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State Auditors to Examine Hercules’ Books

Citing “serious concerns,” state Controller John Chiang orders extensive financial examination.

Saying he had “serious concerns about the reliability and accuracy” of information in financial reports issued by the city and its redevelopment agency, state Controller John Chiang has informed city officials that a team of auditors will soon begin poring over Hercules’ financial records.

In a to Interim City Manager Liz Warmerdam and City Council members released Thursday, Chiang said a recent review of financial reports had identified several areas that led him to conclude “there is reason to believe that the Annual Report of Financial Transactions by the City of Hercules and the Hercules Redevelopment Agency are incomplete and/or inaccurate.”

Under state law, if financial reports are filed late or there is reason to believe a financial report is “false, incomplete or incorrect,” the Controller is empowered to conduct an investigation. The city must pay for the cost of that investigation.

Chiang’s action comes just five months after his office reviewed 18 redevelopment agencies across the state — including Hercules. In a issued in March, the state controller noted concerns over the financial dealings of several former officials, saying “it is understood that these issues are being investigated at several levels.”  That report noted the redevelopment agency was in serious financial trouble, yet had made questionable payments, including $38,400 to a lobbyist, some of which had been taken from affordable housing funds. 

Chiang said a number of factors influenced his decision to order the audit, including inconsistencies in how the city reported using millions of dollars in redevelopment and other funds, two Contra Costa County , a police investigation into and a report issued in December 2010 by then-Interim City Manager Charlie Long, who warned the city its finances were seriously troubled. Long was fired soon after his report was issued. 

Initially the state audit will focus on the financial reports for the 2009-2010 fiscal year, but Chiang told city officials that depending upon what auditors uncover, the state may review transactions in prior years. Auditors also will review city programs that received funding —including federal money — passed through a state agency to the city or the redevelopment agency. 

One area auditors will examine is the “prior period adjustments” on the city’s financial statements. These adjustments are generally used to correct accounting errors and other irregularities, whether they were accidental or not. At least 16 of these adjustments totaling millions of dollars appeared on city financial reports between 2007 and 2010. 

Each year Hercules produces separate financial statements for the general city government, the redevelopment agency and the Public Financing Authority. Although the state controller cited several areas of concern on city-wide financial statements, it was the seriously troubled redevelopment agency reports that appear to have raised the most red flags.

Other specific areas outlined by Chiang in justifying the audit:

  • Negative amounts reported in the general fund, debt service fund and enterprise funds — such as the Hercules Municipal Utility — during the 2008-2009 fiscal year.
  • About $37.8 million in liabilities that may not have been properly reported on the city’s financial statements for last year.
  • A conclusion by the city’s auditor that it was doubtful the redevelopment agency could continue as a “going concern” because of its severe financial problems, which included substantial deficits in its operating fund and affordable housing fund and the fact that tax revenue was insufficient to cover debt service on more than $100 million in bonds.
  • The redevelopment agency's failure to adopt a new five-year implementation plan as required by state law.

Another area of concern centered upon a 2009-2010 “Management Letter” submitted by Moss, Levy & Hartzheim, a Southern California accounting firm that has audited city books for the past four years. Management Letters are separate reports accompanying annual financial statements that address shortcomings in financial management and outline deficiencies in a city’s financial internal controls.

The state controller noted that the city’s management letter for the 2009-2010 fiscal year listed 23 findings of significant shortcomings in Hercules’ financial reporting and compliance with accounting standards. A state review, according to Chiang, found deficiencies reported in previous letters had apparently not been addressed and there was no way to know whether they had been corrected.

In 2008 the Management Letter found 13 deficiencies, which the city said it would correct, including the city’s failure to obtain supporting documentation for purchase orders and incorrect billing rates at the city’s municipal utility. 

