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State Audit Finds Misuse of Hercules RDA Funds

Former city manager responsible for millions in improper payments, according to state controller.

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.

John Loudermilk September 12, 2012 at 06:59 PM
Bravo! Hopefully indictments are forthcoming and clawback of properties illegally bought and disposed.
Susan D.Keeffe September 12, 2012 at 07:28 PM
John, I agree! And what is happening with the Oliva trial? Does anybody know?
Richard L. September 12, 2012 at 10:11 PM
"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." Shows what this guy knows. Appraisals aren't necessary..
Toni Leance September 12, 2012 at 10:24 PM
I think the letter sent by the city is not adequate it does not address the city's reticence, by the new city manager and the new finance director, to cooperate with the State Controller it also states the existence of both the legal ad hoc and finance ad hoc as examples of community involvement.. Legal ad hoc was attacked by a proxy for Dan Romero and never allowed to finish its ethics ordinance and the finance ad hoc was pushed into a standing committee that makes it more difficult for them to communicate directly with the citizens without coming under council scrutiny. The current Mayor and city manager show distain for the State at every opportunity including at the last council meeting. We need assurances, in writing, and by a citizen lead committee that the cities finances are in order. That the budget is reconciled and that there are oversight controls in place to make sure this never happens again.
Toni Leance September 12, 2012 at 10:42 PM
Now that Victoria Crescent is back on the market we should demand the city conduct an appraisal to determine value BEFORE it gets back into contract.
Wil Figueira September 12, 2012 at 11:49 PM
Last night I watched the counsel meeting and one of the speakers Mr Simmons mentioned the possible use of properties now unoccupied which could be use to build schools which may be needed in the future. I remember that several years ago the property near Victoria Crescent was proposed as a future site for a school but it was determined unsuitable by the State Superintendent of Schools. The reason for the determination that it was not suitable is the fact that petroleum transfer lines lie beneath the ground in that area.
Susan D.Keeffe September 12, 2012 at 11:52 PM
Will, The property he referred to is the Corps yard. It has been identified as a possible school site for at least 25 years. But in order for it to become a school site, several things have to happen first including finding some place for the corps yard! Then it has to be offered to public entities first. So there won't be anything happening there for quite awhile.
Glenn Abraham September 13, 2012 at 01:54 AM
Actually, Chiang made none of those comments. The letters were signed by the SCO Audits Division chief, Jeffrey Brownfield. Beyond that: THE STATE AUDITS: WHAT HAPPENS WHEN A CITY MANAGER IS GIVEN TOO MUCH POWER AND TOO LITTLE SUPERVISION BY A LAID-BACK CITY COUNCIL Occasional Report No. 32 Earlier today, the Times’ website published a good article on the State Controller’s Office's (SCO) just-released audits of the Hercules RDA from July 1, 2005 through June 30, 2010; and, of the city’s internal accounting controls for the years 2007 through 2010. http://www.contracostatimes.com/news/ci_21526066/news-release-from-state-controller-john-chiang-hercules?IADID=Search-www.contracostatimes.com-www.contracostatimes.com You can also read the audits: http://www.sco.ca.gov/Files-EO/Hercules_RDA.pdf http://www.sco.ca.gov/Files-EO/Hercules_Internal_Control.pdf
Glenn Abraham September 13, 2012 at 01:54 AM
Everybody, I think, should read these, at least the newspaper article and the SCO's cover letters to Dan Romero, which accompanied the two audits. We could learn what went wrong when City Manager Nelson Oliva was running the Valstad/Balico councils; we could learn what could be the consequences of what's going on now, as City Manager Steve Duran runs the Romero council. The SCO Audits Division chief, Jeffrey Brownfield, in a cover letter to the internal controls audit, stated that, in regard to the Oliva Councils: “Our review found that control deficiencies were serious and pervasive—in effect, non-existent. In addition, the City Council did not appear to exercise any oversight over the city’s operations and financial activities. From January 1, 2007, through December 31, 2010, the City Council adopted 40 ordinances, 679 city resolutions, and 360 Hercules Redevelopment Agency (RDA) resolutions. With the exception of one city ordinance, every ordinance, city resolution, and RDA resolution was adopted unanimously with little or no deliberation. In essence, the City Council approved all requests submitted by the former City Manager without question."
Glenn Abraham September 13, 2012 at 01:56 AM
“We also found that the former City Manager was given broad authority to enter into contracts and authorize disbursements for the city and the RDA. In addition, the city often ignored its competitive bid requirements and had inadequate conflict of interest or nepotism policies. As a result, the potential for waste, abuse, and possible misappropriation of public funds is very high.” We have, in 2012, many of the ingredients which would be needed to recreate the catastrophes of 2010. Oliva had four worthless council members, people who reveled in the ceremonial aspects of their pretty little positions, but who were not sufficiently engaged in the process of actually running the city to be able to control, nor to judge the decisions of, the city manager. Yesterday’s Kuehne, Valstad, Ward & McDonald were fully the equals of today's Wilkins, Boulanger (especially) and Delgado (though John Delgado may be improving). No one would argue that Balico had no idea what Oliva was really doing; now, Dan Romero may, or may not, understand the deals into which Duran is dragging us.
