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State Controller: Hercules Financial Records Could Be “Worst” He’s Seen

Hercules may have to repay more than $2 million in grants.

A review by state auditors of how financially struggling Hercules handled its money during the final year of former city manager ’s tenure has concluded the city’s accounting records were such a mess it was impossible to trace the expenditure of more than $2 million in state and federal funds.

In a report released today outlining a review of municipal financial transactions during the 2009-2010 fiscal year, state auditors said records related to the spending of state and federal grant money – except for gasoline tax funds – were “unauditable.”

“During my time in office, this could be the worst set of city accounting records I have seen,” State Controller John Chiang said in a statement. “The City’s books were so poorly managed, that I must question their use of every single federal and state dollar granted to the City.” Chiang said the accounting was so weak the city forgot to list $159,984 in additional grants it received.

As a result auditors “questioned” the entire $2,034,746 in grant money paid to Hercules between July 1, 2009 and June 30, 2010, an action that could result in the city having to repay much, if not all, of the money.

The audit report is another blow to a community already reeling from the effects of mismanagement by former city officials whose profligate borrowing for redevelopment projects that went bust during the nation’s near economic meltdown three years ago ultimately brought Hercules to the brink of . The long-running financial crisis has been the subject of extensive reporting by Hercules Patch.

Although a new slate of top city administrators is trying to steer the municipality back on course they have been plagued by problems inherited from the previous administration – problems exacerbated by a on bond payments in February and reduced revenues that have made it difficult to produce a balanced budget.

Any withholding of future state and federal grants could have a major impact on development of the city's waterfront, envisioned as a center for new housing that was to have paired major transit like ferry boats, trains and buses with a destination center for dining and shopping.  The project is in line to receive more than $10 million in state and federal grant money.

The full magnitude of Hercules’ financial quagmire must still be determined. In fact, auditors said the city’s accounting was so muddled it was impossible to determine the status of federal and state grant funds received in prior years, raising questions about just how much the city might ultimately be obligated to repay.

Auditors said the city’s sloppy accounting could have existed for years prior to their current review. “Therefore, the city’s potential fiscal liability to the federal government and the State could be much greater than $2,034,746, unless the city can produce sufficient accounting records and supporting documentation to account for the funds.”

At the same time auditors criticized the overall quality of financial reports submitted not only by the city, but the now-defunct Hercules Redevelopment Agency as well, saying “... there is reason to believe that the Annual Report of Financial Transactions submitted by the city and the RDA is false, incomplete, or incorrect,” making it impossible to validate much of the information.

“The manner in which city officials approached their fiduciary responsibilities falls below every reasonable standard of care and begins to explain why Hercules is under water,” Chiang said. “The longer the City goes without accounting for its taxpayer dollars, the greater the risk that federal and state authorities will withhold money from the City, further increasing Hercules’ difficulties.”

Auditors said their efforts were hampered by “…city staff members who either could not, or would not, produce accounting records and supporting documents to show how much, if any, federal and state grant funds have been spent. Some of the requested documents are very basic and inherent in any accounting system, such as general ledger account detail, where expenditures were to be recorded for all grants.”

The City Responds

Also complicating the auditors’ task was the of the city’s senior accountant shortly after the state review began last September. Auditors said the accountant’s replacement repeatedly ignored requests for documents and also left the city while the audit was underway.

City manager Steve Duran, who began work one month after auditors arrived at city hall, responded to an advance draft of the review in an April 30 letter, saying the city had experienced “an unprecedented rate of , resignations and retirements”: which left the finance department with only four employees who were inundated by requests from the city’s new auditing firm and the FBI as well as state auditors.

“The City of Hercules management does not believe there is a lack of accounting records, but that the accounting records could not be produced when requested,” said Duran.

Chiang said the two audits released Thursday will be followed with additional reviews of the RDA and the city’s internal financial controls.

The second audit, of the city’s Special Gas Tax Street Improvement Fund for the period 2003 through 2010, found Hercules generally handled the gas tax revenues properly, but auditors were concerned about accountability because the money was comingled in an investment pool with other city funds. The Controller ordered the city to immediately transfer all gas tax money to a separate bank account.