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Jeffrey Boore August 18, 2011 at 10:25 PM
I feel grateful for this attention from the state level. Our town needs this very badly. I have little doubt that a thorough investigation will uncover incompetence, malfeasance, and very likely graft. I hope that these investigators will have an eye toward producing the evidence for prosecution of those responsible if that is appropriate, as I suspect it is.
Lisa August 18, 2011 at 10:48 PM
Lets hope this leads to the incarceration of Oliva and Balico and all the others involved in this mess...
Selina Williams August 18, 2011 at 11:41 PM
Going concern issues, $38mil in "not properly reported" liabilities.This is beyond the pale. Did the guys from Enron all relocate to Hercules? I wonder if these liabilities were being hidden to prevent total destruction of what little remains of the good faith and credit of Hercules. The audit should provide the basis for prosecution of malfeasance by city officials. What the heck was the finance director who is responsible for maintaining an internal control structure and following financial accounting standards doing? What Hercules needs is a bailout at this point but I believe the state would take control of the city government in that case.
Annie R. August 18, 2011 at 11:49 PM
The City of Hercules cannot begin to rebuild and recover from the financial disaster until those who knowingly participated in the malfeasance are brought to justice.
Toni Leance August 18, 2011 at 11:56 PM
Again I believe that our current City Manager/Finance Director needs to resign and someone with more experience and financial acumen needs to be appointed Charlie Long comes to mind! This has been going on for far too long I am glad to see the State finely step up and investigate. The current budget was incomplete it did not include the deficit for HMU and there were other inconsistancies. The audit was very late and we had to hire consultants at added costs to the city and even then the buget wasn't right. Please lets put the adults back in charge at city hall and get Charle back before we are truly bankrupt which looks like the next shoe to drop.
Dn August 19, 2011 at 12:15 AM
Hercules has been called up to the major league level. Let's see what happens at the plate and in the field.
Lisa August 19, 2011 at 02:35 AM
@Annie R my sentiments exactly! We all know who is to blame.
Susan D.Keeffe August 19, 2011 at 02:50 AM
This is long overdue. I'm happy to see someone finally seriously looking into our financial situation. I hope they go back at least three years to when the shell game began. I suspect there is malfeasance and it needs to be revealed. For us to move forward, we have to know what went wrong and make changes so this can never happen again. We need an expert Finance Director, and a City Manager with experience and expertise. Its a shame Charlie Long isn't Interim as his expertise is sorely needed. Our last budget is an example. How can a budget be developed that conveniently leaves out HMU and other debts and payments owed? I expect it will take time for the auditors to review but I'm delighted the state is looking into us seriously.
Joseph Catindig August 19, 2011 at 03:56 AM
Oh liva, you can run but you can't hide!
Annie R. August 19, 2011 at 04:19 AM
@Lisa, Let's hope John Chiang leaves no stone unturned.
Sarah Creeley August 19, 2011 at 05:09 AM
I want to see the misused funds returned to our city coffers.
Annie R. August 19, 2011 at 05:45 AM
Only in a perfect world would the misused funds be returned.
Richard L. August 19, 2011 at 07:05 AM
I guess the only negative is that the audit is on the City's dime. Wish the state asked to do this before the Municipal Group (not sure the exact name) people did it. Hopefully they charge minimum wage.
Susan D.Keeffe August 19, 2011 at 05:33 PM
Richard, I fear you are right. The City will have to pay for this investigation. Given the complexities involved, I wouldn't be surprised if no one goes to jail. Its not against the law to be stupid, greedy and incompetent. Regardless of the outcome, Hercules must move forward and it is very important to learn what happened and exactly how it happened so steps can be taken to assure such mismanagement never occurs again. I still hope the investigation will show if Oliva violated his contract.
Hercules Mike August 19, 2011 at 05:43 PM
This all makes me quite upset that I bought a home in Hercules two years ago. If I knew about this disaster of corruption I would have bought elsewhere. The citizens have been royally screwed and many people have profited handsomely I am sure.
Susan D.Keeffe August 19, 2011 at 05:49 PM
Mike, I agree the community has been screwed but this is still a great place to live. I've been here 23 years and the neighbors, climate and location are great. You will find many good folks here. It is a good place to raise a family. The community is involved now and working hard with the City on getting things fixed. Please hang in there with us if you can.
Selina Williams August 20, 2011 at 02:50 AM
I hate to say it but we need a Charlie Long type PLUS a team of financial experts all working overtime! We can not simply duplicate the current model and think that will be enough. The hole is much to wide and deep. The city is going to have to pay for more than a big audit. These audits can cost in the hundreds of thousands and there can be substantial fines and penalties attached to the misuse of funds, missing filing deadlines etc.
Giorgio C. August 20, 2011 at 09:49 AM
And still, the job description of Finance Director remains missing-absent. Why is that? http://ci.hercules.ca.us/index.aspx?page=415
Susan D.Keeffe August 20, 2011 at 06:51 PM
Good observation. Where is the City Manager job description? I can't seem to find it.
