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

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.