Giorgio C. May 12, 2012 at 05:32 PM
I suppose the "could not-would not" might be standard language for the auditing industry, but in my profession, they simply report observations and cite us accordingly. Nothing is implied. I do not understand the audit performed in 2010 that does not reference the previous audit which was performed two years, not one year, prior. Even if an audit was skipped, isn't it standard practice to always cite the previous audit? It is critical to know when there is a pattern of repeat deficiencies. In my profession, the auditor wants to see that the previous deficiencies were addressed...or else. Who was hired to perform that particular audit? It appears they "did not" or "would not" include the information of the previous audit. This is why I am concerned by the WCCUSD school district's failure to have accurate job descriptions for district staff. This one item has been noted on two successive audits covering a period of 4 years. This is an example of very poor management and should be addressed by the school board. The same goes for our city government. If the city council sees problems on audits not being addressed, they must hold the city manager accountable. The audit is a de facto performance evaluation of the City Manager. The city council should have questioned that previous audit for its failure to include an update on the previous audit findings and recommendations.
Toni Leance May 12, 2012 at 08:23 PM
Steve Duran has been to busy being a real estate developer to do his job as a city manager in charge of the finance department.
Brent Marin May 14, 2012 at 03:17 AM
Toni, if your statement holds any truth, then the City Council should immediatly investigate and then prompty remove Mr. Duran from his position. Enough is enough. Do mean to tell me that the City of Hercules is paying this guy $300,000 plus dollars, help with a residential mortgage and car expenses and he is not devoting every single second of his day to trying to fix Hercules problems??? Say it isn't so!
Sarah Creeley May 14, 2012 at 03:34 AM
The Town Hall meeting was informative, and it was exciting to see such a big turn out. You can watch it online. It's included with 2012 City Council meetings. I don't understand why there is consideration to spend up to $200,000. we don't have to get rid of a deed restriction to help Safeway come to Sycamore Crossing. If Safeway wants to be here they should pay those monies. No more sweetheart deals for developers! Steve Duran remarked that $200,000. would be the limit, but it would probably cost more than that, This city should not spend any money, let alone "up to $200,000", to remove a deed restriction. This is Field of Dreams all over again. We paid millions of dollars to Field of Dreams for a sport center before we even had the land. To be told that multiple housing apartment complexes is our only viable choice for new developments, well I just don't buy it. Apartment complexes will place additional stress on our Police and Fire. I beleive we should be talking with the John Muir Heritage Land Trust to see what they could pay for Parcel C. Let's think outside of the box.
Brent Marin May 14, 2012 at 04:09 AM
Sarah, I agree completely. If we are not going to have the waterfront developed in the way that it was originally planned, then let's persue your idea. Let us work to get Parcel C protected as an Open Protected Space. I would rather see it turned into a beautiful manicured park with tall tress and a walking path going through them than a bunch of appartments. It would certainly help to bring up the value of all of our homes here in the waterfront district. Ammenities such as parks and public plazas have a positive inpact on adjacent residential properties and make those neighborhoods highly desirable and sought out places to live. Sounds like a plan to me!!
Glenn Abraham May 14, 2012 at 06:28 AM
Let it revert to nature. I've always thought that this was the best idea, the very best use to which we could put "our" land, but I never bothered even mentioning it because I figured that absolutely no one other than me would think it. Then Sarah mentioned it at the town hall meeting, so, for the heck of it, I mentioned it to Myrna. Now Brent has raised it. Three of us. Maybe we should keep going. The special gift that Hercules has is the as-yet-unspoiled open spaces we have. Virtually every other Bay Area town (outside of Marin, but they were much smarter than everyone else, and smarter early enough to make a difference) has ruined the gifts they inherited. We, so far, have not. The natural beauty we now have, or could allow nature to enhance, is vastly more beautiful than the cutest boutique we could possibly put up, let alone an abomination like a Parcel C Towne Apartment megalopolis. Or a Safeway at Sycamore Crossing. This is probably a nonstarter because the city wants money, and many (perhaps most) in the community want stores so they can enjoy the rare and magical experience of parking, shopping, spending and consuming. (Maybe not as much parking, if Dan's vision can be rolled back.) Still, before we plow it under and pave it over, as everyone else has done, we might consider: if we want something special that we don't have to drive to Marin to experience, why not just keep, and let nature enhance, what we already have?