Toni Leance August 20, 2011 at 08:28 PM
I have been saying for quite some time that there are not job descriptions for any of the major positions at Ctiy Hall I pointed out this at meetings and in conversations to both staff and councilpersons. All these should be done and posted. The only job description we got for the City Attorney ad hoc commitee was one written by Mick Cabral which I said wasn't worth the paper it was printed on. There are many things at city hall which have not been done including the mandatory afforable housing reporting to the state. Nothing has been done with the affordable housing program since Nelson and his crew left in Feb. This is alarming and coupled with incomplete budgets and not putting Sycamore North out for market rate bidding is unforgivable. there need to be major changes in city hall I can only hope if and when we get a real city manager they make everyone at city hall reaply for their positions. maybe then there will be some accountability.
Susan D.Keeffe August 20, 2011 at 09:50 PM
Toni, I agree. I have been present when you have pointed out the need for specific job descriptions. I hope the new City Attorney will be helpful in the City Manager Selection. I also hope the new city Manager will do as you say, and analyze the City Staff and the qualifications for folks holding positions. I'm confident there are many employees who are well qualified for the positions they hold, but we still hear of political appointees via Balico, for example, who may not actually be qualified for the jobs they hold. This is another reason why I feel it is important for someone new, with no political ties and no involvement in Hercules, to be selected as City Manager. I am confident our new reform Council will do the right thing and choose wisely.
Giorgio C. August 21, 2011 at 12:08 AM
If you want to stamp out cronyism, you have to post-publicize qualifications and job descriptions BEFORE hiring. If you do not post qualifications, then how would one know if the "nonqualified" are not being hired as favors to friends? You don't.
Giorgio C. August 21, 2011 at 01:56 PM
I am sure there exists a city governance best practices document, probably used by the Grand Jury when conducting audits-investigations. It might be useful to refer to such an accepted check-list of items to see if anything is currently amis here in Hercules.
Toni Leance August 21, 2011 at 07:06 PM
Giorgio you are funny this morning "if anything is currently amis here in Hercules" plenty is currently amis here in Hercules. Budgets that are incomplete, incorrect and missing big line items such as the HMU. A building on Sycamore that no one knows what to do with even though the city build it. Major positions open at city hall inclulding City Attorney, City Manage, Police Chief, Financial Director, Affordable Housing Staff, I could go on... A waterfront that sits in limbo. Parcels of land that is owned by the city that isn't doing anything it was intended for. MarketHall that sits locked up and empty. Yes lots amis here in Hercules I don't need a best practices document to tell me that I just need to look around
Susan D.Keeffe August 21, 2011 at 09:56 PM
Not to mention the realtor hired to handle Sycamore North is from New Jersey, not licensed in California, and has limited knowledge of California! More than a little is amiss!
Giorgio C. August 23, 2011 at 11:59 AM
Toni, If Finance Director was vacated, then I thought it would state "vacant" on the city webpage. I go to the Finance Dept. webpage and see no hint-evidence that we ever had a Finance Director. http://www.ci.hercules.ca.us/index.aspx?page=570 And there is no posted job description for Finance Director. This position is also not advertised on the Job Openings webpage. http://www.ci.hercules.ca.us/index.aspx?page=181 Maybe we don't need one. Can the CM fulfill both roles? That might save us a few dollars.
Toni Leance August 23, 2011 at 02:32 PM
Giorgio the city can not run without a finance director and the city manager can not fulfill both roles. there needs to be a finance director with financial acumen and knowlege of best practices. We have not had that for quite sometime. that is part of the current problem and the reason for the state audit. this city needs to get its financial house in order and quickly. the ad hoc finance commitee has done a good job at starting the process but without leadership at city hall the commitee can not do it all. The finance director along with the city manger and city attorney make up the leadership at city hall. the council comes and goes at the will of the people but staff usually remains in place and creates not only leadership but stability. These positions need to be filled not only with qualified professionals but with people of high ethical standards and the abiltiy ot speak truth to power. it is only then that this city will be on the right track for recovery.
Susan D.Keeffe August 23, 2011 at 04:32 PM
Toni, I totally agree with you. The former Finance Director was a political appointee and she was fired. Liz tried to fill in but it isn't her area of expertise and it shows. And of course, once again, no posted job description! The way out of appointing unqualified people is through a transparent, fair, job application process beginning with a posted job description for every opening. It is my hope the new City Manager will fix this. Our Ad Hoc committees are helping as well so finally there is community input.
Giorgio C. August 25, 2011 at 12:49 PM
Many cities require that their Finance Director be a CPA. Does Hercules require this? We are not alone-some other cities are grappling with this same issue http://www.41nbc.com/news/local-news/1031-macon-council-debate-finance-director-qualifications

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