meet state standards and shore up capacity.
Rates could be raised again next year with city officials saying they don't have enough money to pay for the system.
The taxpayer group says the $5 million loan is a sign that rates were increased too high. Its members argue that using water fund money for costs that aren't water-related is against state law.
Making the loan could cost taxpayers in the long run, because the city may have to increase water bills to cover the cost of the transaction, said Taxpayers Association co-chair Dave Thomas.
The city disputes those charges. The issue is touchy because in 1998 the Howard Jarvis Taxpayer Association sued Modesto after it used water and sewer fund money improperly. The city settled the lawsuit out of court.
Thomas worries the city is going down a similar path now.
"If you take money out of the (water) fund to do something that isn't part of the enterprise, you've got to raise fees or rates," Thomas said. "That's clearly against treating the taxpayer properly. It's just a great tragedy."
The water fund is an enterprise fund, which means it's supposed to run like a mini business within the city. Its revenues come from monthly water bills and user fees. Expenditures are supposed to cover only water-related costs.
By law, enterprise funds are kept separate from Modesto's general fund, which is the money the city spends as it wishes on police, fire and parks and recreation.
The city says borrowing the water fund money to pay for the software upgrade is a win for taxpayers. The new software will replace a 1980s-era system that's inefficient. The software runs several of the city's core functions, including financial management, payroll and human resources.
Software company Oracle is offering Modesto a 75 percent discount that expires on May 31, so the city wants to act now to save taxpayer money, said City Manager Greg Nyhoff.
Thomas also questions how the city will pay the 2.5 percent interest on the water fund loan. He says taxpayers will be on the hook for that expense.
Borrowing money on the open market would have been more expensive, said Finance Director Gloriette Beck. Oracle offered to finance the purchase at 5 percent interest, but the city declined, Beck said. The city will pay 2.5 percent interest on the water fund loan. The water fund earns 1 percent interest.
Loaning money out of the water fund won't hurt ratepayers, said Nyhoff, because the city can call the loan back whenever it needs the money.
"We cannot fundamentally hurt the ratepayers and that's not going to happen, period," Nyhoff said. "We will call the loan before the ratepayers have to (pay higher bills) because we make this loan."
Because the water fund is loaning the money instead of transferring it, Modesto isn't running afoul of laws governing city funds, officials said.
The loan will come out of the water fund's connection fees. Those fees are collected when new building happens. The city usually uses that money to pay for water expenses related to new growth.
Modesto's $103 million general fund is facing a $12 million shortfall in the upcoming budget year. The shrinking general fund has forced the city to slash services and lay off employees.
With the general fund depleted, Eric Reimer of the Taxpayers Association says he wonders how the city will repay the loan to the water fund.
Beck said the loan payment plan is structured so it doesn't burden the general fund right away. The first two payments are interest-only payments.
"What we tried to do was to shift the principle to later years to give the economy a chance to recover," Beck said. "The general fund will be more viable in future years."
The City Council will discuss the proposed water fund loan at its May 11 meeting.
Reimer and Thomas have been consistent critics of the city's water fund since 2004, when officials began looking at raising rates. The study that was used to set the charges -- doubling them for some residents -- was based on inaccurate information that the city provided to a consultant.
City officials say the error left Modesto $29.5 million short of what it needed for the system improvements, but the mistake has also left a cloud over the rate increases that has opened the city to accusations that it has misused the money.