Guadalupe flirting with bankruptcy

June 17, 2014

By JOSH FRIEDMAN

Guadalupe City Administrator Andrew Carter, who often describes himself as a numbers person, has discovered some financial mismanagement and accounting practices that could leave him without a city to administer.

Guadalupe, which has the smallest tax base of all cities in both Santa Barbara and San Luis Obispo counties, has long grappled with budget problems. When Carter left his seat on the San Luis Obispo City Council in Feb. 2013, he took over a city that was nearly bankrupt.

The Northern Santa Barbara County town of about 7,000 residents has a general fund budget of $3.6 million and an ongoing deficit of about $725,000, Carter said. But, the extent of Guadalupe’s fiscal woes did not become public knowledge until last month when Carter reported that previous city officials had been using illegal accounting tactics to cover up a structural deficit in the city’s general fund.

In his first year on the job, Carter delegated budgeting duties to an experienced city official, he said. When he took over the reigns this year, Carter noticed that the city had been transferring money from special tax of fee based funds and enterprise funds such as water and sewer to back fill general fund expenses.

State regulations require agencies to spend money they collect from rate and fee payers on the services for which they are billed. For example, a city cannot take money residents pays for their water bills and use it to fund salaries for police and fire departments; the funds must go toward water department expenses.

Another type of restricted use revenue is money derived from specific purpose taxes. Santa Barbara County, for instance, has a specific purpose half-cent sales tax which Guadalupe can only use for street maintenance and transportation improvements.

For years, though, Guadalupe has used enterprise and special fund revenues to pay for general maintenance. Some expenditures charged to the wrong funds include money spent on park irrigation, workers’ compensation and electricity for the senior center, legion hall and city hall, according to a recent staff report.

Recently, annual transfers into the general fund have totaled about $200,000 more than the city can legally justify.

If voters do not pass three new taxes in November, Guadalupe is expected to disband its police and fire departments, enter bankruptcy or disincorporate, meaning it would cease to exist as a city.

“The community has an either or choice,” Carter said. “If we don’t get support for the three tax measures, we will have to disband our police and fire departments and contract to the county.”

If Guadalupe disbands its police and fire departments, emergency response times would likely increase by 15 minutes, Carter said. If the city were to disincorporate, it would be the first city to do so in California since Hornitos did so in 1973.

Some interfund transfers are allowable in Guadalupe because the city is so short-staffed. Employees, like Carter, have to perform both general fund and special fund sponsored services. Carter, for instance, acts as his own utilities director.

But, Carter said that over the years, the interfund transfers have equated to 99 percent to 193 percent of the combined budgets for the departments that dip into multiple funds. These unjustifiable transfers have occurred for at least 17 years, audits show.

In 2013, then finance manager Carolyn Galloway–Cooper handled budgeting duties, Carter said. Galloway-Cooper, now the finance manager in Buelton, became Guadalupe’s finance director in January 1998. From January 2003 to September 2009, she served as city administrator. Galloway-Cooper then left the city but returned as finance director in August 2010, remaining in the position until November 2013.

Galloway-Cooper did not respond to multiple requests for comment.

Each year, the city of Guadalupe is audited by accountants. The Central Coast accounting firm Glenn Burdette is the current auditor and has audited Guadalupe’s budgets since 2002-2003, Carter said.

In the most recently published financial report, Glenn Burdette stated that budget shortfalls raise doubt as to whether the city can remain a going concern. The firm’s audit report also criticized some of Guadalupe’s accounting practices, such as its delays in reporting liabilities and asset depreciation.

But, Glenn Burdette auditors made no mention of excess interfund transfers or allocation of general fund expenses to special or enterprise funds. They stated that Guadalupe’s financial statements complied with American accounting standards.

Auditors with Glenn Burdette did not respond, either, to multiple requests for comment.

Carter said he spoke with auditors at the firm after uncovering the issues with the intefund transfers.

