State Audit Finds Misuse of Hercules RDA Funds

Under the stewardship of former city manager Nelson Oliva, the now defunct Hercules Redevelopment Agency made millions of dollars in improper payments and engaged in other questionable financial and real estate transactions that were in large part responsible for the city’s current financial problems. 

These were the findings released today by California State Controller John Chiang, whose office conducted a review of RDA operations between 2005 and 2010. 

A second, separate review examined the city’s accounting operation between 2007 and 2010 and found internal financial controls almost non-existent. 

See all of Patch's coverage of the financial crisis in Hercules. 

In a letter to Hercules Mayor Dan Romero accompanying the report released Wednesday, Chiang said his review found “serious mismanagement practices” by Oliva, who “had an apparent conflict of interest in relation to the RDA’s contract with NEO Consulting.” 

Chiang criticized former city council members, who also served as the RDA’s directors, saying there was no indication that they “ever raised any concerns about [Oliva’s] actions: despite the fact that at least $7.1 million in improper expenditures was charged to the agency’s operating fund and another $1.4 million was charged to the city’s Low and Moderate Income Housing Fund. “Weak oversight and poor management practices invited self-dealing, nepotism and other public trust abuses that crippled Hercules’ fiscal health,” Chiang said in a statement accompanying the audit. 

Among the questionable practices found during the review were the “arbitrary and capricious awarding of loans that appear to be gifts of public funds” and the payment of more than $3 million to Oliva’s consulting company. 

In examining the housing fund, Chiang’s auditors found a number of improper charges, including at least $222,170 for mailboxes, $26,400 in lobbying expenses and $18,848 for the city’s beautification program. But what may portend future problems for the city were $32.8 million in “.”

The controller said that several parcels of real estate were acquired during Oliva’s tenure but the city cannot “produce any pertinent documents such as appraisals that would be used to determine whether the real estate had been purchased at fair market value.

Chiang said bond funds were improperly used to purchase one parcel that was outside the city limits. Several of those parcels were transferred from the RDA to the city last year and are now being sold. Whether the transfers were proper will be the subject of a future RDA asset review being conducted for every former RDA in the state.

So far only two of those reviews have been completed – for the Cities of Milpitas and Morgan Hill. The IRS is currently conducting what it calls a “routine review” of the RDA’s 2007 tax increment bond issue and how proceeds from the sale of those bonds were used. In the second audit examining internal controls, among other things, auditors uncovered a “vague set of contracts with local school principals.”

The controller said the city paid almost $200,000 to four local school principals for unspecified professional services, with one principal billing the city for attending a school ceremony and another for politically-related activities. 

Unlike an where the controller criticized the city’s cooperation in producing documents, this time Chiang reported that the city had provided all documentation that it could find, but  city officials admitted some documents could not be located.