Glenn Abraham September 13, 2012 at 01:56 AM
The most significant difference between Oliva’s councils and Duran’s, is that we now have Myrna de Vera. Those 5:0 votes of Oliva’s councils have become 4:1 votes now, thanks to Myrna’s refusal to go along blindly with Duranigan schemes which no one on the council, not even Myrna, is well-enough informed to evaluate. But, in spite of Myrna’s and John’s efforts to have the finance director appointed by the council and not by the city manager, Steve Duran snuck out and hired his pal, Nickie Mastay, and now the finance director reports to the city manager and not the council. Nelson Oliva could not have pulled off his scams without the cooperation, or at least acquiescence, of his finance director, Gloria Leon. Don Kuehne continued to protest that the council didn’t learn, until too late, what was really happening with the city’s finances. That doesn’t excuse Kuehne's failure, but does illustrate what can happen when the finance director reports to the city manager, and not to the council.
Glenn Abraham September 13, 2012 at 01:57 AM
Don Kuehne was a joke council member, as were Valstad, McDonald and Ward. Gérard Boulanger, Bill Wilkins and John Delgado are just as much a joke. (Again, Delgado may be improving; Boulanger surely isn’t.) This is how Oliva got away with it: the council members would not put in the time and effort necessary to understand the problems of the city, to monitor the activities of the city manager, to be able to understand the situation. They turned Oliva loose to govern the city in their (effective) absence. Such is the case now, in spite of Dan Borenstein’s gratuitous throwaway comment about the “tireless efforts of [Myrna’s] colleagues.” With the possible (and it’s just a possibility) exception of Dan Romero, they’ve done nothing to make them tired…except for Myrna, who is working hard, and working for us, the community. The others aren’t enemies of the community, except possibly Dan; the others want what’s best for the community, though Dan may well be focused on what’s best for the Dan; but, none of their good intentions amount to anything, so long as they allow control of the city to devolve onto the Dubliner, Steve Duran, a city manager whose affection for developers seems to be much warmer than his concern for the community he is temporarily commuting to visit.
Glenn Abraham September 13, 2012 at 01:57 AM
No one has ever claimed that Valstad, Kuehne and Ward did not want what was best for Hercules. In spite of their probably-benign intentions, look what happened. That’s why we must, in November, elect candidates who can vote with Myrna, and not just vote for the city manager. That’s why we must defeat Romero & Boulanger & Wilkins. I’m not particularly excited about the alternative candidates (except maybe McCoy), but it’s a certainty that boulerokins would, if reelected, let Duran run loose, and that is clearly dangerous. We need council members who want to govern the city, and not just to hire a sheriff and then walk away, except for the ribbon cutting.
Jeffrey Boore September 13, 2012 at 06:06 PM
The prospectus for the 2007 bond, mentioned in this article, indicates that all of those funds would go for infrastructure to develop the waterfront area. That is why that money was borrowed almost six years ago. In fact, every dime of those borrowed funds, which we are all obligated to repay, plus interest, went into unrelated projects, every one of which was a financial disaster for this city, apparently because their purchases directly benefitted Nelson Oliva's private company, NEO (i.e., Nelson E. Oliva) Consulting. For those years (and after other delays caused by unrelated malfeasance), Oliva worked in many different ways to thwart the waterfront development in order that he could squander those funds intended for it for personal gain, and he was assisted, either actively or negligently, during his tenure and as fallout to his departure, by Ed Balico, Joanne Ward, Don Kuehne, Kris Valstad, Joe-Eddy McDonald, Charlene Raines, Dennis Tagashira, Gloria Leon, Lisa Hammon, Jesse Harder, Fred Deltorchio, and others.
Wil Figueira September 13, 2012 at 06:26 PM
Toni: I went back to my recording of Tues. night meeting and found that Mr. Simmons did in fact include Victoria Crescent area as well as the corp yard as possible areas for a future school.
Toni Leance September 13, 2012 at 06:53 PM
I think Susan answered your question. What is your point?
Jerry Aldeeni September 13, 2012 at 08:57 PM
Every one of the incumbent council members knew exactly what was going on under Oliva’s regime… There needs to be federal, criminal indictments levied against all the serving council members during that dark moment in time.
Wil Figueira September 14, 2012 at 05:45 AM
Toni I have lived in Hercules since 1976 and have heard and seen many things in these years here. I am only saying that when a person who is running for office makes a statement as Mr. Simmons did they should know all the facts. I am really amazed at the polarization I am seeing among the most vocal. The constant vitriol remarks by contributors to this blog is damaging to the credibility of the contributors.