“They confirmed that the amount of the interfund transfers have been confirmed by council,” Carter said. “Apparently, they never made the connection that they were way beyond what was reasonable to expect.”

Faced with the $725,000 structural deficit, Carter has proposed a combination of tax increases and cost-cutting measures to balance the budget.

He plans to shave general fund expenditures by about $350,000. The primary savings would come from a proposed 5 percent pay cut for city employees and departmental reorganizations that would eliminate unnecessary positions.

Carter also plans to raise $350,000 through three tax initiatives that the city council is currently in the process of placing on the November ballot.

A business tax costing firms 50 cents for every $1,000 in gross receipts would raise $100,000, Carter said. An initiative eliminating the city’s cap on its utility user tax would also raise $100,000. The third measure, a half-cent city sales tax, would bring in $150,000 to the general fund.

Each measure needs a simple majority vote to pass, and the utility tax initiative would likely affect only one entity — vegetable seller Apio, the city’s largest business.

But, the results of recent initiatives indicate an unfavorable sentiment toward new taxes in Guadalupe. The last two tax measure failed, one of which more than 72 percent of voters rejected in 2010.

Due to Santa Barbara County’s roads tax, sales tax is already 8 percent in Guadalupe. The proposed half-cent sales tax would raise the rate to 8.5 percent, which is a full percent above the state requirement.

Guadalupe’s police and fire departments consume about 80 percent of its budget. When asked if the city could continue to fund its public safety services if only one or two of the taxes pass, Carter said the city would need all three to pass.

If the city were to disband its police and fire departments, emergency responses would likely come from Santa Maria and/or Orcutt. Santa Maria is approximately eight miles away from Guadalupe, and Orcutt is approximately 12 miles away.

Deputy fire chief of the Santa Barbara County Fire Department, Eric Peterson, said his agency would not open a station in Guadalupe.

“We can’t afford to put a fire station in there,” Peterson said. “We don’t have the funding for that.”

The nearest county fire station is located in Orcutt. Peterson said responses to Guadalupe would come from either Orcutt or Santa Maria, if the county could arrange a deal with the city.

Likewise, the nearest Santa Barbara County Sheriff’s substation is located just outside of Orcutt.

“The sheriff’s office would be open to discussion regarding providing police services at whatever level was needed and agreed upon,” sheriff’s spokeswoman Kelly Hoover wrote in an email.

Even if the taxes pass, Gaudalupe could go bankrupt due to lag time in collecting the new revenue. Sales and utility user tax revenues are not expected to reach city coffers until April 2015.

Likewise, the reductions in staffing costs from employee pay cuts and position eliminations may not kick in until this September.

Carter projects the city to have a $579,000 general fund deficit when the current fiscal year concludes at the end of June. The deficit would leave the general fund with a negative balance of about $275,000.

In addition, the city will have a $350,000 deficit budgeted for 2014-2015 due to its inability to implement the deficit-cutting measures in time.

Unlike many cities flirting with bankruptcy, Guadalupe does not offer lavish salaries and benefits to its employees.

Carter’s approximate $80,000 salary is the highest among city employees. Guadalupe police officers have a 2 percent at 55 pension formula, which is below the industry standard in California, and several of the firefighters essentially work as volunteers. Guadalupe also contracts out several services, including janitorial, planning and legal work.

But, it is questionable whether the size of the city’s tax base justifies its incorporated status. Guadalupe has a per capita sales tax revenue of $44, Carter said. Countywide, the average is $155, and cities generate an average of $225 per person in sales tax.

A new housing development called DJ Farms could draw 3,000 new residents to Guadalupe and subsequently grow the tax base. With construction started on the project, the city has begun to collect revenue from development fees.

Unsurprisingly, Carter discovered that the city has already improperly allocated the $180,000 from the fees. The money belonged to a special fund that collects development fees, but Carter found it in the general fund.

Now, the new revenue represents a large chunk of the ongoing deficit.

Carter is expected to bring a draft budget for 2014-2015 to the city council next week. The upcoming fiscal year begins July 1.