Toni Leance May 14, 2012 at 01:52 PM
Brent I mean that Duran is acting as a developer with he cities property. I do not believe that he has any residential mortgage perk in his contract. I think his salary is around $250k +bonus and I would think a car allowance. The line item in the budget for both his and warmerdams salary is in excess of $500k
Brent Marin May 14, 2012 at 02:59 PM
Glenn, I do enjoy reading all of your posts on the Patch. You are very well informed and very articulate in presenting your thoughts on the events the have transpired in this wee little 'Mayberry' that we call Hercules. I will be the second person to ask you to consider running for a Council seat in the next election cycle. Hercules needs intelligent people to run this City who are also Realistic about the aspirations, tribulations, and the general welfare of our town and its residents. There are many in this community who agree that the current course of action taken by the City leaders is not the correct one. I am afraid by not accepting the hand that was delt to them by the former appointed Management and Elected Council of Hercules, that the current Council, though well intentioned, is actually making a bad situation worse. Whoring out our land to the lowest bidder for development, that is not akin to the Waterfront and jeopardizing our future standard of living is not the path to success. Please don't get me wrong. We have very smart and well intentioned people serving on the City Council. I just think that they are misguided into thinking that the can save the City from going into Bankruptcy. The staggering debt that has been incurred will be eventually found out to be unsurmountable and the City will fail financially anyway. This is reality. Accept it. Make the tough descisions. Move on to a brighter future with minimum lasting damage. This is how I see the situation.
Brent Marin May 14, 2012 at 03:15 PM
Toni, Thanks for the information on the City managers pay package. I stand corrected and appologize for misconstruing your statement.
Douglas Bright May 14, 2012 at 03:32 PM
I remember reading that Nelson Oliva kept very poor records while he was City Manager. The staff complained that he was very secretive about the management of revenue and expenditures. It seems he was the only one who had the whole picture of the city's finances and he wasn't sharing it with his staff. I wouldn't be surprised if the majority of documents the auditors are looking for simply never existed or were taken (or deleted) by Oliva when he left. The incompetence (or complicity) of the auditors who monitored the city's books during Oliva's tenure is staggering. Charlie Long discovered more in one month than those auditors uncovered after years of examinations. Glen, you should send emails to the clients of that auditor and let them know what they enabled Oliva & Co. to get away with.
Glenn Abraham May 14, 2012 at 06:56 PM
I. Brent, thanks; really, thanks. I've been criticized for appreciating feedback (and I do, especially thoughtful feedback like yours), but I do want to get a sense of whether I represent something of a constituency of opinion in Hercules, or whether I speak only for myself. None of that would make me change anything I write (no matter how often I'm attacked), because I'm writing to express MY vision of Hercules. That plus exposing wrongdoing and shortsighted stupidity. I do appreciate your suggestion that I run for the council (and, in fact, you're not the second: other people know how to appeal to my vanity), but I never will, so I'm not looking for supporters. I see my role as...--->
Glenn Abraham May 14, 2012 at 06:57 PM
II. ---> I see my role as...well, do you remember, all those years, when we had Dan Romero, attending all of those council meetings which we never bothered to attended, doing all of that research which we never bothered to do, standing up in front of the inept and the corrupt and the indifferent at council meetings, and speaking up for transparency, for our right to know what our government is up to, speaking up for US? Well, that Dan Romero has vanished. Upon becoming mayor, he transformed himself, presto!, into Ceasar Augustus Dan. Ceasar Dan runs a very tight ship, andhe would never tolerate a Citizen Dan Romero, and is in fact doing his best to prevent other citizens from becoming the new Citizen Dan, the man who represents us, and not just himself and his office. That will be my role. I'll do the research and I'll monitor the council's activity and I'll praise that which I consider praiseworthy and criticize that which I consider to be disingenuous, sneaky, secretive or wrongheaded. I'll be the new Dan Romero of Hercules, the Citizen Dan, to replace the one we lost, the one who would never be tolerated at council meetings by now-reigning Caesar Dan. Maybe some people will be influenced by what I say. I doubt that Emporer Dan will be among them. And, btw, I agree with everything you said.