Glenn Abraham September 14, 2012 at 06:32 AM
Wil: you're right. About everything, but especially about the vitriol. We would all benefit from a reasonable discussion. That said, there'd be a lot less vitriol if people in masks were denied entry. I doubt that the person behind "Redrock" would have said what he said if he, not his fictional front man, had to stand by it. We should be responsible for our words. I have plenty of respect for you, and Ken Morrison, and Chris Kelley (but not her husband, Dean Fukima, appearing here as "Taintwright"), and all the others who express their opinions intelligent...and honestly. To come in with a fake name is to begin the conversation with a lie. I could have a reasonable discussion with Anton, if he would just log in under his name, and speak his opinions openly, instead of the ol time charade, the fiction who kinda heard something somewhere from someone. Or ol time pinoy: a leader of the recall, and a Filipino...we didn't have too many Filipinos in the leadership. If Dan would sign in as Dan, and tell us what he really believes, we could have a reasonable discussion, and maybe learn something from one another. So long as we create straw men to carry out attacks under cover of pseudonym, we are only increasing the bitterness. There is too much vitriol, on both sides. We should boot the pseudononymous ghosts, introduce ourselves, and have a real discussion. I would very much like to talk to Dan Romero. I don't have much to say to The Truth.
Phil Simmons September 14, 2012 at 06:55 AM
Wil Take a look at the city maps. And yes the maps are an old plan and a school may not be feasible without some clean up. One thing is certain it sure will not be feasible if there are houses built on the property. Land can be cleaned. And in fact much of the surrounding area is being cleaned up now. Houses would be permenant. Once built there would be no choice left. In point of fact the land is zoned for retail anyway and the better choice for a school is at the corp yard.
Goldilocks September 14, 2012 at 06:59 AM
This is an excellent post, Jeffrey. It succinctly sums up the Oliva malfeasance and how we waterfront residents have lived here going on 10 years with little or nothing to show for it and millions spent. I do think you're off base bringing Lisa Hammon & Fred Deltorchio into this. He was assisting the FBI with their investigation of Nelson and Lisa did the gutsiest public resignation I've ever seen once she was on to Nelson. What about Eguzki?!
Susan D.Keeffe September 14, 2012 at 08:34 AM
Wil, I don't think my response to you was vitriolic but I apologize if you think it was. I've been here since 1988 and am aware of several sites the school district reviewed at one point, including the little park at the corner of Santa Fe and Railroad which was designated as a school site when I first moved here. The final offer from the city was the Corps yard site and Dr. Harter referenced it specifically at the educational forum held recently. The site was deemed unacceptable by the district for a variety of reasons but it remains the best option - there aren't many options to choose from if we want a school west of San Pablo Avenue.
Jeffrey Boore September 14, 2012 at 04:49 PM
Thank you for the compliment on my post. I don't know someone named Eguzki and I'd be interested in hearing more. I can't say that I'm familiar with everything that Fred Deltorchio did, but I include him in that list because I saw him being underhanded in trying to derail the waterfront development. He tried to embarrass the City Council into publicly refusing an authorization for a payment that would have been the death knell to the waterfront when (1) he knew perfectly well that nearly all of that money had already been authorized as payment for work completed and (2) he knew that Charlie Long was out of the country and so would be unavailable to correct his public misinformation. The Council took the brave action and did the right thing, and in the aftermath Charlie and Fred had angry words that could be heard all over town. Charlie was rightly furious over Fred's cynical attempt to do this, transparently motivated by Fred's trying to save the jobs of his friends on the police force even if it meant killing the waterfront forever. I have a different take on Lisa Hammon. Her departure was certainly dramatic and she made vitriolic statements, but she squandered much of the opportunity to point out real malfeasance and instead complained about relatively trivial things like favoritism in things like paid time off work. I blame her for about 18 months of delay in the ITC and for taking the city to the point where we almost lost all of the grant money. Here is why --->
Jeffrey Boore September 14, 2012 at 04:50 PM
The train station is obligated by the Waterfront Initiative to be built in "Waterfront Warehouse" architectural style. The Initiative is very specific in spelling out exactly what architectural features comprise this. Instead, she let Jesse Harder and the rest of the HDR team completely ignore that requirement and design a modernistic train station (dubbed "Safeway Station"), as is his personal preference. When presented to the public, there was outrage, then a series of meetings for about a half-year, and we still don't have a conforming design (although it is better than the original). She did nothing to acquire the land for the train station or to accomplish the necessary environmental review processes. She also allowed many design changes that would have had unacceptable impact on the surrounding private development, so much so that at one point the landowner even prevented survey work on his land to defend against her destructive actions. In her own words, her mission was to build a train station in an empty field and she had no interest in the surrounding private development. She was incompetent at managing that project, she pointedly ignored the community's wishes, and she was inexplicably hostile toward the owners of the land surrounding, and on which the train station was to be built. If she had behaved competently, this September we'd be celebrating the opening of the train station instead of the groundbreaking.

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