Mayor Welcomes State Audit

Hercules is poised to become the third California city since the scandal-ridden Bell audit last year to hand the State Controller’s office keys to its file cabinets. And the mayor of this small town says she will greet the state’s team of accountants with open arms.

“I welcome the State Controller's audit, even if it means a lot of work for the staff, because I, too, wish to know the truth,” says Mayor Myrna de Vera. “Was it corruption or incompetence or both that brought Hercules to its knees?”

Thanks to years of unchecked borrowing and stalled development projects, the city is struggling beneath a colossal debt that’s forced it to lay off a third of its employees, including cops, and slash basic services.

Spending in this small town has so far outpaced revenues in recent years that the city has resorted to using the proceeds of bond sales to make up the shortfall, which is more than $6 million, State Controller John Chiang said in a to the city last week.

Chiang said he intends to send auditors in to examine the city’s books and sort through what appears to be incorrect or inaccurate information submitted to the state.

This is only the third time the state has conducted such an audit since the massive outcry surrounding the controversy in Bell, a Southern California city where the city manager and police chief were being paid more than the president of the United States, and city council members were earning nearly as much as state legislators.

"When the problems of the City of Bell came to light, the controller received 100 requests to audit local agencies,” said Garin Casaleggio, Deputy Communications Director for State Controller John Chiang. Montebello and Hercules are the only cities to be audited by the state controller since those requests were made.

The prospect of an audit has sparked some interesting reactions in this small town, especially from those who know enough about the city’s finances to suspect it might be warranted.

"The previous regime was just blindly spending money without paying attention to the fact that there was no money to spend,” said Charlie Long, a commercial rest estate developer who served as interim city manager in Hercules for a brief stint last fall. “That, to me, seems like a failure of the former finance director and Nelson Oliva.”

Oliva, an affordable housing contractor, managed Hercules from 2007 through last fall. When a stroke reportedly forced him to take a medical leave, Long was hired to manage the city in his absence.

On Dec. 3, Long raised the red flag with a note to elected officials saying it did not appear the city would have enough money to meet its bills moving forward. Moreover, he reported, key city funds were operating unchecked with deficits as high as $14 million, and the co-mingling of funds had so blurred the city accounting that it was virtually impossible to tell whether money had been used appropriately.

The following week, Long provided a more detailed analysis of the problem and called a special meeting of the city council to address the shortfalls. But he never had a chance to present that report because he was summarily fired.

Oliva was simultaneously reappointed as city manager, but his return was temporary. In what has become the revolving door of politics in Hercules, the city council negotiated Oliva’s paid departure within two weeks and put their police chief in charge of city hall until a replacement could be found.

Oliva did not return calls to both his Hercules and southern California homes seeking comment.

“I think what the council and (Interim City Manager) Liz Warmerdam has tried to do over the past several months is to make order out of chaos, and that process continues,” said Long, who now serves as a consultant on the city’s waterfront development. “The current regime is trying to clean up the mess.”

Warmerdam concurred. Originally hired as a consultant more than six years ago, she has risen for now to the top management position in a city reeling from the rapid-fire turnover of recent months.

“The City is trying to move past the mistakes of the previous administration and thought we were out of the woods on these types of inquiries,” she wrote in an e-mail last week. “We are going to comply the best we can with the limited resources we have available.”

Many senior employees have either been terminated or have resigned during the past six months, leaving almost no institutional knowledge to readily explain why or how the city deemed it necessary to move millions of dollars from one account to the other to balance the books in recent years.

“I assure the citizens of Hercules that your current Council has been taking steps with our skeletal staff to right the mistakes of the past administration,” de Vera said. “The Council formed several citizen advisory committees to help with finance, legal issues, and the waterfront. Within the next few weeks, the Council will be hiring a new auditor, city attorney, and city manager.

“We are cleaning up city hall as best as we can.”

The Controller’s letter suggests the city engaged in creative accounting and was responsible for providing inaccurate and misleading information about the community’s financial health of the community. All California cities are required to hire outside accounting firms to review their financial statements annually. The Controller’s letter noted that the reports for the fiscal year ended June 30, 2010 were both “late and incomplete.”

Derek Rampone, a CPA with Moss, Levy & Hartzeim LLP who headed the audit of Hercules’ 2009-2010 financial statements, did not return Patch telephone messages or e-mail seeking comment on the Controller’s letter.
 
Last month, Rampone told Patch his firm relied on the city’s own financial software system when it conducted audits, and said it was his firm’s policy not to speak with the media. The firm, which had been hired in 2007, is no longer the city’s auditor.

The state, however, says the auditing firm will not endure the same close scrutiny as in the case of Bell. "In the City of Bell we did a quality control review of their independent auditor. That’s not a portion of this (Hercules audit),” said Casaleggio of the controller's office.

Countless interviews conducted by Patch reporters over the past eight months suggest that elected officials and key city employees might not have even been aware of the financial crisis creeping up on the city until Long outlined the details last December. The controversy has resulted in an almost a complete turnover at city hall, with former Mayor Ed Balico stepping down amid a recall attempt, and two of his colleagues losing their council seats in the bitter battle that ensued.

“The community of Hercules has responded to the past administration’s misdeeds by voting in a new Council within the past eight months,” Mayor de Vera said. She and Councilman John Delgado were elected last November and sworn in on the heels of the current controversy.“Hopefully, the Controller’s findings will shed light on how Hercules arrived at our current fiscal crisis and we, the people of Hercules, can then move forward.”
 
Hercules Patch Editor Laila Kearney contributed to this report.