Glenn Abraham May 14, 2012 at 07:10 PM
Douglas, I'll send that email if you can get me that client list. Cc: FBI, California DOJ. Contra Costa County D.A. And every councilmember, senior city staff, and journalist in Calistoga. Anyone know who Oliva is working for now? Lawton? Did balico earn enough in his career as councilsnake, or did he have to go back to work? Anyone got HIS client list? McKinney? Weigel?
Claire Voyance May 14, 2012 at 07:54 PM
Does Hercules have a rigid hiring process like most government agencies?
Phil Simmons May 14, 2012 at 08:13 PM
Claire, No !!! The city manager can hire whoever he pleases at any time for what ever reason without having to justify it to anyone. That is other than the standard laws concerning hiring that are federal laws.
Eagle eyes October 01, 2012 at 03:43 PM
vote yes on Boulanger re election
Glenn Abraham October 01, 2012 at 04:23 PM
...et votez deux fois. Ou trois. Quatre! Votez malin, votez le sans-éthique, votez PINOCCHIEAUX!
Susan D.Keeffe October 01, 2012 at 06:08 PM
Richard L, I agree. The City spent a lot of money on what appears to be almost worthless audits. If there is a lack of documentation, even including basic accounting ledgers, what was the auditor auditing? What an incredible mess.
Susan D.Keeffe October 01, 2012 at 06:10 PM
What letter?
Susan D.Keeffe October 01, 2012 at 06:15 PM
Carol, I agree. It also makes me nervous. And we have the majority of the City Council approving and supporting everything our current City Manager does. Is it possible there is much they do not know?
Susan D.Keeffe October 01, 2012 at 06:19 PM
Carol, I suspect there were no records or records that were missing critical data. We also know a computer was erased around the time DeLeon left or shortly before she left. If Oliva and Co. were "cooking the books" there may be no way of finding out what is going on other than what Toni is suggesting re a "forensic analysis". I think we may be in more trouble than we suspected.
Susan D.Keeffe October 01, 2012 at 06:26 PM
Fool me once, shame on you. Fool me twice, shame on me. Check his web-site.
Glenn Abraham October 01, 2012 at 08:58 PM
I was coming back to comment on Gérard's GOOD side: how he is probably a nice person who cares about other people, someone whose lies may well just reflect the insecurity of a nice guy who thinks he needs a fake persona in order to be accepted, or respected. But I hadn't yet seen his website. Is this something new, for 2012? I can't find it online. Sue, do you have a link? And I suppose I should qualify the "nice guy" comments: the information I got from his former, and longtime, boss/partner/friend indicates a person who schemes and uses other people, including those who are trying to help him. That, plus the fact that, whatever the reason for his 2011 electoral lies, he DID lie, and we really can't have a councilman whom we know we cannot trust; and the fact that, when caught in those lies, he didn't have the decency, didn't have the shame, to do the right thing and withdraw from the election; and the fact that, in practice, he has been one of the least-informed of all of the councilmembers, a nice guy who reliably votes with Dan Romero's descent-into-hell decisions. There are already a lot of reasons for saying that Gérard is a likable guy who should not be reelected; but I still want to see his website. I have a feeling that I will find there a lot of other reasons.
Susan D.Keeffe October 02, 2012 at 01:43 AM
Glenn, Sorry. I couldn't find the link either so it must be down . Last time I checked it as the same as during the Recall election with the same info in it. Hopefully, it is now really down.
Glenn Abraham October 02, 2012 at 01:54 AM
Bummer. The 2011 site was gerardboulanger4hercules@comcast.net. Put that in the address bar, and you'll get "Windows cannot find 'gerardboulanger4hercules@comcast.net'. Check the spelling and try again." I checked the spelling and tried again. Windows cannot find Gérard. Interesting way to run a campaign for reelection.
Joseph Catindig October 02, 2012 at 03:18 AM
I'd take my website down...and give up my city council seat and tell my running mate(slate) to step down as well if I lied like this guy.
Eagle eyes October 03, 2012 at 08:15 AM
only one guy can save Hercules..Mr. Boulanger.....BOULANGER 2011 .a man with winsdom and vision
Toni Leance October 03, 2012 at 04:44 PM
@eagel eyes your joke is so funny unless this is Gerrard and this is is strategy to win his seat. Liar liar pants on fire!
Eagle eyes October 04, 2012 at 06:41 PM
Toni no habla francaise but Hey. good try on your part !
Toni Leance October 04, 2012 at 06:52 PM
Then you must be making a joke because no one in their right mind can be for Gerrard a known liar

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